Fractional Ownership in Commercial Real Estate in India

Fractional ownership of commercial real estate is gaining popularity in India. It allows investors to own a portion of a high-value commercial property, such as an office building, a warehouse, or a retail space, without having to bear the full cost of ownership. This model has opened up new avenues for investors to participate in the real estate market, particularly those who may not have the financial capacity to invest in entire properties1. This approach democratizes access to commercial real estate investments, opening doors for retail investors who may not have the financial resources to purchase properties outright2. This report provides an overview of fractional ownership in commercial real estate in India, covering its meaning, historical context, legal framework, risks and rewards, investment amounts, expected returns, and key players in the market.

What is Fractional Ownership?

Fractional ownership, also known as co-ownership, allows a group of investors to pool their funds and collectively own a share of a high-value asset. In the context of commercial real estate, this means multiple investors can jointly own a portion of a property, such as an office building or a warehouse1. Each investor holds a fraction of the property's value proportional to their investment contribution1. This approach reduces the financial burden on a single investor and allows them to earn returns on their investment3. Investors enjoy returns proportionate to their share from both rental income and capital appreciation4. They can also sell their shares, just like any other asset4.

It is important to highlight that fractional ownership democratizes access to commercial real estate, allowing retail investors to participate in a market that was previously inaccessible1. This model empowers a wider range of investors to benefit from the potential gains in the commercial real estate sector.

Historical Context

Fractional ownership in real estate has evolved over time, offering a more flexible and accessible investment model compared to traditional approaches. In the past, real estate investment typically involved substantial capital requirements, with a single buyer owning the entire property. This limited liquidity and risk diversification4. Fractional ownership, on the other hand, allows individuals to invest in smaller amounts, own a fraction of the property, and benefit from higher liquidity as shares can be sold more easily4. This historical development has made real estate investment more inclusive and adaptable to the needs of modern investors.

Legal Framework

Fractional ownership in India operates within the framework of several legal regulations:

• Indian Contract Act, 1872: This act governs the contractual relationships between parties involved in fractional ownership, ensuring the legal validity and enforceability of agreements5.

• Real Estate (Regulation and Development) Act, 2016 (RERA): RERA provides a regulatory framework for the real estate sector, including fractional ownership projects, ensuring transparency and fair practices5.

• Transfer of Property Act, 1882: This act governs the transfer of ownership rights and interests in properties5.

• Securities and Exchange Board of India (SEBI): SEBI plays a pivotal role in regulating fractional ownership platforms by categorizing them as Alternative Investment Funds (AIFs). This ensures investor protection by mandating disclosures, outlining operational processes, and setting eligibility criteria for investors6.

In the real estate industry in India, it is common for fractional ownership to happen through a Joint Development Agreement (JDA). A JDA is a contract between the landowner and developer that specifies their joint efforts in developing the land and...source

While there is no specific regulation solely governing fractional ownership of real estate in India, SEBI issued a consultation paper in May 2023 to regulate platforms offering fractional ownership to protect investors8. This highlights the increasing recognition and regulation of this investment model in India.

Fractional Ownership vs. REITs

It is important to distinguish fractional ownership from Real Estate Investment Trusts (REITs). While both offer avenues for real estate investment, they have key differences. The table below provides a comparison between the two models:

Risks and Rewards

Fractional ownership in commercial real estate offers a unique set of potential risks and rewards:

Lower Barrier to Entry & Limited Control: One of the primary advantages of fractional ownership is the lower barrier to entry. It allows investors to enter the commercial real estate market with a smaller investment amount compared to purchasing an entire property9. However, this also means investors have limited control over property decisions, as major decisions often require unanimous agreement among co-owners9.

Diversification & Hidden Fees: Fractional ownership allows investors to diversify their portfolios by investing in multiple properties across different locations and asset classes9. This can help mitigate risk and potentially enhance returns. However, it's essential to be aware of potential hidden fees associated with some platforms. Carefully reviewing the fee structure before investing is crucial9.

Passive Income & Liquidity Issues: Investors in fractional ownership can earn passive income through rental income generated by the property7. This can provide a steady stream of income without requiring active involvement in property management. However, it's important to note that selling fractional shares may take longer compared to traditional property sales, potentially creating liquidity challenges6.

