Fractional ownership is revolutionizing the Indian real estate sector by democratizing investment opportunities and granting retail investors access to high-value commercial properties. With its potential for high returns, ease of tracking, and diversification benefits, this investment model is rapidly gaining popularity.

According to a report by Knight Frank, the market size of fractional ownership in India was USD 5.4 billion in 2020 and is projected to reach USD 8.9 billion by 2025, growing at a CAGR of 10.5%.

Commenting on the advantages and its future prospects in India, Nayan Raheja of Raheja Developers said, “Fractional ownership offers significant advantages for investors looking to tap into the potential of the commercial property market. It provides high appreciation potential and easy tracking. Commercial real estate investments have a track record of delivering excellent returns, and with the digitization of the real estate industry, tracking fractional investments has become more convenient than ever.”

Raheja added, “We are the first company to provide Bank Secured Returns up to 12% for 6 years to fractional ownership buyers in the country. The scheme also provides investors peace of mind to sub-assign the leasing rights to professional IPCs to manage the asset on their behalf to create a lifetime of revenue stream.”

Online platforms and technology-driven solutions allow investors to monitor their fractional ownership, enhancing transparency and providing greater convenience.

“Fractional ownership grants retail investors access to Grade A properties that were once exclusive to institutional investors. These high-quality commercial properties, known for their prime locations and superior features, offer the potential for attractive returns and long-term value appreciation,” said Ashwani Kumar from Pyramid Infratech.

Additionally, fractional ownership allows investors to purchase a fraction of a large-scale property, allowing for greater diversification of investment portfolios and reducing risks by spreading investments across different assets.

Rajesh K. Saraf, Managing Director, Axiom Landbase Pvt Ltd, said, “Fractional ownership also offers hassle-free management through dedicated management companies. These companies streamline the rental collection and tenant management processes, relieving individual investors from the burdensome responsibilities of property management. This hands-off approach allows investors to enjoy the benefits of real estate investment without the associated management complexities.”

Ankit Kansal, Managing Director, 360 Realtors, said, “Fractional ownership provides an avenue for portfolio diversification beyond traditional investment instruments like fixed deposits (FDs), gold, and residential properties. Investors can achieve a more balanced and diversified investment strategy by including commercial real estate through fractional ownership. In normal circumstances, a retail investor can’t think of investing in high-ticket commercial assets such as Grade-A offices, warehouses, industrial plots, hotels, etc. However, with the help of pooled investment approach of fractional ownership, even with INR 10-20 lakh, one can invest in such an asset and earn higher rental yields and IRR. Presently the overall market is sized at INR 4000 crore, climbing from INR 1500 crore in 2019. The aggregate potential is much larger. In the Grade-A office asset alone, there is an untapped market of INR 550,000 crore.”

Non-resident Indian (NRI) investors find fractional ownership particularly appealing due to the professionally-managed environment and the potential for generating rental income.

Fractional ownership offers NRI investors the opportunity to invest in high-quality assets in India while benefiting from the expertise of management companies. This attracts NRI investors looking for stable and rent-generating assets in their home country.

However, it’s essential to consider a few factors before engaging in fractional ownership. Firstly, financing options for fractional ownership properties are limited, with only a few banks offering mortgages. Investors may need to explore alternative financing avenues to secure the necessary funding for their investment.

Additionally, fractional ownership involves joint ownership, which means that all ownership partners must make decisions regarding maintenance, repairs, and decor collectively. This process can sometimes lead to delays and challenges in reaching a consensus.

Furthermore, the sale of a fractional property requires the approval of other fractional owners, reducing the flexibility and freedom typically associated with owning property outright.

Despite these considerations, fractional ownership remains an attractive investment option for retail investors seeking exposure to India’s commercial real estate market. By carefully weighing the benefits and considerations, investors can make informed decisions and leverage the potential of fractional ownership to diversify their portfolios and access high-value properties. As the market grows and financing options expand, fractional ownership is set to thrive in India, offering a viable avenue for individuals to participate in the lucrative commercial real estate market.

With SEBI’s recent announcement to regulate Fractional Ownership in residential real estate, owning a luxury home is just a ‘fraction’ of share away. The recent announcement of market regulator, SEBI, to regulate Fractional Ownership in residential realty, is being considered as revolutionary for the residential real estate sector in India, with a potential to benefit millions of investors who always aspired for luxury real estate but could not afford it for lack of funds.

