The real estate sector is increasingly becoming innovative, with revolutionary concepts such as serviced apartments and AirBnB’s tenancy model now firmly established. Fractional real estate is one of the recent trends in property ownership that seems to be the future of the sector in India.

What is Fractional Ownership?

 Fractional ownership refers to jointly owning high-value property such as a plane, a yacht or a piece of real estate. The financial burden involved in acquiring such high-ticket value assets often makes it difficult for individual investors to own, but fractional ownership makes it possible for ordinary people.

• Several unrelated investors pool their resources to own an asset, share the costs and mitigate risks, either for purely commercial reasons, for access rights, or both.
• Prior to purchasing an asset, investors agree on the rules and regulations that will govern joint ownership, such as usage rights.
• Each owner is guaranteed some amount of access to the property during which they can use the property or avail it to the public, for example, as a rental.
• A management body is required to enforce these rules and regulations, and oversee the day-to-day running of the property, such as finding new tenants (for which they get a share of the revenue).
• If the owner finds the tenant, they don’t have to pay the management.
• Additionally, fractional owners pay a certain amount every year for the management and maintenance of the property, relative to their percentage of their ownership.

Usage rights of a fractionally owned asset can be assigned based on various models, but the most common include the following:

Pay-to-use

An owner pays a fee to use the asset, which can be calculated on a daily/weekly basis. The money, as well as any rental income, is used to pay for expenses, and the surplus is distributed among the owners

Proportionate Assignment

Each co-owner is assigned a specific number of days to use the property every year, in proportion to the value of their investment. They can use the property as they wish, or even leave it unoccupied.

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Fractional Ownership in Real Estate – A ray of hope

In economies around the world, the average person can only dream of owning real estate property due to the high costs involved. However, fractional ownership of real estate provides a way for common people to pool resources and own property that generates revenue. For example, if a property costs Rs 50 crore, an investor can commit Rs 25 lakh, Rs 1 crore or even a higher amount, and becomes a partial owner.

A Specific Purpose Vehicle (SPV) is registered under the Ministry of Corporate Affairs (MCA) for a commercial real estate property, to hold it on behalf of fractional owners. The SPV operates a trusteeship or a limited liability partnership through which funds from shareholders are piped. The SPV purchases the property. Each fractional owner is a shareholder in the SPV proportionate to his/her contribution to the property.

Global Fractional Real Estate Ownership Companies

• Ember Co-Ownership:
  Ember offers access to luxury vacation homes worldwide at a fraction of the cost of whole ownership, making extraordinary living experiences more accessible.
• Fraction:
  Fraction is a fractionalization platform enabling investors to pool resources for shared ownership, allowing them to benefit from potential returns without large upfront capital investments.
• RealtyShares:
  RealtyShares serves as a crowdfunding platform facilitating investments in fractional ownership of commercial real estate in the “middle market,” targeting properties valued at $50 million or less

Is it safe to invest in fractional real estate?

Investing in real estate has traditionally involved large sums of money, and the fear of being duped has always dissuaded potential investors. Fractional real estate is a relatively new concept without sufficient regulation, and investors face the same risks. However, while every investor must exercise caution and prudence, fractional real estate is a lot safer as the risk is spread among many fractional owners.

Additionally, the institutional machinery behind fractional real estate today also provides some level of confidence. For example, the international firms and platforms that help investors to purchase and manage the property are quite transparent, must obtain a license from RERA (Real Estate Regulatory Authority) for its operations, and often use reliable technology such as blockchain.

PropTech Firms

One of the forces behind the increasing popularity of fractional real estate is the new-age PropTech firms that are providing easily accessible platforms to investors. They are set up by highly experienced industry experts, who provide transparent management of assets to investors, which builds trust.

Additionally, PropTech firms shield investors from the complex and cumbersome legal, taxation and other issues involved in real estate acquisition and maintenance. Online platforms operating in India include Definite, Myre Capital, hBits, Propertyshare, and Assetmonk.

Blockchain-powered Tokenized Fractional Real Estate

Innovative PropTech firms have exploited the digital transformation of industries and deployed technology-based solutions that enable investors to diversify their portfolios across multiple assets in different locations.

With tokenized real estate, a fractional owner’s shares are permanently recorded with blockchain technology, assuring investors that the records of their investment will be permanent, forever. Rental income from such tokenized real estate is also disbursed through cryptocurrencies and provides seamless cash flows to fractional owners.

The Rise of Fractional Ownership for Real Estate in India

India is perhaps one of the countries that are currently witnessing the highest interest in fractional real estate. hBits, a fractional ownership realty firm conducted a study that revealed that fractional ownership has increased by an average total transaction of Rs 750 crores over the last five years. Notably, 50% of these transactions were completed in the last year alone, and the spike seemed to coincide with the onset of COVID-19 related lockdowns.

The target market of fractional real estate is the tech-savvy millennial generation, the majority of whom are well educated and probably already living in their own homes. However, they cannot afford the high capital required to invest in commercial real estate. As fractional real estate gains popularity, it is now quite common to see groups of friends jointly owning a holiday home, at a fraction of the cost.

Indian Fractional Real Estate Ownership Companies

• BRIKitt:
  BRIKitt is a pioneering Proptech platform in India that simplifies fractional ownership in real estate, making it more accessible to investors by lowering entry barriers.
• Strata:
  Strata leverages technology to enable investors to own fractions of Grade-A commercial properties in India, providing them with opportunities for real estate investment with ease.
• hBits:
  hBits offers fractional ownership of carefully selected, high-quality properties, allowing investors to participate in real estate investment with reduced entry costs and minimal hassle

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Types of Fractional Ownership

Fractional real estate can be purchased and owned in several different ways, all of which are chosen for their benefits in terms of providing relief from taxation and/or regulations. Fractional owners decide on which model provides the maximum benefit.

Joint ownership model

All owners have a title to the property and usage rights that do not affect the rights of the others. Owners can sell their shares with the consent of others.

Co-operative model

Fractional owners form a cooperative society and become its members. They then purchase property in the name of the co-operative, and any member can sell their shares, which will be transferred to the new member.

Company model

Fractional owners form a company and purchase real estate property in its name. Each owner holds shares in the company and can sell them to another shareholder.

Trust structure

The property’s seller forms a trust and executes a trust deed for the benefit of the fractional owners.

Green Financing in Real Estate

Green finance is revolutionizing the real estate industry by incentivizing sustainable property development and investment. With the growing global emphasis on environmental conservation and climate change mitigation, financial institutions are increasingly offering specialized products and services tailored to support eco-friendly real estate projects. This shift towards green financing not only benefits the environment but also offers financial advantages to stakeholders. By incorporating energy-efficient technologies, renewable energy sources, and green building practices, property developers can access favorable loan terms, tax incentives, and grants, making sustainable development financially attractive.

Furthermore, green finance encourages transparency and accountability in real estate transactions. Investors and homeowners are becoming more conscious of the environmental impact of their property investments, seeking opportunities to align their portfolios with sustainability goals. This evolving financial landscape is driving innovation in real estate, fostering the development of green buildings, eco-friendly communities, and sustainable urban infrastructure. As green finance continues to gain momentum, it is reshaping the real estate market, promoting responsible investing, and paving the way for a more sustainable future.

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Conclusion

As fractional real estate ownership continues to gain popularity, India’s real estate sector is expected to bounce back after the hit by COVID-19, and more small investors will realize the dream of owning high-value assets.