Read through this guide to understand all there is to know about fractional ownership – its history, evolution, distinction from REITs and SM RIETS, legal framework, regulations, benefits and risks associated, tips for first time investors and FAQs.
Are you eager to understand how fractional ownership can diversify and enhance your investment portfolio?
Fractional ownership investments are rapidly becoming essential for retail investors. They offer steady, consistent returns and access to premium assets previously reserved for ultra-high-net-worth individuals, driving their increasing popularity.
To navigate this investment space effectively, it’s crucial to deepen your understanding of the concept. This article covers the topic along with several key considerations including the history and evolution of fractional ownership, the nature of fractionalized assets, the legal framework, the associated rewards and risks and much more.
Contents:
- What is Fractional Ownership?
- Evolution of Fractional Investing in India
- Assets That Can Be Invested In Fractionally
- How Fractional Real Estate Investing Works
- Difference between fractional ownership, REITs and SM RIETS
- Legal Framework and Regulations
- Benefits of Fractional Real Estate Investment
- Risks and Considerations
- Tips for First-Time Investors
- Frequently Asked Questions
1. What is Fractional Ownership?
Fractional ownership is an investment structure where multiple investors collectively own a percentage share of a high-value asset. Unlike traditional ownership, where one individual or entity owns the entire asset, fractional ownership allows multiple parties to share the costs, benefits, and responsibilities associated with owning and maintaining the asset.
Example: Consider a commercial property valued at ₹10 crores. If ten investors each contribute ₹1 crore, they each own 10% of the property. These investors share in the rental income generated by the property, and if the property is sold, they receive 10% of the sale proceeds. This model allows individuals to invest in high-value assets without needing to bear the full cost, spreading both risk and rewards among the co-owners.
2. Evolution of Fractional Investing
Fractional investing has evolved significantly over the past decade, driven by the increasing demand for alternative investments and the rapid growth of the real estate sector.
Here’s a brief timeline of its evolution (with a focus on India):
Early 2010s: The concept of fractional ownership began gaining traction globally, primarily in the U.S. real estate market, with early adopters exploring ways to pool resources to invest in high-value properties.
Mid-2010s: Indian investors started showing interest in fractional ownership, particularly in the luxury real estate segment. However, the concept was still in its nascent stages, with limited awareness and few platforms offering such investment opportunities.
2018-2020: The Indian market saw the launch of platforms dedicated to fractional ownership. These platforms began to popularise the concept, offering fractional investments in commercial properties and other asset classes.
2020-2021: The COVID-19 pandemic accelerated the shift towards fractional ownership as investors sought stable, income-generating assets amid market volatility. Since then, the Indian market has witnessed a surge in new entrants, heightened investor interest, and improved regulatory clarity, positioning fractional investing as a mainstream wealth-building strategy.
2024: The Securities and Exchange Board of India (SEBI) has recently approved regulations allowing small and medium real estate investment trusts (SM REITs) to offer fractional ownership opportunities in real estate. This development comes under the SEBI (REITs) Amendment Regulations, 2024, introduced in March. These regulations open new avenues for investors by enabling them to own portions of real estate properties, making real estate investment more accessible and diversified.
3. Assets That Can Be Invested In Fractionally
Here are some assets that one could explore investing is as a fractional owner:
i. Real Estate
Here are a list of real estate assets that can be fractionalised:
a. Residential Properties
Fractional ownership in single-family homes, apartments, and condominiums allows investors to own a portion of high-demand residential properties, generating rental income and benefiting from property appreciation.
b. Commercial Properties
Investing fractionally in office buildings, shopping malls, and warehouses offers exposure to income-generating commercial real estate, which often provides higher yields compared to residential properties.
c. Vacation Properties
Investors can co-own vacation properties like beachfront villas or mountain cabins earning rental income , and enjoying personal time if the agreement allows for interval ownership privileges
d. Farmland
Agricultural land, ranches, and vineyards can be owned fractionally, offering both the potential for land appreciation and income from farming operations.
