“Investing in real estate is extremely profitable over the long term,” said Ravi, “But the problem is that property investment requires a lot of money.”
Ravi is a 29-year-old employee in a startup and a keen watcher of the property markets.
He was conversing with his old-time buddy Suraj who now works in a home finance company.
“Besides, I don’t want to put a large chunk in one property. I want to diversify risk.”
“You can do what you want today, man,” Suraj revealed, “You can invest small amounts in large properties and even earn an income.”
“What? How is that possible?”
“There are ways,” said Suraj.
“Tell me all about it,” demanded Ravi.
In this article, we will discuss how you can invest small amounts of money in large properties.
You can invest in luxury properties and large commercial building projects even with a modest budget.
Keep reading for the next 3 minutes.
The Concept of Fractional Ownership in Real Estate
Fractional ownership refers to splitting the value of an asset among investors with each getting a share of the property or asset. This concept usually applies to commercial real estate.
Many Indians prefer to invest in real estate instead of financial assets such as equity shares, bonds, or mutual funds. But investing in real estate properties requires huge financial resources and not everyone can do that. Fractional ownership allows an individual with limited resources to own a specified share of a particular commercial real estate via a platform that pools a large number of investors. The platform facilitating transactions of buying a fractional share in real estate is called a fractional ownership platform or FOP.
SM REIT Regulations
In March 2024, SEBI notified the SM REIT regulations to bring FOPs within the regulatory framework as a subclass within the REIT regulations for assets valued between ₹50 and 500 crores. Similar to REITs, SM REITs are fully regulated by SEBI with units of each of the schemes listed on the stock exchanges.
The Security and Exchange Board of India’s (SEBI) decision to notify Small and Medium Real Estate Investment Trusts (REITs) will provide a boost to the fractional ownership industry and safeguard investor interests, incorporating both commercial and residential properties within the new framework.
SEBI regulations are complemented by the Real Estate (Regulation and Development) Act (RERA), 2016.
This combination of SEBI regulations and RERA provides a robust legal framework that fosters trust and transparency in the fractional ownership market. Investors can participate with greater confidence, knowing their rights and protections are enshrined in law.
Several fractional ownership plans were launched after these regulations were notified.
A regulated product comes with significant benefits for investors like high-net-worth requirements for the investment manager, compliance and reporting standards, transparency, investor protection mechanisms, and marketing restrictions.
How Is It Different from Traditional Property Investment?
There are significant differences between traditional property investment and fraction ownership of real estate.
Let us see what they are.
Traditional Real Estate Investment
- High entry barrier: Significant upfront capital investment is required to purchase an entire property.
- Limited portfolio diversification: You can own only a small number of properties due to the high cost.
- Direct management responsibilities: The full burden of property management, including maintenance, tenant relations, and repairs, falls on the owner.
Fractional Real Estate Investment
- Lower investment barrier: Fractional shares make high-value properties accessible to a wider range of investors with smaller budgets.
- Broad investment diversification: You can spread your investment across multiple properties, mitigating risk and potentially maximizing returns.
- Reduced management hassles: Fractional ownership platforms typically handle property management responsibilities, and investors are free from these burdens.
In essence, fractional ownership allows you to co-own a high-value property with multiple investors. Imagine a luxurious beachfront villa or a prime commercial space in a bustling metropolis. Traditionally, owning such properties would require substantial investment, often out of reach for many individuals. Fractional ownership tackles this challenge by dividing the property into shares so that you can invest with modest capital.
How You Can Invest in a Fractional Ownership Platform
It is crucial to have a clear understanding of the investment objectives, as well as the associated limitations, risks, and returns of FOPs. Different platforms offer fractional ownership with differing mechanisms, resulting in variations in risk, rights, and returns.
However, if you do it right, it is a cost-effective way to invest in real estate.
We will now see how you can smoothly pull it off.
Select the appropriate platform
There is a plethora of online platforms offering fractional ownership. Compare their track records, regulatory compliance (SEBI registration), and property portfolios.
Different platforms have different minimum investment requirements. Check that too.
Look at the return frequency, whether it is monthly, quarterly, annual, or only at the time of exit.
Lock-in period
The investment in fractional ownership property can come with a lock-in period. This period can be different for different real estate properties and also for different FOPs.
Property selection
Fractional ownership platforms offer shares in office spaces, retail outlets, or even warehouses. Some FOPs offer investment options in luxury apartments, vacation homes in popular tourist destinations, or student housing units.
As per the Sebi regulations, the SM REIT must invest at least 95% of the value of any schemes’ assets in completed and revenue-generating properties and shall not invest in under-construction or non-revenue-generating real estate assets. The balance of 5% of the value of the schemes’ assets may be invested in unencumbered liquid assets.
It is important to know which type of real estate properties will be bought by the platform.
Tenant profile
Investing in an FOP platform can also generate regular income, apart from capital appreciation over time.
If you are investing for regular income, it is a good idea to check the tenant profile so that the platform is assured of receiving rent on time and can easily pay your share.
Check if the platform’s tenant profile consists of financially solid entities.
Fractional ownership lets you co-own a high-value asset such as real estate with multiple investors. However, there is limited control over property decisions and potential illiquidity (difficulty selling shares quickly). Choosing a reputable SEBI-registered platform and understanding exit strategies can help mitigate these concerns.
Summing Up
Fractional ownership lets you co-own a high-value asset such as real estate with multiple investors.
However, there is limited control over property decisions and potential illiquidity (difficulty selling shares quickly). Choosing a reputable SEBI-registered platform and understanding exit strategies can help mitigate these concerns.