Potential for High Returns & Uncertainties: Commercial properties generally yield higher rental returns and appreciate over time, offering attractive returns to investors9. However, like any real estate investment, fractional ownership is subject to market fluctuations and management issues that can affect property values and rental income9.

Shared Responsibilities & Lack of Transparency: Fractional ownership allows co-owners to share the financial burden and management responsibilities associated with property ownership9. This can be beneficial for investors who prefer a more hands-off approach. However, some platforms may lack transparency in their operations and property valuations, which can be a concern for investors9.

Professional Property Management & Market Fluctuations: Fractional ownership arrangements typically include professional property management, relieving investors of day-to-day management tasks11. This can be a significant advantage for those who lack the time or expertise to manage properties themselves. However, it's crucial to remember that market fluctuations can impact property values and rental income, posing a risk to investors4.

Networking Opportunities & Management Issues: Fractional ownership can create networking opportunities with like-minded co-owners12. This can be valuable for sharing knowledge, insights, and potential investment opportunities. However, the performance of the property management company can significantly affect returns, making it essential to choose a platform with a strong track record4.

Higher Rental Yields & Liquidity Constraints: Commercial properties generally yield higher rental returns than residential properties, often 3-4 times higher12. This makes fractional ownership in commercial real estate an attractive option for income-seeking investors. However, while fractional shares offer more liquidity than traditional property ownership, they may still be less liquid than stocks or bonds, potentially creating challenges for quick exits4.

Platform Dependence & Co-owner Disagreements: Investors in fractional ownership rely on the platform for property management, transparency, and efficient operations4. Choosing a reputable platform with a proven track record is crucial. However, potential disagreements among co-owners regarding property management and decisions can also pose challenges4.

It is crucial for investors to carefully consider these risks and rewards before investing in fractional ownership. Conducting thorough due diligence and choosing a reliable platform are essential steps for a successful investment experience.

Fractional vs. Traditional Investment

Fractional ownership offers a distinct approach to real estate investment compared to traditional methods. The table below highlights the key differences:

| Investment Cap | | |---|---| | Fractional Ownership in Real Estate | Requires lower capital investment and provides shared ownership. | | Traditional Real Estate Investment | Requires higher capital investment and provides complete ownership. |

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Investment Amount and Expected Returns

The minimum investment amount for fractional ownership varies depending on the property and the platform, typically ranging from INR 5 lakhs to INR 50 lakhs or more10. Some platforms offer investments starting as low as INR 25 lakhs7.

Expected returns from fractional ownership in commercial real estate can be attractive. Rental yields typically range from 6-8%7. Some platforms offer up to 10% rental yield and up to 18% IRR1. Commercial real estate has historically provided stable returns, with annual returns from CRE staying at 10-11% since 2013-1417.

Fractional ownership of commercial properties offers investors 3-4 times higher returns than residential properties13. The share of rental income serves as a source of passive income, which along with appreciation in property value adds to long-term capital gains13.

To evaluate the potential returns from fractional ownership, consider this example: If an investor puts INR 25 lakhs into a fraction of a commercial property valued at INR 10 crore with a rental yield of 8%, they can earn INR 2 lakhs annually, minus expenses. Over five years, if the property appreciates by 20%, the value of the INR 25 lakh investment would increase by INR 5 lakhs18.

The market size of fractional ownership in India is projected to grow significantly. Estimates suggest a jump from Rs 1,500 crore in 2019 to Rs 4,000 crore in 20237. In the upcoming five years, fractional ownership in commercial real estate in India is expected to witness significant growth, with an estimated increase of 13 percent to 16 percent19. This surge is driven by factors such as government support, increased demand for office spaces, the growing presence of institutional investors, and substantial foreign investments19.

Conclusion

Fractional ownership in commercial real estate presents a compelling opportunity for investors in India. It offers a more accessible entry point to the market, allowing investors to diversify their portfolios and potentially earn attractive returns1. However, it's essential to carefully consider the risks involved and conduct thorough due diligence before investing. Choosing a reputable platform with a proven track record and transparent practices is crucial for a successful investment experience. The evolving legal framework and the increasing popularity of fractional ownership suggest a promising future for this investment model in India8.

