Ruth Saldanha: In its latest statement in October, the Bank of Canada held rates. This is a small bit of relief for many Canadians who have mortgages and have been eyeing rising rates with some amounts of alarm. For those who may or may not own their homes but still want some exposure to real estate in their investment portfolios, fractional ownership of real estate may seem attractive. Is it though? Madeline Hume is a NEXT Senior Research Analyst with Morningstar Research Services, and she has been tracking fractional ownership. She is here today to talk about what she has found. Madeline, thanks so much for being here today.
Madeline Hume: Thanks for having me, Ruth.
How Does Buying Just a Part of a Home, Work?
Saldanha: So, let’s start by talking about what exactly is fractional ownership of real estate. How does it work?
Hume: Yeah. So, it means different things to different people. There’s no one definition that applies to all fractional real estate. It can mean even slightly different things in Canada versus the U.S., for example. Typically, what everybody agrees upon is that it is an ownership stake in a real estate investment that confers some sort of access or rights to the property, but there’s no standard definition for what those rights or access actually are. So, some businesses that build themselves as fractional real estate platforms are giving you a certain amount of time or unit of time spent on the property in a given year, like a time share. But what I’d like to talk with you about today is fractional real estate platforms that offer access to real estate properties as an investment vehicle.
So, what does that mean in practice? That means that investors are putting down a certain amount of money. It could be as low as $50 in some cases, quite a bit lower than a down payment. And in return, they’re expecting some distribution of income from rents of the property and the potential for capital gains when the property is ultimately sold.
Fractional Ownership of Homes Vs Single Stock ETFs
Saldanha: So, this sounds a little bit like a single stock ETF, but instead just for a single home or maybe for a building. Is that it?
Hume: It’s maybe the closest comparison that I could draw for investors that may not be able to get a handle on it, but I would say that there’s one crucial difference. Practically, all shares of Microsoft, for example, for a stock are created equal. If you sell one share, you know exactly what on the other end as an investor you’re buying. And you can exchange those like-for-like. But with real estate, no two properties are the same. They’re much more difficult to buy and sell because you need to find a buyer that’s interested in the unique property that there’s exposure to.
The Risks of Fractional Home Ownership
Saldanha: So, you touched a little bit upon some of this, but what are some of the risks of fractional ownership?
Hume: Yeah. So, the biggest one is liquidity. So, when you have the challenge of not having an asset that’s like-for-like with another investment, it means that when investors commit their money to a particular project, it can’t easily be withdrawn like a stock or an ETF can be sold. Either investors have to pay a penalty to liquidate their shares or sell it to another potential investor, which means they have to sell it for whatever the other investor thinks those shares are worth and that’s certainly up for debate.
What to Do For Exposure to Real Estate – Without Fractional Ownership?
Saldanha: So, assuming I’m an investor who wants some exposure to real estate but doesn’t have enough for a down payment or for an entire house, what are my options here?
Hume: Yes. So, there is one long outstanding option that many investors have successfully used since time immemorial, and that’s a real estate investment trust. It’s commonly known as a REIT. Essentially what it is, is it’s a share that invests in a basket of diversified properties. And because those shares are traded daily on exchanges and there is a certain amount of liquidity that’s expected for those vehicles, the properties that they’re invested in are not just diversified, so you’re getting exposure to multiple properties at once, but they also oftentimes are held to higher quality standards, lower leverage standards, things that protect investors when the markets start to get hit.
Saldanha: Great. Thank you so much for joining us today with your perspectives, Madeline.
Hume: Ruth, it’s been a pleasure talking with you.
Saldanha: For Morningstar, I’m Ruth Saldanha.
Navigating through the vast domain of investment, real estate emerges as a stalwart, blending tangible assurance with formidable financial returns. Whether it’s the intrinsic value of physical assets or the stable growth trajectory, real estate invites investors with a promise of security and substantiality, especially crucial in volatile economic climates.
Why choose real estate?
Let’s delve deeper, organising the magnetic allure of real estate:
Tangible security and appreciation
Tangible investment: A physical asset providing a robust financial backup and a sense of concrete assurance.