An investment approach where multiple investors get together and create a pool of funds, when as individuals, they do not have the requisite funds to buy the aspiring asset, Fractional Ownership, ensures that the cost of an asset is split between multiple investors, and all the shareholders/investors get the benefits of the asset, such as income sharing, reduced rates, and usage rights. 

While Fractional Ownership has always existed in India, it was primarily restricted to REITs-driven warehousing and commercial real estate. But now, with SEBI’s recent regulatory framework announced for fractional ownership in residential real estate, a new ray of hope is showing up in the residential real estate. 

The future looks promising with the Fractional Ownership Residential Real Estate Market set to grow $5 Billion by 2024! Having said that, it's important to note that the Fractional Ownership market in India is still evolving, and regulations specific to it may vary across states. As the market matures, there may be additional legal and regulatory guidelines and developments to ensure investor protection and transparency. What’s needed right now is a conscious effort to make an informed choice.”

Talking about its functioning, Fractional Ownership is moderated by a real estate management company that invites inventors to invest a certain amount in a potential asset, and takes benefit from the asset appreciation, while at the same time, ensuring the regular upkeep, maintenance and records of the asset. 

The investors can go through a range of properties listed on IT-enabled platforms, and make an informed decision. A minimum ticket size is decided as shares, as per the property potential, and accordingly a set of investors/shareholders are invited to choose the portions as per their individual choice and capacity. The shareholders can withdraw their share at any point in time, as per need.

While the Fractional Ownership market in India is still at a nascent stage as compared to the other parts of the world, however, there are clear indicators of its growing popularity. Fractional Ownership allows individuals to invest in high-value properties at a fraction of the cost, making it an attractive preposition for those seeking to own a share in high-end properties.

Besides, it offers benefits such as shared ownership, cost savings, access to premium amenities and locations, and above all, hassle-free transaction and ownership-related processes, while also allowing investors to enjoy the benefits of dream realty without financial burden.

What is awaited now is a clear regulatory framework surrounding Fractional Ownership, though there have been discussions and proposals to establish clearer guidelines and regulations to govern the model, which is expected to give a boost to the buyers’ confidence in the times to come!

The Securities and Exchange Board of India (Sebi) on May 15, 2023 released a consultation paper in a bid to regulate fractional ownership platforms (FOPs), and safeguard investors.
The consultation paper has sought comments from the public on proposals to regulate such platforms. FOPs are platforms that allow investors to buy a small share of a real estate asset, typically for a minimum investment of Rs. 10 lakh.
Sebi’s proposal comes as the number of FOPs has grown significantly in the last three years.

What is Fractional Ownership Of Real estate

Fractional investment or ownership of real estate through FOPs is an investing strategy in which the cost of acquisition of real estate, usually commercial, is split among several investors, who invest in securities issued by a special purpose vehicle (SPV) established by the FOP.
Such SPV purchase the real estate asset. The costs of upkeep and acquisition are divided among the investors or shareholders in SPVs, who also share the benefits and returns of the assets, subject to management and maintenance fees levied by the FOP or its associates or specified third parties.

Concerns: Working of FOPs

All activities of FOPs are not currently regulated by the Real Estate (Regulation and Development) Act, 2016, which means that investors are finding it hard to get legal redressal. FOPs often do not provide investors with enough information about the real estate assets they are investing in, making it difficult to assess the risks involved. Lack of liquidity in long-term is another issue concerning an FOP investor.

Sebi’s Proposals

The proposal suggests bringing FOPs under regulatory oversight by including them in the Reit (Real Estate Investment Trust) Regulations and labelling them as MSM REITs. FOPs, along with any person or entity involved in fractional investment in real estate, will be required to register with Sebi as an MSM REIT. The registration process will be specified by Sebi.
FOPs and other entities must meet the eligibility criteria set by Sebi and transition their existing transaction structures to comply with MSM REIT regulations. SEBI will specify the maximum allowable expense ratio for MSM REITs to protect the interests of investors.
To ensure transparency, minimum disclosure requirements are followed in the offer document, and in the annual and half-yearly reports sent to investors. Now, periodic disclosure requirements also have to be followed as per the listing agreement with exchanges.
Sebi’s proposal is still in the consultation stage, and the regulator is seeking feedback from the public. Sebi claims that the proposed regulatory framework for FOPs offers several benefits to the market and market participants.

