Is Fractional Ownership Real Estate a Good Investment in India?

Buying property can be great from a traditionalist's view. However, purchasing high-value commercial real estate of high value may cost substantially in prime locations. Apart from paying the acquisition price to the owner, you will also have to spend exorbitantly on maintenance of the property, legal formalities for tenants, selling the same whenever you need the money and so on.

Fractional ownership presents a novel approach that enables multiple investors to participate in a high-grade commercial property via an appropriate ownership or investment structure. The question that arises is whether fractional ownership real estate is a good investment in India. Before we answer that, let's discuss how fractional ownership in real estate works, the benefits and some key risks you need to know before you buy commercial real estate.

How Fractional Ownership in Real Estate Works?

Fractional ownership in real estate enables multiple investors to participate in the ownership or rights in an investment via a shareholding or property ownership structure.

For example, a commercial property worth 10 crores could have other investors joining in via appropriate structures rather than buying it whole by a single investor.

If this commercial property has an annual rent of, say, 20 lakh, based on the terms, then eligible investors who invested in the scheme could get returns based on their share of investment, net of expenses and liabilities. In some cases, the structure also enables returns from an increase in the value of the property at the time of its sale in the market. However, please note that both the rental and appreciation are not guaranteed.

Benefits of Fractional Real Estate Investment

1. Low Capital Requirements

Unlike conventional methods of buying residential/commercial real estate, fractional ownership provides you with the opportunity to be part of some selected best properties with less capital at times.

2. Rental Earnings

Typically, for a commercial property, the buyer needs to take care of the maintenance and other expenses; however, if there is a healthy demand for the commercial space, then this will provide you with regular rental earnings.

3. Diversification

Fractional ownership in commercial real estate provides you with the opportunity to diversify your portfolio (existing stock, mutual funds, bonds, etc.) in addition to getting benefits of possible appreciation and income generation from such rental property. Whether or not the said property enables diversification will depend upon your existing portfolio and the value of such realty.

4. Professional Management

Depending on the terms of such fractional ownership structure, either there will be a professional team managing or executing repairs, or there will be specific duties of each owner. For instance, in some cases, a professional management fee is charged by such management teams. Know exactly what additional terms there are besides your share.

Key Risks to Know Before You Buy Commercial Real Estate

Even though fractional ownership has several benefits as discussed earlier, there are some risks as well that need to be factored in before you consider buying commercial real estate.

Liquidity risk - There are situations where it becomes challenging for you to realize the value of your investment due to a long period between the sale of the property and there being no buyer.

Tenant risk - There are chances that the tenant might default on their rent or vacate early.

Valuation risk - The market value to arrive at the final selling price of such property might be different from the estimated value at the beginning of the investment.

Legal risk - Your rights as an investor will depend heavily on structures put in place via such a fractional ownership agreement.

Expense risk - Some such structures charge management fees to manage or execute repairs in the property; this needs to be considered while calculating profit.

Market risk - Interest rates or demand in the local area might reduce, affecting the value of real estate.

You should instead consider these risks while analyzing real estate, and it is not just about rent returns and appraisal.

Is Fractional Ownership Regulated in India?

SEBI has guidelines concerning a certain kind of Small and Medium Real Estate Investment Trusts, or SM REITs.

Eligible SM REITs that comply with these registrations must follow disclosure, listing and other relevant requirements.

Not every company that engages in fractional ownership deals would be a "SEBI registered entity". Therefore, before any investment, it makes sense to know which entity runs such a scheme and go over its offering documentation thoroughly concerning ownership, rights of the investor and terms of exit.

How to Choose the Right Fractional Owned Real Estate Investment?

Here is a brief list of stuff that should cross your mind:

• Location, valuation, and rental value of property;
• Leases as well as tenant profiles
• Net income from this property after all expenses.
• What management and additional fees are charged.
• Ownership rights.
• Relevant legal requirements in such an investment.
• Conditions relating to exit.

Compare the offers and do not just invest blindly because it boasts a higher yield.

Final Though

Fractional ownership real estate could be right for certain investors who want to participate in commercial real estate and avoid the hassle of buying property alone. In addition, it makes big properties accessible, has the potential to provide a rental income stream and is professionally managed. Fractional ownership real estate is far from a guaranteed-income scheme that will reward you handsomely. If you require cash to come out quickly or have no issue dealing with losses, such an option might not be suitable for you.

Havendaxa or anyone else, investors should thoroughly research the property in question, their investment, and related expenses and documentation before committing. The above article is meant only to inform readers about options in fractional ownership real estate. All investment in real estate involves a myriad of risks, and there are no guaranteed returns.