What is Fractional Ownership?

Fractional Ownership is a way to invest in real estate without buying the entire property. Multiple buyers collaborate to invest in a property, often commercial or vacation homes. Each buyer gets partial ownership of the property.

For instance, if there’s a property worth three crore rupees, an average person might not afford it individually. However, through Fractional Ownership, 10 people can collectively invest in it. This way, each person’s investment cost would be 30 lakh rupees, and they would have 10% share of the real estate.

Several Fractional Ownership platforms like Strata, hBits, PropertyShare, and bhive offer opportunities to invest in properties. Typically, investments can start from 10 to 25 lakh rupees. In return, these platforms manage the property, cover maintenance costs, and distribute rental income among the investors.

But, how does fractional ownership platforms work?

Fractional ownership platforms create a private limited company known as a Special Purpose Vehicle or (SPV). The SPV raises funds from investors equal to the value of the property and acquires the property. The registration of the property occurs between the seller and the SPV. Investors, or buyers, become shareholders in the company.

The trend of fractional ownership is rapidly increasing, according to real estate management company TruBoard Partners. In India, the AUM of fractional ownership platforms was 1,500 crore rupees in 2019, it jumped to 4,000 crore rupees in 2023. It is estimated that the fractional ownership market will continue to grow at an annual rate of 25-30% in the next 4-5 years.

There are two ways to earn income from fractional ownership investments: one is rental yield and other is capital appreciation. Fractional ownership platforms claim that retail investors can earn a return of 8-10% through rental yield. As the property value increases over time, investors would benefit. According to the website of fractional ownership platform hBits, investors can expect total return of 13 to 20% after 5 years.

Buying expensive property in a posh location is often beyond peoples’ budget. Through fractional ownership, investors can purchase a portion of high-value properties. Investing in premium property may give better returns, and property management firms are typically involved in handling day-to-day tasks and maintenance, investors are relieved of such concerns.

In fractional ownership, if a tenant fails to pay rent or the property remains vacant, it can lead to a loss of rental income. Similarly, if a co-owner does not give maintenance costs, other partners may have to cover his share. Disputes among partners regarding  use, management, or sale of the property can lead to legal conflicts. This would waste both time and money.

Fractional ownership has limited liquidity, it makes it challenging to easily sell one’s share in the property. Investor can exit their investment in two ways: first is that he can sell his shares through the fractional ownership platform. The second is that the SPV finds a buyer who is interested in purchasing the entire property and all shareholders exit holding in the real estate.

If you also want to invest in property through fractional ownership, then, you should do some research. Choose a platform with a good track record. Evaluate the property’s location, rental income, and appreciation potential. Pay attention to documents related to ownership and other legal aspects. It’s essential to strengthen oversight in fractional ownership. Currently, this industry operates under the Companies Act 2013. Ownership platforms are registered under RERA. The market regulator SEBI may also bring fractional ownership under its regulatory purview.