Appreciation potential: With a recorded 8.7% (as per the Knight Frank Residential and Office Market Report H1 – 2023) appreciation in key Indian cities, real estate promises growth.
Revenue and diversification
Steady rental yields: Urban influx is intensifying the demand for rental properties, generating steady revenues. Residential averages to about 2-3% and going as high as 4% in prime areas (JLL Research). Commercial properties deliver even higher yields.
Portfolio diversification: Acting independently from stock market fluctuations, real estate offers diversification and risk mitigation.
Technology and accessibility
Fintech and real estate: Technology has simplified the real estate investment process, making it efficient and accessible.
Democratisation through fractional ownership: Platforms now enable a broader spectrum of investors to explore and partake in high-yielding real estate opportunities.
Commercial real estate potential
Alternative to residential: The realm of commercial real estate extends opportunities beyond residential properties, offering higher yields (6-9%).
High-return accessibility: Once exclusive to HNIs, tech-enabled strategies like fractional ownership enable wider access to commercial properties.
Tax and financial incentives
Tax advantages: Tax deductions and benefits, particularly on home loans, enhance financial feasibility for investors.
Embedded within these points lie the combined rationale of seasoned and emerging HNIs, alongside an ever-evolving global investor base, heralding real estate not merely as a strategy but an adaptable investment philosophy.
Strategies for real estate investment
Navigating through the layered terrains of real estate demands an astute strategy. Here’s a guide through the fundamental pathways:
Locational acumen: Identify potential hotspots with promising infrastructure and developmental prospects.
Robust valuation: Ensuring accurate property valuation to ascertain intrinsic worth and safeguard against overpricing.
Purpose and time horizon: Establishing a clear objective and timeframe to align with market cycles and investment goals.
Cash flow and profit analysis: A meticulous evaluation of expected incomes and profit margins to ensure fiscal health.
Prudent leverage: Wisely balancing the use of borrowed funds, mitigating risks while optimising profit potential.
Property-type decision: Considering variables like cost, location, property condition & resale value, decide between new constructions and existing properties.
Indirect investments: Diversifying via REITs and fractional ownership of commercial real estate to access premium properties without direct /complete ownership hurdles.
Credit score management: Maintaining a healthy credit score for advantageous loan terms and better financial flexibility.
Market trend awareness: Keeping an informed eye on market dynamics, policy shifts, and other influential factors.
By intertwining informed strategies with the lucrative and stabilised aspects of real estate investments, investors can sculpt a resilient and prosperous portfolio, harnessing both the traditional and modern virtues of the real estate domain, making it a timeless and adaptive instrument in the global investment symphony.
Aryaman Vir is the CEO at WiseX
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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.
What had SEBI proposed?
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.
Exclusive ownership or fractional?
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.”
Should you invest in a fractional ownership model for the short term?
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.”
Fractional ownership is revolutionizing the Indian real estate sector by democratizing investment opportunities and granting retail investors access to high-value commercial properties. With its potential for high returns, ease of tracking, and diversification benefits, this investment model is rapidly gaining popularity.
According to a report by Knight Frank, the market size of fractional ownership in India was USD 5.4 billion in 2020 and is projected to reach USD 8.9 billion by 2025, growing at a CAGR of 10.5%.
Commenting on the advantages and its future prospects in India, Nayan Raheja of Raheja Developers said, “Fractional ownership offers significant advantages for investors looking to tap into the potential of the commercial property market. It provides high appreciation potential and easy tracking. Commercial real estate investments have a track record of delivering excellent returns, and with the digitization of the real estate industry, tracking fractional investments has become more convenient than ever.”
Raheja added, “We are the first company to provide Bank Secured Returns up to 12% for 6 years to fractional ownership buyers in the country. The scheme also provides investors peace of mind to sub-assign the leasing rights to professional IPCs to manage the asset on their behalf to create a lifetime of revenue stream.”
Online platforms and technology-driven solutions allow investors to monitor their fractional ownership, enhancing transparency and providing greater convenience.
“Fractional ownership grants retail investors access to Grade A properties that were once exclusive to institutional investors. These high-quality commercial properties, known for their prime locations and superior features, offer the potential for attractive returns and long-term value appreciation,” said Ashwani Kumar from Pyramid Infratech.