Key Players in the Market

Several companies offer fractional ownership in commercial real estate in India. Here are some of the prominent platforms:

Assetmonk:

• Offers investment opportunities in commercial real estate among other asset classes, including fractional ownership, with investments starting as low as 25 lakhs.

• Has over 350 crores of rupees in assets under management (AUM) and has delivered an average internal rate of return (IRR) of 14 to 24% and an average yield of 9%.

• The platform's track record is testified by nine successful product exits, with 100% on-time payouts and 30% repeat investments.

• No information available about the team or funding rounds4.

BRIKitt:

• Provides exclusive exchange benefits, allowing investors to seamlessly exchange their ownership in one property for another within the BRIKitt portfolio.

• Recognized by Forbes India and D Globalist as one of 200 companies with global business potential.

• No information available about the team's track record21.

hBits:

• Offers real estate opportunities for a minimum ticket size of INR 30 lakhs and offers up to 18% IRR and up to 10% rental yield.

• With over 1,00,000 registered users, hBits has around INR 365 crore in Assets under management (AUM).

• Offers a variety of services to its customers, including hassle-free management, rent collection, and maintenance; easy and secure access to all data and information; remote accessibility to distinctive property data insights any time anywhere; and seamless exits and continuous price discovery for asset tracking.

• No information available about the team or funding1.

Strata:

• A tech-enabled platform that allows investors to co-own high-value commercial real estate and earn rental income, as well as capital appreciation.

• No information available about the team, funding, or track record2.

Real X:

• A blockchain-based platform that facilitates seamless and transparent fractional ownership in real estate, enabling easy buying, selling, and management of property shares.

• No information available about the team, funding, or track record4.

Wisex:

• Provides easy access, transparency, and liquidity to a curated selection of rent-yielding commercial real estate assets.

• The company has over 60,000 users and has facilitated investments of over INR 400 crores.

• No information available about the team15.

Alt DRX:

• Claims to be the world’s first digital real estate exchange.

• Operates on the principle of fractional ownership, breaking down real estate assets into smaller, digital tradable units.

• Leverages advanced technology, including a proprietary machine learning algorithm, to determine real-time Net Asset Value (NAV) and facilitate peer-to-peer trading.

• No information available about the team or funding15.

Farmfrax:

• Allows you to purchase agricultural land which they lease and develop and then is sold after a few years with capital appreciation.

• No information available about the team or funding15.

Earnnest.me:

• Launched in February 2022 and has over 700 investors, with 70% of them having used the platform more than once.

• No information available about the team or funding15.

Altgraaf:

• Allows investors to make investments in real estate and earn returns through capital appreciation.

• Has facilitated over ₹1,000 crore in deals.

• No information available about the team15.

Analyzing the competitive landscape, it's evident that each platform offers a unique set of features and benefits. Some platforms, like hBits, focus on providing a comprehensive range of services, while others, like Real X, leverage blockchain technology for transparency and efficiency. Investors should carefully evaluate the features, track record, and available information about each platform to make informed investment decisions.

Works cited

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13. Investing In Pieces: How Fractional Ownership In Commercial Real Estate Is Transforming Personal Finance In India - ABP Live, accessed December 16, 2024, https://news.abplive.com/business/personal-finance/investing-in-pieces-how-fractional-ownership-in-commercial-real-estate-is-transforming-personal-finance-in-india-1695407

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15. Best Fractional Real Estate Platforms In India - Random Dimes, accessed December 16, 2024, https://randomdimes.com/best-fractional-real-estate-platforms-in-india/

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19. How is Fractional Ownership in Commercial Real Estate changing? - RateperSQFT, accessed December 16, 2024, https://www.ratepersqft.com/blog/real-estate-investment/fractional-ownership-in-commercial-real-estate/5

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21. India's No.1 and Most Trusted Fractional Ownership Platform - Brikitt, accessed December 16, 2024, https://brikitt.com/most-trusted-fractional-ownership-platform/

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