You can own a fraction of a real estate property, but it pays to keep the following in mind

• SEBI has introduced new investment criteria to mitigate risks associated with fractional ownership of real estate.
  
• You should research the property, its location, market trends, and potential risks before investing.
  
• Fractional ownership platforms operate by purchasing pre-leased commercial properties and dividing the ownership among investors.
  

Owning real estate is not just a financial decision, in many cases, it’s a deep-rooted emotional one for many households. Buying commercial real estate, on the other hand, has always been touted as a wise economic decision.

But how can one own such an asset if you can’t afford it given that the price of commercial properties is often too high for most individuals? You can still invest to avail a slice of real estate through fractional ownership!

Minimum investment required

Previously, the minimum investment required for fractional ownership of real estate varied, typically ranging from ₹10 to ₹25 lakhs. However, most platforms standardised the minimum investment at ₹25 lakhs. With the introduction of new regulations from SEBI, this threshold has been lowered to ₹10 lakhs making it more accessible to a broader range of investors.

Fractional ownership options in India are still limited. However, while the concept is relatively new, it has quickly garnered investor interest. The fractional ownership industry is currently estimated to have ₹4,000 crores AUM and is expected to experience substantial growth, with projections suggesting it could reach a size of $5 Bn+ AUM by 2030, as per a JLL report.

The number of platforms offering these investment opportunities is still limited, reflecting the industry's early stage of development.

However, there were no defined rules on fractional ownership until SEBI stepped in recently.

What SEBI says regarding fractional ownership

To safeguard investor interests and foster growth in the Real Estate Investment Trusts (REIT) and fractional ownership market, SEBI has implemented a distinct framework tailored for small and medium (SM) (REITs).

“SM REITs are structures that pool funds ranging from at least ₹50 crore to less than ₹500 crore, with the aim of issuing units to a minimum of 200 investors. These funds are utilised to acquire real estate assets, ensuring investors receive income generated from such assets. Going forward, any firm offering product (FOP) intending to establish an SM REIT must seek SM REIT registration from SEBI,” says Sudeep Chandran, Founder and COO of YOURS, a platform for Fractional Ownership of Luxury Second Homes.

SEBI has also introduced new investment criteria to mitigate risks associated with fractional ownership. “It mandates that at least 95% of a scheme's assets must be invested in completed and income-generating properties, while the remaining 5% can be allocated to liquid assets. Furthermore, SEBI has issued additional rules and guidelines aimed at enhancing the sector's performance and safeguarding investors' interests," says Aryaman Vir, CEO of WiseX, a real estate investment platform that facilitates fractional ownership.

Fractional ownership platforms

Fractional ownership platforms operate by purchasing pre-leased commercial properties and then dividing the ownership among investors using a special purpose vehicle (SPV) structure.

An SPV is a distinct legal entity set up for the sole purpose of acquiring a specific real estate asset, allowing for a clear separation of this investment from other financial engagements. Investors participate by acquiring securities issued by the SPV, effectively gaining a fractional share in the property.

“The costs associated with the acquisition and maintenance of the property are distributed among the investors in the SPV, and these investors then share in the profits and returns from the asset. This sharing takes into account the management and maintenance fees that are levied by the FOP or by appointed third parties. Such a structure provides investors with an accessible route to earn from real estate, offering benefits like rental yields and potential asset appreciation,” says Vir.

This model of investment significantly reduces the financial burden on individual investors, allowing them to attain steady income streams and long-term financial returns. Furthermore, it enables investors to diversify their investment portfolios by engaging in various real estate projects located in different areas, with each project having its own SPV.

What you should keep in mind

Before you enter into an agreement, review the agreement thoroughly to understand your rights, responsibilities, and any potential limitations or restrictions associated with the fractional ownership arrangement.

“Like traditional property investment, due diligence is a must. You should research the property, its location, market trends, and potential risks before investing. Consider factors such as property valuation, maintenance costs, and resale prospects,” says Chandran.

Also, when you co-own a property through a platform, credibility, reputation, and track record of the fractional ownership platform facilitating the investment also become important. Look for platforms that have a reliable track record of adhering to regulatory guidelines, providing transparent information, and offering robust investor protection mechanisms.