e. Mixed-Use Developments
Buildings that combine residential and commercial units offer diverse income streams and the potential for higher returns due to their multi-functional
ii. Luxury Items
Here are a list of luxury assets that can be fractionalised:
a. Yachts
High-end sailing yachts and motor yachts can be owned fractionally, allowing investors to share the costs of ownership and maintenance while enjoying access to luxury boating experiences.
b. Private Jets
Fractional ownership in business jets or light jets provides investors with access to private air travel, with shared costs making it more affordable.
c. Exotic Cars
Supercars, vintage cars, and luxury sedans can be owned fractionally, giving investors the thrill of owning a high-end vehicle without bearing the full cost.
d. Jewellery
High-value jewellery pieces, rare gemstones, and designer collections can be owned fractionally, offering a unique investment opportunity in the luxury goods market.
e. Art Collections: Paintings, sculptures, digital art (NFTs)
Investors can co-own valuable paintings, sculptures, and even digital art (NFTs), benefiting from the appreciation of these assets over time.
iii. Business Ventures
Here are a list of business venture assets that can be fractionalised:
a. Startups
Fractional investments in tech companies, biotech firms, and app developers allow investors to gain exposure to high-growth sectors with significant upside potential.
b. Small Businesses
Restaurants, retail stores, and service providers can be funded through fractional ownership, enabling investors to share in the profits of successful small businesses.
c. Franchises
Investors can own a share in franchises like fast-food chains or fitness centres, benefiting from the established brand and business model.
d. Renewable Energy Projects
Solar farms, wind turbines, and hydroelectric plants offer fractional ownership opportunities in sustainable energy projects with long-term income potential.
e. Film Productions
Investors can participate in the funding of movie projects, TV series, or documentaries, sharing in the profits from successful productions.
iv. Sports and Entertainment
Here are a list of assets in the sports and entertainment space that can be fractionalised:
a. Sports Teams
Fractional ownership in professional teams, minor league teams, or esports teams allows investors to be part of the sports industry and share in the revenue generated.
b. Event Venues
Stadiums, arenas, and concert halls can be owned fractionally, providing income from events and long-term appreciation of the venue’s value.
c. Music Royalties
Investors can own a share of royalties from popular songs, albums, or music catalogues, earning passive income as the music is streamed or played.
d. Film and TV Royalties
Fractional ownership in box office hits, TV shows, or streaming content provides a steady income stream from royalties.
e. Sports Facilities
Golf courses, tennis clubs, and sports academies offer fractional ownership opportunities, with investors earning income from memberships and events.
v. Collectibles
Here are a list of collectible items that can be fractionalised:
a. Fine Art
Masterpieces, contemporary art, and limited editions can be owned fractionally, allowing investors to diversify their portfolios with valuable and appreciating assets.
b. Wine Collections
Rare wines, vintage bottles, and wine futures can be owned fractionally, offering both enjoyment and potential appreciation in value.
c. Antiques
Furniture, historical artefacts, and rare books can be co-owned, providing a unique investment opportunity in the collectibles market.
d. Coins and Stamps
Rare coins, historical stamps, and limited editions offer fractional ownership opportunities in highly collectible and often appreciating assets.
e. Classic Cars
Iconic models, restored vehicles, and rare finds can be owned fractionally, allowing investors to participate in the classic car market without the full cost burden.
4. How Fractional Real Estate Investing Works
As aforesaid, fractional real estate investing allows multiple investors to co-own a property, sharing the costs, risks, and rewards. Here’s how it works:
i. Pooling Resources
Investors pool their funds to purchase a property, with each investor owning a fractional share based on their contribution.
ii. Ownership Structure
The property is typically owned by a legal entity, such as a Limited Liability Partnership (LLP) or a Private Limited (Pvt. Ltd.) company, with investors holding shares in the entity.
Fact: WiseX’s SPVs are structured as Private Limited (Pvt. Ltd.) companies, providing a robust and secure ownership framework for investors.
iii. Income Generation
The property generates rental income, which is distributed among investors in proportion to their ownership share. Investors also benefit from any capital appreciation when the property is sold.
iv. Exit Strategy
Investors can sell their shares through a secondary market or wait for the property to be sold, with the proceeds distributed among the co-owners.
v. Data on Returns
Fractional real estate investments in India have historically provided annual returns of 7-10% from rental income and 4-8% capital appreciation, though actual returns can vary based on market conditions and the quality of the property.
