SEBI

SEBI proposes norms to regulate fractional ownership platforms offering real estate assets

Fractional ownership of real estate properties appears to be one of the burgeoning trends that will rule the Indian real estate market in the upcoming years. In this structure, a few like-minded individuals control a piece of real estate, typically commercial. Each of them becomes a fractional owner because they jointly own the property. As a result, one owner’s financial burden is lessened. In this approach, the owners share the cost of expenses. It is a terrific approach to earn profit from real estate. New generations are moving more and more towards fractional ownership as a result of the digital transformation of real estate. That could be the next great thing in investment technology. More real estate investment options are sought after by knowledgeable investors. Compared to other sectors, this one is the most stable in terms of revenue generation. It makes sense to invest in real estate, given that the stock market is unstable and fixed deposits do not offer competitive rates of interest.

What is Fractional Ownership?

Fractional ownership is simply the ownership of expensive commercial assets managed jointly by several investors with pooled funds. Otherwise, retail investors could not invest in these enormous commercial buildings. The property management company enables ordinary investors to make an initial investment and profit from appreciation rates.

Our sole claim to any property is determined by ownership in and of itself. However, fractional ownership refers to the idea of owning only a portion of any property rather than being the sole proprietor with all the benefits. Currently, investing in commercial real estate in India can be beneficial, but certain financial obstacles prevent the average person from entering the market. 

Fractional Ownership: A Developing Trend

Real estate consistently outperforms more conventional investments like government bonds, gold, and fixed deposits. Until recently, the commercial real estate market was the exclusive domain of powerful corporations and wealthy investors. Both middle-class and retail investors were reluctant to participate in large commercial enterprises and were unable to do so. Retail investors are already taking part in these high-potential markets through the advent of the fractional ownership trend in India.

By simply dividing the high cost into smaller amounts, this technique of asset purchase enables millennials to take advantage of new opportunities for a fraction of the price previously needed. Tech-savvy millennials are always seeking new ways to use technology to make money. The way millennials invest in fractional ownership has altered as a result of technology, which is undergoing a digital transformation across all industries. 

Fractional ownership is the next big thing in investment technology. It gives investors access to new channels and reduces the price of previously only affordable assets to High Net-worth Individuals (HNIS). In any case, it has typically only been accessible to those with in-depth expertise, the necessary connections, and access to people with large sums of money.

SEBI to regulate platforms offering fractional ownership of real estate assets

SEBI will govern platforms allowing fractional ownership of real estate assets.

• Typically, the term “fractional ownership” refers to the smallest investment stakes in real estate. In the past three years, a variety of web-based platforms have exploded, enabling investors to invest in buildings, warehouses, malls, and other real estate.
• On these platforms, the minimum investment ranges typically from 100,000 to 250,000 rupees.
• According to a discussion paper released by SEBI^[1], the country’s market regulator, investors may be missold if there is no standard, uniform selling practises and no independent evaluation of the information or materials given to potential investors.
• Typically, a discussion paper is the first step before SEBI develops new regulations.
• The regulatory body suggested that these platforms register under the Regulatory Framework for Micro, Small, and Medium REITs, where they would need to have independent trustees, sponsors, and investment managers.
• According to the regulator, the net worth requirements for the sponsor and investment manager are 20 million rupees and 10 million rupees, respectively.
• According to SEBI in the discussion paper, the underlying real estate assets offered on these platforms are comparable to the real estate or property described in the REIT Regulations.
• Such fractional ownership has been available in markets like the United States and the United Arab Emirates since 2015. 

Risks involved in fractional ownership of real estate

Real estate fractional ownership, sometimes referred to as co-ownership or shared ownership, occurs when two or more people or entities jointly own a piece of property. While investing in real estate through fractional ownership may be more affordable, there are risks. The following are some possible risks of real estate fractional ownership:

Conflicts amongst co-owners: Co-owners could disagree on how the property should be utilised and managed or when it should be sold. Co-ownership disputes can be expensive, time-consuming, and require a lawyer’s involvement.