Additionally, fractional ownership allows investors to purchase a fraction of a large-scale property, allowing for greater diversification of investment portfolios and reducing risks by spreading investments across different assets.
Rajesh K. Saraf, Managing Director, Axiom Landbase Pvt Ltd, said, “Fractional ownership also offers hassle-free management through dedicated management companies. These companies streamline the rental collection and tenant management processes, relieving individual investors from the burdensome responsibilities of property management. This hands-off approach allows investors to enjoy the benefits of real estate investment without the associated management complexities.”
Ankit Kansal, Managing Director, 360 Realtors, said, “Fractional ownership provides an avenue for portfolio diversification beyond traditional investment instruments like fixed deposits (FDs), gold, and residential properties. Investors can achieve a more balanced and diversified investment strategy by including commercial real estate through fractional ownership. In normal circumstances, a retail investor can’t think of investing in high-ticket commercial assets such as Grade-A offices, warehouses, industrial plots, hotels, etc. However, with the help of pooled investment approach of fractional ownership, even with INR 10-20 lakh, one can invest in such an asset and earn higher rental yields and IRR. Presently the overall market is sized at INR 4000 crore, climbing from INR 1500 crore in 2019. The aggregate potential is much larger. In the Grade-A office asset alone, there is an untapped market of INR 550,000 crore.”
Non-resident Indian (NRI) investors find fractional ownership particularly appealing due to the professionally-managed environment and the potential for generating rental income.
Fractional ownership offers NRI investors the opportunity to invest in high-quality assets in India while benefiting from the expertise of management companies. This attracts NRI investors looking for stable and rent-generating assets in their home country.
However, it’s essential to consider a few factors before engaging in fractional ownership. Firstly, financing options for fractional ownership properties are limited, with only a few banks offering mortgages. Investors may need to explore alternative financing avenues to secure the necessary funding for their investment.
Additionally, fractional ownership involves joint ownership, which means that all ownership partners must make decisions regarding maintenance, repairs, and decor collectively. This process can sometimes lead to delays and challenges in reaching a consensus.
Furthermore, the sale of a fractional property requires the approval of other fractional owners, reducing the flexibility and freedom typically associated with owning property outright.
Despite these considerations, fractional ownership remains an attractive investment option for retail investors seeking exposure to India’s commercial real estate market. By carefully weighing the benefits and considerations, investors can make informed decisions and leverage the potential of fractional ownership to diversify their portfolios and access high-value properties. As the market grows and financing options expand, fractional ownership is set to thrive in India, offering a viable avenue for individuals to participate in the lucrative commercial real estate market.
With soaring prices of real estate in India, the earlier popular concept of owning “real” estate in the Indian landscape seems like a far-fetched dream for the middle class, let alone talking about investing at large. But in recent years, technology-fueled startups have democratized real estate investing under the aegis of an ownership cum investment model known as “Fractional Ownership”.
In layman’s terms, Fractional Ownership is a concept wherein a percentage of an asset is owned as a fraction, on payment of a proportionate sum of money, which in turn provides the investor (fractional owner) benefits such as usage rights, income sharing, priority access, and capital gains from the upside potential of high-value assets.
Fractional Ownership is not just limited to real estate investing, it works wonders for a plethora of high-value asset classes that have traditionally been limited to high-net-worth individuals or institutional investors. This can be attributed to high ticket sizes, geographical constraints, and information asymmetry, among other reasons. Today, online platforms have come up around the world allowing average investors to venture into high-value assets ranging from art pieces, unique collectables, antiques, commercial real estate, equipment and machinery to vineyards.
When we apply this concept to real estate, fractional ownership helps bring like-minded investors together where they pool money to buy high-value residential or commercial properties. Platforms providing fractional ownership opportunities curate a list of high-value properties with in-depth research and analysis. All necessary information about the property is accessible to the prospective investors. Fractional ownership platforms provide an opportunity for average investors to come together and pool their resources to collectively own a high-value property. Thus, enabling real estate investing for as little as a few thousand rupees.