Key Benefits

FOPs registering under the Sebi Reit Regulations will have to follow the standard know your customer (KYC) requirements, thus ensuring that the client information is properly verified.
Net worth and deposit requirements for sponsors and managers will guarantee the platforms’ financial stability. Artificial limitations on the number of investors and the use of SPVs will be eliminated, thus allowing for more participation in FOPs.
Listing FOP units on stock exchanges enables robust risk management, fair pricing, and guaranteed settlement. It also provides liquidity and exit opportunities for investors and establishes a well-defined framework for addressing investor grievances.

The concept of fractional ownership of an investment asset is that multiple investors get together and create a pool of funds when one individual does not have the requisite ticket size due to the price of the asset being on the higher side. As per Investopedia, “Fractional ownership is an investment approach in which the cost of an asset is split between individual shareholders. All the shareholders get the benefits of the asset, such as income sharing, reduced rates, and usage rights".

In India, the concept of fractional ownership is practised in real estate. Fractional real estate (FRE) is an informal structure wherein an entity involved in real estate business or real estate services gets a set of investors together, pools the money through legal documentation and invests in a property that otherwise would have been unaffordable for one investor. Reportedly, market regulator Sebi is working on issuing guidelines to control the FRE segment for the sake of investor protection.

If we go by the concept and not strictly by technicals, the fractional ownership concept is practiced in many other investment assets. For instance, Global (US) stocks are listed on the NSE IFSC at Gujarat International Finance Tec-City (GIFT). Select leading global stocks are listed on Indian exchanges—NSE and BSE—operating at GIFT City. The price of these stocks, in rupee terms, would be on the higher side due to the currency conversion rate. The way it works is that you cannot buy the stock directly but can buy an IFSC receipt, which is a negotiable financial instrument in the nature of a depository receipt (DR). The US stock is the underlying asset, and the receipt represents a fractional ownership of one stock. For illustrative purposes, let’s assume you have a positive view on the Apple stock and want to take exposure to that. The price of the stock is, say, $170. At a conversion rate of ?82 per dollar, the price per share of Apple would be approximately ?14,000. The price of one DR with Apple as underlying at NSE IFSC is, say, $6.71. At a conversion rate of ?82, it will cost approximately ?550. Hence, with a DR, you are buying about 4% of one stock of Apple, with commensurate benefits in price appreciation, dividends, etc.

Mutual fund (MF) schemes sell units of ownership in a pool of investments. As an example, when you purchase one unit of an exchange-traded fund (ETF) with Nifty or Sensex as the underlying, you are actually buying a fraction of Nifty or Sensex. It imparts the benefit of small scale to investors who do not have the ticket size to purchase all the stocks in Nifty or Sensex.

Non-fungible tokens (NFTs), which are not strictly investment assets as these are informal and non-regulated, works on the concept of fractional ownership as the ownership of one asset is distributed among many. Cryptocurrency exchanges—though it is debatable whether these are “exchanges" as it is not regulated by Sebi or any other authority—offers a tiny fraction of ownership in one cryptocurrency. Given that the concept is there in some form or the other, and it helps retail investors in terms of ticket size, it can be formalized and introduced in mainstream investments, i.e. stocks and bonds.

There are Indian equity stocks with price on the higher side. An example would be MRF with a share price of approximately ?1 lakh. Then, there are bonds with face value of ?1 lakh or above. While MFs can help buy such units at an affordable price, financial markets are developing and new instruments are becoming available to investors. A financial services provider can offer fractional ownership in stocks and bonds by pooling money from multiple investors. However, that would be informal and available only to a limited set of investors. Rather, it should be introduced as a product by the exchanges, i.e. NSE and BSE, so that the benefit is available to all investors.

How would this work? The exchanges will offer a stock or bond with price beyond a threshold. The receipt would be available at the exchange, representing a fraction of ownership of the stock or bond. Trades will happen at the exchange platform on the receipts, where the price movement will represent the movement in the underlying. The benefits of dividend or interest will be distributed proportionately or built in the traded price of the receipt.

With increasing investor base in the country and increasing financialization of savings, and ‘retailization’ of availability of investment avenues is desired.