Liquidity Risk: Fractional ownership of real estate investment is typically less liquid than investing in publicly listed stocks, which means that it could be challenging to sell your portion of the property when you want or need to.

Limited Control: You might only have a small amount of power over the property as a co-owner. All co-owners may need to agree on a decision before it can be made, which could cause delays and conflict.

Costs associated with maintenance and upkeep: Co-owners are accountable for maintaining and fixing the property. The onus is placed on the other co-owners if one is unable or unwilling to cover these expenses.

Market Risk: The property’s worth can change based on market conditions, like with any investment, which could lead to a decline in value or trouble selling your share.

Management risk: There is a chance that the property will not be adequately managed or that the managing party will have conflicts of interest, depending on the management structure of the fractional ownership.

Before making a fractional ownership real estate investment, it is crucial to conduct an extensive study and understand the advantages and disadvantages of this strategy. Speaking with a financial or real estate investment specialist may also be helpful.

REITs vs Fractional Investing 

REITs

Real Estate Investment Trusts (REITs), a more well-known alternative to fractional ownership, are a real estate investment vehicle. A real estate investment trust (REIT) is a type of collective investment plan that enables an investor to purchase units of and invest in a portfolio of income-producing real estate assets. In order to generate income for the unitholders from the pool of money they contributed, investments are made in assets like shopping centres, office buildings, hotels, and flats. These assets are then rented out or leased.

S.No	REITs	Fractional Ownership Real Estate
1.	REITs enable investors to make real estate investments without actually owning a property.	In contrast to REITs, fractional ownership investors make investments and own the property jointly.
2.	In REITs, investors have no input whatsoever because that decision is made by the corporation managing the funds, unlike fractional investment.	The fractional investment gives them entire discretion in choosing the sort of property to invest in.
3.	Individuals who buy shares in publicly traded REITs frequently have the choice to sell them at any moment.	In contrast, fractional ownership is a longer-term investment with a predetermined holding period of between 5 and 10 years.
4.	REITs are subject to SEBI regulation. They must adhere to strict rules that include professional management with core competencies.	Fractional ownership is governed by the people in charge of running the business and owning the property.
5.	Investors must put at least 80% of their capital into assets that generate income.	Such a requirement does not exist here. The funds may be used to purchase both ready and under-construction properties.
6.	Investors are not required to pay any upfront costs or maintenance fees.	The investors are charged for brokerage and maintenance fees.
7.	The minimum investment is between Rs. 20 and Rs. 50 thousand.	Typically, the minimum investment is in lakhs.
8.	REIT dividend income, however, guarantees consistent income.	Although properties have tremendous potential, the returns can vary.

Things to Consider Before Entering the Fractional Ownership Market

Investors should take into account a few important factors before investing in fractional ownership because it is a relatively new financial product.

Extensive market research: It reveals that commercial real estate investments are only available through a small number of start-ups, and fractional ownership is still a relatively new concept in India. Wealthy investors typically manage these start-ups. It is best to conduct the study and identify the business with competent executives and a vast investor network. 

Obtain the Top Offer: Comparatively speaking, locating a property with the highest return on the smallest investment is a very simple effort compared to other considerations, like determining the current market value of that specific property. In order to avoid overpaying for a home, experienced investors know to search for deals. 

Look for solutions that cater to customers: Look for companies or prop-tech start-ups that offer simple exit choices, guarantee the highest possible financial returns, and have a high yield over the long term.

Conclusion

Fractional ownership of real estate investment is typically less liquid than investing in publicly listed stocks; it has offered retail investors a cutting-edge opportunity. Of course, researching an asset class before investing is the most important thing. Although they operate very differently, fractional property and REITs can provide investors with various advantages. Everything ultimately boils down to your investment goals. And these trends are positive because they point to market circumstances that are maturing and offering more options for holding assets.

Read our Article: How will the budget affect InvITS and REITs?