As discussed earlier, fractional ownership gives consumers the liberty to venture into different asset classes. Consequently, it allows one to diversify the investment portfolio. By owning a fraction of multiple high-value assets investors can spread their risk and potentially reduce their exposure to market fluctuations which might vary geographically, and this also allows the investor to enjoy greater liquidity compared to traditional ownership structures. In fractional ownership, several unrelated parties get to share in the risk and ownership of a high-value tangible asset. Thus, maximising the gains from diversification and minimizing the loss by sharing the risks with other fractional owners.
With every passing day, each of us is getting busier and, in this hectic lifestyle, we rarely get time for managing our personal lives, let alone handling some property we are invested into. For this, fractional ownership companies typically have professional management teams who are responsible for the maintenance and upkeep of the assets. This reduces the burden on individual investors and provides them with peace of mind knowing that their investment is well taken care of. Adding to it, some of these companies offer the potential for passive income to investors through rental or leasing agreements (in proportion to the fraction owned).
Overall, fractional ownership companies provide investors with a unique investment opportunity that offers benefits such as access to high-value assets, diversification, liquidity, professional management, and fixed passive income. In light of all this, fractional ownership is becoming increasingly popular with investors, especially among millennials who have recently experienced slumps in conventional investments. The fractional ownership market in India is seeing a promising rise as the commercial real estate market is estimated to grow more in the coming years.
(By Shiv Parekh, founder of hBits, a fractional real estate platform.)
Disclaimer: Views are personal and readers are advised to consult their financial planner before making any investment.
ReAlpha, a real estate technology and investment company, announced on Monday the launch of a fractional ownership web platform that will utilize artificial intelligence (AI) to bring a collection of property offerings to investors looking to add short-term vacation rentals to their portfolios.
The platform will target vacation hot spots like Orlando and Nashville.
The first property to be listed by reAlpha is The Jasmine, a five-bed, 4.5-bath townhouse in Orlando. The 2,221-square-foot property is near both Walt Disney Studios and Universal Studios. ReAlpha plans to expand across the Florida market this year and then into Nashville, Texas and other parts of the Sun Belt, according to Jorge Aldecoa, president of reAlpha Homes.
Aledcoa said the goal of the new web platform is to “democratize” ownership models in the global short-term rental market, which he values at more than $1.2 trillion.
“How do we make this available to anybody, the regular individual who’d love to get into investing and just doesn’t have either the knowledge behind it or the capital to bring in 20 percent equity?” Aldecoa said. “It’s really about giving them that opportunity at a level that’s palatable for them, whether that be a smaller amount or larger amount.”
Under the reAlpha fractional ownership model, investors can buy shares in individual properties that have been sourced and authorized by reAlpha prior to being introduced into the market.
Unlike timeshares, which require the purchaser’s physical use of the property, investors in reAlpha’s short-term vacation rentals can purchase passive equity interests and still have the opportunity to receive quarterly dividends based on income flow and any appreciation on the property’s value.
The firm will use its proprietary AI technology — reAlphaBRAIN — to score assets on various real estate attributes, ranging from area population growth and long-term rental projections to walkability and number of nearby restaurants. After the AI assessment, reAlpha’s team will conduct its own evaluation before listing the vacation rental on its platform as an offering.
“We’re a tech company, and we’re playing in the real estate sandbox,” is how Aldecoa describes his firm. “We’re bringing a tech component to the [short-term vacation rental] space.”
Unlike Pacaso, a proptech firm that buys single-family homes and sells ownership shares of the home to as many as eight buyers, or Airbnb, which serves as both a broker and a web platform where properties are listed for short-term use, reAlpha plans to create a new property stock market that utilizes the inventory across the proptech landscape.
“The space is so fractionalized, in terms of true competitors, there aren’t too many doing what we are doing,” Aldecoa said. “This is an investment vehicle. It’s truly a passive investment for an individual.”
Brian Pascus can be reached at firstname.lastname@example.org
The key force behind the resurgence and sustained momentum of commercial real estate (CRE) has been new-age accessible instruments like fractional ownership and REITs, writes Shiv Parekh, Founder, hBits.
As India emerges from the clutches of the pandemic and stabilises itself amid economic concerns around the Russian invasion of Ukraine, the commercial real estate sector has received a major boost fuelled by a host of factors. Commercial real estate (CRE) has recorded impressive growth in 2022, accelerating the momentum set in 2021 and looks poised to capitalise further on new emerging opportunities in 2023.
