Absolutely. For Medium: UGC style, conversational, trust-building, educating and subtly showcasing Havendaxa as part of the narrative without feeling like an advert
What is fractional ownership in real estate?
The idea is simple: multiple people jointly buy an asset
Instead of one person buying 100% of the property, several investors own varying percentages of it
And this is what makes it different from a real estate-themed mutual fund or a REIT.
So how does fractional property ownership in real estate work?
Let me explain.
What exactly is fractional ownership of real estate?
As the name suggests, it refers to the fractional, i.e. partial, ownership of a given real estate asset
For example,
Consider a commercial property worth ₹10 crore
Instead of one investor buying this property, several investors could buy it together.
If the property ownership is split into 100 equal units, and an investor buys 5 of these, they would effectively own 5% of this asset, assuming this is how the ownership structure is set up.
The important thing is that this is not some generic "investment in real estate", but a specific interest in a particular property, with applicable T&Cs.
Similarly, there can be various ways to set up such an investment, which define the exact rights of an investor.
This is why it is important to read the fine print.
Now, why is this a thing?
There is one obvious reason: an affluent buyer may not have the appetite or the liquidity to make such a large purchase, but would be interested in buying a smaller percentage of such an asset. Thus, fractional ownership can help lower the entry barriers.
But this is not the only consideration.
The alternative to this would be for an investor to sift through the market looking for suitable buyers and properties, which may be challenging given the highly specialised nature of commercial real estate, which often involves large stakes and requires extensive due diligence.
Instead, a fractional ownership product may offer an investor a curated opportunity that includes a prospective tenant, an income forecast, the exact ownership structure and risks, exit options, etc. But all of this comes with its own considerations.
With that said, let us understand how exactly fractional property ownership typically works.
Say there is a commercial property.
Suppose this property is valued at
₹20 crore.
Now imagine this opportunity is being presented as a fractional ownership product.
This means that instead of one buyer purchasing this entire property, there are several such buyers.
To illustrate the mechanics, consider the following example:
Investment size: ₹20 crore
Number of investors: 100
According to this structure, an investor who buys one unit of this product would get an ownership right that is 1/100th of this property.
Of course, the details would depend on how exactly this instrument is set up.
Once there is an ownership right to this property, it will presumably generate some form of income.
If this is a rental property with an existing tenant, the latter will presumably pay rent to the owner(s).
Once this income is generated, expenses, taxes, upkeep, fees, etc. will be paid, and the remainder distributed to the owners in accordance with their relevant fractional interests.
This can be seen in the sample calculation below:
Now, where exactly is this property owned?
To the extent possible, this question must be asked before making any purchase.
In the context of a fractional ownership product, it is likely that there is something called an SPV (Special Purpose Vehicle), which is a shell company, that owns this property, and the investors buy OTC instruments, or something similar.
Essentially, investors buy securities from an SPV, which in turn buys an asset.
Of course, as always, it is important to read the fine print.
That said, what happens to the revenue generated by this property?
Say the property has a tenant who pays rent. This rental income gets deposited with the entity that owns this property.
This could be an SPV, which in turn pays this amount to the relevant investors, minus applicable expenses.
In any such calculation, it is also necessary to understand what percentage of this revenue one is entitled to receive.
That said, keep in mind that the overall rental yield of a property is not the same thing as the overall return on investment for a fractional owner.
This yield is, to a large extent, predicated on how well the property is managed, and how its owners perform on the expenses front.
With that said, let us examine a hypothetical rental scenario that applies more directly to a fractional ownership product.
As I see it, there are two ways for such an ownership structure to generate revenue.
One, rental income
and two, appreciation, i.e. the possibility that the property will eventually be sold at a higher price than the purchase price.
Let us examine both.
Fractional ownership and rental income
Say the ₹20 crore property under discussion will be rented out, and has a projected rental yield of 7%.
The income from this rental will presumably go towards covering the costs of ownership (property taxes, maintenance, insurance, management costs, legal costs, etc.).
The remainder will be distributed to the owners/fractional owners according to their entitlement.
Thus, it is important to understand what percentage of the rental income is payable to each owner.
For example, if an investor holds a 5% interest in the ownership of this asset, it would stand to reason that they should receive roughly 5% of this income stream.
