MC Explainer: Should you invest in property via the fractional ownership model?

Fractional ownership model is where a number of investors pool in money to purchase a property being offered by several fractional ownership platforms known as FOPs in the open market.

The Securities and Exchange Board of India (SEBI) in May 2023 proposed regulating fractional ownership of real estate assets in a bid to provide protection to small investors. The move received mixed reactions from several quarters.

Moneycontrol spoke to real estate experts to understand whether an investor should invest in a real estate property via the fractional ownership model or opt for a smaller property via the traditional exclusive ownership model.

Fractional ownership of a property typically refers to small investment holdings of real estate assets. This is where a number of investors pool in money to purchase a property being offered by several fractional ownership platforms known as FOPs in the open market.

There have been several models by FOPs where for instance10 investors will invest Rs 10 lakh each to purchase a residential property priced at Rs 1 crore. In return, the FOPs manage the property and the rental yield (after the FOP deducts its fee for taking care of the property) is shared between the investors equally or where the contribution to the pool was not equal, in the ratio of the contribution.

There are several FOPs that also offer a certain number of days’ free stay at the property in a given period of, say, one year.

Many FOPs come up with such schemes for purchase of second homes in holiday destinations and several platforms also offer fractional ownership of commercial properties for leasing purposes.

ALYF, an FOP platform, for example, offers a fractional ownership model where investments start as low as Rs 10 lakh.

SEBI had in May 2023 proposed that FOPs should be made to register under the Framework for Micro, Small and Medium Real Estate Investment Trusts, and have separate trustees, sponsors and investment managers. In a discussion paper, SEBI had highlighted that there is lack of standard, uniform selling practices and lack of independent valuation, which could result in investors falling prey to mis-selling.

According to Sunil Gehi of Mohans Estate Consultants in Mumbai, it is always better to be an absolute owner of a smaller property and have exclusive possession rather than being an on-paper part-owner in a fancy property.

Gehi said, "There is a grey area when it comes to regulating the space of fractional ownership of properties. For example, today if I purchase an apartment or commercial property for Rs 10 lakh or any amount for that matter, I will become the exclusive owner. But here (under the fractional model) I will have ownership with, say, nine other owners. Are not we risking our capital? What if I want to exit and others do not agree? The companies dealing in it guarantees a buyback, but what if the buyback is not adhered to? To the best of my knowledge, no promoter of such schemes is offering an irrevocable bank guarantee for buyback."

He added, "Also, one cannot opt for any home loan to purchase residential property under the fractional ownership model. The only benefit here is that it will be like a serviced apartment where everything will be looked after from maintaining it to giving it out on rent."

Also read: Fractional ownership in commercial real estate promises great returns, but REITs are safer

Strata, a platform involved in fractional ownership involving commercial premium spaces beginning from Rs 25 lakh, said short-term investors should avoid investing in such a model.

"Besides being a ‘stable’ and an ever-growing asset class, commercial properties offer superior returns, approximately 3X-4X rental returns, unlike their residential counterparts. Typically, the returns range between 12 and 18 percent depending on multiple factors such as location, type of asset, etc., while the combined IRR (internal rate of return or the annual growth an investment is estimated to generate) can be 13 to 15 percent over a period of four to five years. As a thumb rule, fractional ownership in commercial real estate is ideal for long-term investments. Therefore, if anyone is looking for short-term returns, they should avoid investing in (fractional ownership properties)," said Sudarshan Lodha, co-founder and CEO, Strata.

He added, "Investors should typically take up goal-based investing, wherein the goals are bigger, well-planned and aligned across a minimum period of three to five years or multiples thereof. One should carefully consider an array of factors such as one’s income levels, saving mobilisation, investment pattern, risk appetite and investment goals, among others, before foraying into the space."