A major driving force behind the resurgence and sustained momentum of CRE has been new-age accessible instruments like fractional ownership and REITs. These instruments have enabled regular investors a share of the booming CRE pie and expanded the overall investment base.
Below are some of the expected trends for 2023:
As demand continues to soar steadily, the CRE sector is expected to grow to a market value of $1 trillion, up from $200 billion in 2021, and is expected to contribute to 18-20 percent of the country’s GDP by 2030, as per reports. It is expected that 2023 will see the sector spreading its wings as sectors like retail, hospitality, warehousing, data centres were spurred, by soaring demand and investments.
Warehousing & Data Centres
A majority of the demand has been in Grade A warehousing spaces. The growth is illustrated in the fact that the average size of a Grade A warehouse in India has doubled from 80,000 square-feet in 2018 to 1,60,000 square-feet in 2022.
Overall stock in the first half of 2022 stood at 307 million sq ft, compared to 170 million sq ft in 2018 and is expected to reach ~500 million sq ft by 2025, at a CAGR of 28 percent year on year.
According to industry experts, the warehousing and logistics sector has been the largest beneficiary during the COVID-19 pandemic and the share of total real estate investment in the sector has increased from 2 percent in 2020 to 20 percent in 2021. Warehouse volume in India has grown nearly three-times from 2.4 million cubic-feet in 2016 to 6.4 cubic-feet in 2021.
Return of Office Spaces
There will be a heartening trend in 2023 which will lead to the return and consolidation of demand for office spaces. Premium office spaces have attracted investors; thanks to a sharp uptick in demand by IT companies, software and BFSI firms. Recording a 66 per cent rise, the office space leasing has witnessed an absorption of 42 million sq. ft. Moreover, the growth of co-working spaces, reverse migration back to cities, and MNCs making India their new APAC bases have contributed significantly to the numbers in 2022.
Accessible options like fractional ownership of commercial real estate (CRE) have helped investors not only preserve, but grow their capital amount. Such investments offer 8-10 percent rental yield per annum and investors also get capital appreciation which ranges between 5-10 percent, so the investor earns 13-20 percent IRR for the time they are invested in.
The rental yield of a commercial property (8-10%) is higher than the yield from a residential property (2-4%). So, an investment of 25 lakh in fractional ownership has the potential to deliver Rs 16,500 to 20,000 monthly in rental income alone. This leads to a steady expansion of wealth and improved monthly liquidity.
These kinds of investments are Ideal for investors looking for a fixed monthly income: as these properties are able to deliver a 8-10% rental yield, which is best in class in the fixed income category. Along with that, these properties also get capital appreciation, so the investors don’t have to worry about capital erosion, while consuming the rent from the portfolio. Also, with the escalation clauses in the rental agreements, the rent they receive also Increases on regular intervals, more or less with Inflation. So, they get inflation protected returns along with being able to take care of their monthly expenses.
These kinds of investments are also ideal for Investors looking at alternative asset classes to diversify their portfolio without dilution of returns.
As per projections, the commercial real estate market in India is expected to grow at a CAGR of approximately 13 percent during forecast period 2022-2027. Moreover, NRIs have invested over $13.1 billion in the Indian real estate market in the last fiscal and the investment is expected to grow further in 2023.
Way Forward in 2023
This year is expected to carry forward the momentum generated in 2022 and see more demand in areas like warehousing, data centres, organised retail and Grade-A office spaces.
Moreover, at a time when the economy is still fragile and growth projections moderate, one needs to stay cautious with one’s investments. Smart investment options like Fractional Ownership of CRE allow investors to preserve as well as grow one’s capital. These instruments ensure stable returns that not only beat inflation but also enable investors to save better.
— The author, Shiv Parekh, is Founder of hBits, a fractional real estate platform. He has also worked at top financial organisations in the US including Citibank, Stanford Management Company (Stanford University’s endowment that manages over $20 billion) and Karbone (renewable energy investment bank). He has also excelled in commercial real estate development in India.
(Edited by : C H Unnikrishnan)