5. Difference between Real Estate Fractional Ownership, REITs and SM REITs
While fractional ownership in real estate, Real Estate Investment Trusts (REITs), and SM REITs offer ways to invest in real estate, they differ in structure and operation:
| Features | Fractional Ownership (Real Estate) | REITs | SM REITs |
| Property Type | Typically preferred for Commercial Real Estate | Mix of Residential and Commercial Properties | Both allowed. |
| Investment Approach | Focused approach on a specific property | Owns multiple properties | Focused approach on a specific property |
| Minimum Investor Ticket Size | ₹25 Lacs amongst reputed platforms | ₹300 | ₹10 Lakhs |
| Underlying Assets | Specific property | Portfolio of multiple commercial and/or residential properties | Specific property |
| Regulations | Companies Act | Real Estate Investment Trusts Regulations 2014 | SM REIT(s) Chapter introduced in the REIT(s) act in March, 2024. Existing Fractional Ownership Platforms (FOP) to migrate here. |
| Offer Size | No such limit. Typically FOPs are offering properties ranging from ₹30-100 Cr | ₹500 Cr or above | Between ₹50-500 Cr |
| Framework Popularity | Popular since 2020’s | 1st REIT got listed in 2019 | Only a few regulated trusts operate since the introduction of the regulations. |
| Returns | Fixed rental income plus expected capital appreciation | The regulations emphasise consistent income distribution but do not specifically guarantee returns through capital appreciation | Fixed rental income plus expected capital appreciation |
| Assets’ Development Requirements | Investments can be made in properties at any stage of development. | Minimum of 80% of the value of the REIT’s assets must be invested in completed and rent-yielding properties | SM REITs to invest 95% of their investments in rent-yielding developed properties |
6. Legal Framework and Regulations
The legal framework for fractional ownership in India is evolving, with key regulations covering the following areas:
- Real Estate (Regulation and Development) Act, 2016 (RERA): Ensures transparency and protects investors’ interests in real estate transactions, including fractional ownership.
- SEBI Regulations: The Securities and Exchange Board of India (SEBI) regulates platforms offering fractional ownership, ensuring compliance with securities laws. The introduction of Small and Medium REITs (SM REITs) in March 2024 is an amendment to the existing REIT regulations. This amendment focuses on fractional ownership in assets valued between ₹50 crore and ₹500 crore. Additionally, under these regulations, 95% of all assets under management must be invested in revenue-generating properties. Learn more about the framework of SM REITs by reading this document, which answers frequently asked questions about SM REITs.
- Company Law: Legal entities like SPVs (LLPs or Pvt Ltd) are used to structure fractional ownership, governed by the Companies Act, 2013.
- Taxation: Income from fractional ownership is taxed as per the Income Tax Act, 1961, with specific provisions for rental income, capital gains, and dividend distribution.
7. Benefits of Fractional Real Estate Investment
As an alternative investment opportunity, fractional ownership offers several benefits:
i. Affordability
- Lower Capital Requirement: Allows investors to participate in high-value real estate without needing to commit large sums of money.
- Access to Premium Assets: Provides access to high-end properties that might be otherwise out of reach for individual investors.
ii. Diversification
- Spread Risk: By investing in fractions of multiple properties, investors can reduce the risk associated with any single property.
- Asset Variety: Offers opportunities to invest in different types of real estate, such as commercial, residential, and mixed-use developments.
iii. Income Generation
- Rental Income: Investors earn a share of the rental income proportional to their ownership stake, providing a steady income stream. Notably, the rental income from commercial properties is 3-4 times higher than residential rental income and also higher than most bank fixed deposits (FDs).
- Long-Term Capital Appreciation: There is potential for property value appreciation over time, leading to capital gains upon sale.
iv. Professional Management
- Experienced Managers: Properties are managed by professionals, ensuring optimal operation and maintenance, which can enhance returns.
- Hands-Off Investment: Investors do not have to deal with day-to-day property management, reducing the hassle of direct ownership.
v. Capital Appreciation
- Market Growth: As real estate markets grow, the value of properties and, consequently, fractional shares can increase, offering significant capital appreciation potential.
vi. Liquidity Options
Secondary Market: Some platforms offer secondary markets where investors can sell their shares, providing liquidity even in an otherwise illiquid asset class.