But, as always, it all depends on the terms and conditions.
In the same way, one should consider how much of the appreciation in this property will be distributed to the owners.
Say, for instance, that this property is bought at ₹20 crore, and subsequently sold for ₹25 crore.
This represents a 25% increase in value, and if the terms of ownership so permit, 25% of this profit would be distributed to the owners in addition to the rental revenue discussed above.
But this is entirely dependent on how the investment is structured.
That said, keep in mind that there is always a possibility that the property will lose value, which can have the opposite effect.
As I see it, this distinction between the "rental yield" and the "return on investment", and the fact that appreciation in value is not guaranteed, helps put things into perspective.
As far as the exit option goes, one must understand what options exist for selling this fractional interest.
Typically, there are three options:
Selling the entire property
Selling a given share to a third party, and
Some sort of structured exit.
Now, as far as the exit load goes, there is always a possibility of not being able to sell a given property. This is why one typically does not rely on real estate as a liquid investment instrument, as opposed to stocks and mutual funds.
Thus, one must understand how liquid this investment is likely to be, and what the exit route is.
Finally, fractional ownership is not the same thing as buying a REIT
In short, a REIT is an investment vehicle with an established format that buys and manages real estate assets, and distributes its revenue to its investors, who are required to pay taxes on this income.
Fractional ownership products, on the other hand, can take different forms.
As far as I understand this, they really depend on the underlying asset.
All this is to say, before buying any fractional ownership product, it is necessary to understand what exactly this ownership entails, and all the terms, conditions, and risks involved. With that said, let us talk about the difference between fractional ownership and buying a whole property.
This, I think, is fairly self-explanatory.
Suppose the alternative to buying a fractional interest in a ₹20 crore property is buying a ₹3 crore property outright.
In that case, there are pros and cons to either strategy.
Similarly, there could be other alternatives involving different sets of risks and rewards. But what can we really say about the fundamental difference between the two approaches?
That said, as I see it, the appeal of fractional property ownership products lies in the fact that they allow an investor to diversify risk across multiple assets.
Instead of buying one large property, say, a ₹20 crore property, this approach allows an investor to spread their risk by purchasing fractional interests in multiple properties.
In either case, there should be some sort of due diligence about the property, the potential tenant, the projected rental yield, the likelihood of eviction, taxes, upkeep, appreciation, exit options, etc.
In short, the due diligence that would typically apply to a large property purchase should be taken into consideration when it comes to these fractional ownership products.
As you can see, there is a significant amount to consider when it comes to a fractional interest in a property, just as there is when it comes to purchasing any commercial real estate asset.
That said, I think it comes down to what sort of return an investor is seeking.
In any case, if we take this idea and apply it to a hypothetical fractional ownership product, we would get something like this:
What is Havendaxa?
As I understand it, platforms like Havendaxa are meant to facilitate fractional ownership in this manner.
The basic idea is that there are assets that are available for purchase, and investors need not buy entire properties.
Rather, these platforms aim to find buyers and sellers, and help facilitate property purchases and investments.
That is to say, they help both the investors and the owners of any such property.
When it comes to any given property, there would necessarily be some sort of agreement that entitles each owner to shares of the rental yield and appreciation, and covers the relevant taxes, expenses, management fees, liabilities, etc.
That said, when examining a specific product offering, it is necessary to carefully go through the fine print.
At the end of the day, it is all too easy to assume that any product offering resembles something that one knows from first principles. But when it comes to finance, it is vital that one examines the specifics of a given instrument, along with the risks and rewards it involves.
This is why it becomes so important to understand what exactly one is buying, and precisely what rights and liabilities one is taking on.
To conclude once again: fractional ownership is an attempt to enable more people to participate in buying a property by allowing them to buy only a fraction of it at a time.
Instead of one buyer purchasing 100% of this property, there are several such buyers.
Thus, the benefits and risks of this purchase can be distributed among these buyers in accordance with a given set of terms and conditions.
However, it is important to remember that these benefits and risks are not guaranteed.
While such an ownership arrangement may help an investor diversify their risk across multiple properties, the risks on a given property cannot simply be ignored.
All of this comes down to what return an investor is seeking, and what risks they are willing to take.
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