8. Risks and Considerations
Here are a few factors for you to consider prior to diversifying your investment portfolio with fractional ownership opportunities:
i. Market Risk
- Property Value Fluctuations: Real estate markets can be volatile, and property values may decrease, impacting the value of your investment.
- Economic Factors: Broader economic conditions, such as inflation, interest rates, and economic downturns, can affect real estate values and rental income.
ii. Liquidity Risk
- Difficulty in Selling Shares: Fractional shares may be harder to sell, especially if there is no active secondary market or during market downturns.
- Long-Term Commitment: Investors may be locked into an investment for a significant period, limiting access to their capital.
iii. Management Risk
- Dependence on Management Quality: The success of the investment heavily depends on the property management team. Poor management can lead to lower returns and property value depreciation.
iv. Management Fees
- Ongoing management and maintenance fees can eat into profits, especially if the property underperforms.
v. Regulatory Risk
- Changing Regulations: Real estate and investment regulations can change, potentially affecting the profitability and legality of fractional ownership structures.
- Compliance Costs: Ensuring compliance with local laws and regulations can add to the costs and complexity of managing fractional ownership.
vi. Co-Ownership Conflicts
- Disagreements Among Owners: Conflicts between co-owners regarding property management, selling decisions, or other issues can complicate the investment. However, the voting rights granted to each investor ensure that decisions, including selling the property, are made based on a 75% majority. This democratic process allows for fair resolution of disputes and empowers investors to make collective decisions efficiently.
- Decision-Making Delays: Collective decision-making processes can be slow, leading to missed opportunities or delayed actions. Nonetheless, the structured voting mechanism helps streamline these processes, ensuring that the majority’s preference guides actions and mitigates prolonged indecision.
9. Tips for First-Time Investors
Here are a few actionables tips for first-time investors:
i. Research Thoroughly
- Understand the Property: Investigate the property’s location, market conditions, and potential for rental income and appreciation.
- Platform Credibility: Choose a reputable fractional ownership platform with a strong track record and transparent operations.
- Legal Structure: Ensure you understand the ownership structure, your rights, and any legal obligations involved.
ii. Start Small
- Test the Waters: Begin with a smaller investment to gain experience and understanding of how fractional ownership works before committing larger amounts.
- Learn the Process: Use your initial investment as a learning opportunity to understand the mechanics of fractional ownership, including management fees, income distribution, and exit strategies.
iii. Diversify
- Spread Investments: Diversify your investments across different properties or asset classes to reduce risk and improve potential returns.
- Balance Portfolio: Consider balancing your portfolio with other types of investments (e.g., stocks, bonds) to mitigate risks associated with real estate.
iv. Understand the Legalities
- Review Contracts: Carefully read and understand all contracts and agreements, including details about management fees, income distribution, and exit options.
- Seek Professional Advice: Consult with a financial advisor or legal professional to ensure you fully understand the implications of your investment.
v. Monitor Performance
- Regular Reviews: Regularly check the performance of your investment, including rental income, property management efficiency, and market conditions.
- Stay Informed: Keep abreast of market trends and any changes in regulations that could impact your investment.
vi. Plan Your Exit Strategy
- Understand Exit Options: Familiarise yourself with the process and options for selling your fractional share, including any secondary market opportunities that may be available.
- Long-Term Perspective: While it’s important to have a long-term investment horizon, it’s also crucial to be aware of the potential challenges of exiting early. However, having a well-thought-out exit strategy can help you navigate these challenges more effectively.
Learn more: How to Plan Commercial Property Investment?
10. Frequently Asked Questions
Here are answers to some of the most frequently asked questions:
Q.1. What is fractional ownership meaning?
Fractional ownership is a method of owning a percentage or “fraction” of an asset rather than owning it outright. This model is common in high-value assets like real estate, where multiple investors pool their resources to purchase a property. Each investor holds a fractional share of the asset, entitling them to a proportionate share of the income generated by the property and any capital appreciation. Fractional ownership offers an affordable way to invest in expensive assets while spreading the risks and responsibilities among multiple owners.
Q.2. How do I choose a reliable fractional ownership platform in India?
To choose a reliable fractional ownership platform in India, consider the following factors:
- Regulation and Licensing: Ensure the platform is registered with appropriate regulatory bodies, ensuring it operates within the legal framework.
- Transparency: Look for platforms that provide clear information on fees, property details, ownership structure, and the rights of investors.
- Track Record: Research the platform’s history, including past projects, investor reviews, and overall reputation in the market.
- Management Team: Evaluate the experience and credibility of the platform’s management team in real estate and investment management.
- Legal Structure: Understand the legal structure of ownership and how the platform handles investor rights and obligations.
Q.3. Is fractional real estate a good investment?
Fractional real estate can be a good investment for those looking to diversify their portfolio, gain exposure to high-value assets, and generate passive income. It offers the benefits of real estate investment without the need for a large capital outlay. However, like any investment, it comes with risks, including market fluctuations, liquidity concerns, and potential management issues. Investors should thoroughly research and consider their risk tolerance before investing.
Q.4. How is the re-sale of fractional ownership handled?
The resale of fractional ownership can be complex and varies depending on the platform and asset. Some platforms offer a secondary market where investors can list their fractional shares for sale to other investors. However, liquidity can be a challenge, as the market for fractional shares may not be as active as for whole properties, potentially leading to delays in selling or a lower-than-expected sale price. At WiseX, investors wishing to exit their investment early are provided with assistance in finding buyers through the secondary market at no additional cost.
Q.5. Can fractional ownership apply to any purchase?
Fractional ownership is most commonly applied to high-value assets like real estate, luxury goods (e.g., yachts, private jets), and sometimes even artworks. While the concept can theoretically be applied to any asset, it is most effective when used for items that are expensive and typically beyond the reach of a single buyer. The key is that the asset must be divisible in a way that each fraction holds value and can be effectively managed and shared among owners.
Q.6. What responsibilities do you have as a fractional owner?
As a fractional owner, your responsibilities typically include:
- Financial Contributions: Paying your share of maintenance fees, taxes, insurance, and other ongoing costs associated with the asset.
- Decision Making: Participating in key decisions related to the management or sale of the asset, often in coordination with other co-owners.
- Adherence to Agreements: Following the terms of the ownership agreement, which may include rules around the use, sale, or leasing of the asset.
- Property Management: Depending on the arrangement, you may have a say in how the property is managed, or this may be handled entirely by a third-party manager.
Q.7. How does fractional ownership work for WiseX?
At WiseX, fractional ownership allows investors to purchase shares in high-value assets, such as premium commercial real estate, at a fraction of the full cost. These identified properties are pre-leased to blue-chip companies, ensuring stable and reliable rental income. Investors pool their funds to acquire the property, and each investor owns a proportional share based on their investment. WiseX handles the management of the property, including maintenance, tenant management, and income distribution. Investors earn returns from rental income and potential property appreciation, with the flexibility to sell their shares through WiseX’s platform or in a secondary market.
Q.8. Is fractional ownership safe?
Fractional ownership can be safe if the investment is made through a reputable and transparent platform that adheres to legal and regulatory standards. However, it is important to recognize the inherent risks, including market volatility, liquidity challenges, and management quality. Conducting thorough due diligence on the platform, understanding the legal structure, and being aware of potential risks can help mitigate safety concerns.
Q.9. Can I sell my fractional ownership?
Yes, you can sell your fractional ownership, but the process and ease of sale depend on the platform and the asset. Some platforms offer a secondary market where you can list your shares for sale to other investors. Alternatively, you may need to find a buyer on your own or wait for the platform to facilitate a sale. Liquidity can be an issue, and the time it takes to sell your shares may vary.
Bottom Line
Now that you are familiar with the intricacies associated with fractional ownership investments, here are some additional resources that will help you in diversifying your portfolio:
- Take a look at WiseX’s commercial real estate fractional ownership opportunities.
- Book a call with a dedicated investment manager to learn more about the opportunities available.
Explore our articles on numerous subjects related to alternative investments.
