Individual investors can get partial ownership in Grade-A commercial real estate with a minimum of Rs. 25 lakh investment. Fractional ownership allows small investors to own a slice of commercial real estate property in large cities and industrial hubs, including plush office spaces, large warehouses, and glitzy skyscrapers through an alternate investment route. The concept of fractional ownership of property in India allows individual investors to invest in pre-leased Grade A commercial properties with a minimum of Rs. 25 lakh and earn an average 10% rental yield.
Any resident or NRI (Non-Resident Indian) can own shares in commercial properties in India. NRIs need to have an NRO (Non-Resident Ordinary) account to invest in commercial real estate in India.
What is Fractional Ownership?
Fractional ownership refers to a business model in which a real estate asset is split into chunks and groups of investors pool in funds to purchase a property. All of them share passive ownership of a high-value asset. This setup reduces the financial burden on an individual investor to own a slice of ‘Grade-A’ commercial real estate in large cities and industrial hubs.
Incomes and expenses are shared by all investors in proportion to their investment in the asset.
Fractional Ownership Example
For example, there is a plush office space worth Rs. 100 cr in Gurgaon, which means an individual needs to have Rs. 100 cr to purchase this real estate property. But, not everyone except a high networth individual (HNI) can afford to buy this property. This is where fractional ownership comes into play where multiple investors come together, collect money, and purchase the commercial property. Consequently, each investor gets partial ownership of the office and the profit is split proportionately based on the investment. As the market value of the property appreciates with time, all investors could earn higher rental income and enjoy capital appreciation by selling the property.
How Does Fractional Ownership Work?
Typically ‘Grade-A’ commercial properties are listed on online portals for investment, which already have tenants. An investor can start contributing from Rs. 25 lakh for a property worth somewhere around Rs. 50 crore.
For each commercial property, fractional ownership is executed through a Specific Purpose Vehicle (SPV). Funds pooled from each investor are routed through a trusteeship company or a limited liability partnership (LLP) within which the SPV operates. The property is purchased by the SPV and each fractional owner will own shares of the SPV holding the property, proportionate to his/ her contribution to the property.
The SPV is created only to hold the property on behalf of the customers. The investment platform is responsible for the SPV and the underlying property on behalf of the customers. Ownership is transferred to fractional owners through an SPV.
To be registered with the ‘Registrar of Companies (RoC)’ under the Ministry of Corporate Affairs, Investors have to sign SPV agreements. All the documents including lease/ rental agreement, property sale deed along with the SPV agreement copy are shared with the investors.
Who can invest in CRE through Fractional Ownership?
Any Indian citizen, including NRIs can invest in CRE properties in India, provided they submit valid KYC documents. NRIs can invest through their NRO accounts.
Return on Investment (ROI) from Commercial Real Estate
Commercial real estate offers comparatively better returns than most other stable investment options. The rental yield from commercial properties ranges from 8% to 10% i.e. Rs. 2 lakh to Rs. 2.5 lakh per year for an investment of Rs. 25 lakh and IRR (internal rate of return) of 16 to 20% over five years.
The CRE is not an avenue for quick gains. When committing funds, investors should have a long-term perspective of at least 3-5 years.
There are no specific regulations for this asset class. As per the current income tax system, rent received from the CRE property is taxed as income from other sources under the applicable tax slab.
A home loan taken to buy a house property qualifies for tax exemptions under Section 24 and Section 80C of the Income Tax Act. NRI investors can get benefits under the Double Taxation Avoidance Agreement (DTAA) signed with the country of their current residence.
Why Fractional Ownership of Real Estate is Popular
As the commercial real estate market is expected to grow exponentially, the concept of fractional ownership of commercial real estate is becoming more popular each passing year. People are increasingly investing in commercial properties because of the underlying factors, such as augmented demand for office space in the upcoming years, movement of multinational companies from China to India, and huge foreign investment in commercial projects. Investment in CRE has a potential for high capital appreciation.
This is the reason why not only residents but NRIs are also investing in commercial real estate in India. Investors can earn passive income by investing in CRE. The gradual increase in the market value of a property is generating interest among investors to buy commercial properties.
Are Investor’s Interests Protected by Laws?
The business model of fractional ownership in commercial real estate is a relatively new concept. However, the trusteeship company/ LLP within which the SPV operates falls under the ‘Registrar of Companies (RoC)’ under the Ministry of Corporate Affairs. The investment portal where these services are offered needs to obtain a license from the Real Estate Regulatory Authority (RERA).
How to Exit
Lock-in and exit policy varies from investment portal to portal. Some portals have a lock-in of six months, others don’t impose any such restrictions. Generally, there are three ways to exit – resale through the investor’s dashboard, private sale where investors can sell their fractional ownership to anyone on their own subject to KYC and other regulatory guidelines, and complete asset sale when the entire property is sold.
Is fractional ownership the same as the stock market investment
Since the investors enjoy the freedom to select the asset, and shares which they want to own, fractional ownership of a commercial property is similar to investing in the stock market. But practically the setup doesn’t correlate with the stock market.
Types of usages of fractional ownership
Each member may have their ideas of using the asset. Therefore, after purchasing the property, fractional owners need to reach a agreement on how to use the property.The investment portion doesn’t affect the usage rights of investors. Primarily, there are two ways of allocating usage rights as under:
- Co-owners pay a usage fee on a daily or weekly basis to use the property.
- The usage fee and the rental income is used to cover the expenses.
- In case of surplus, the income is divided among the co-owners.
- In case of shortage of funds, all co-owners contribute to pay for the expenses.
Usage Assignment Approach
- Each owner will get exclusive rights to use the asset for a specified period.
- This period can be fixed, variable, or a mixture of both.
- During this period, the co-owner can use the property as per his/ her wish.
- The purchase price and usage rights of each co-owner will be proportionate.
Important Points about Fractional Ownership
While investing in CRE is an attractive proposition, it requires good know-how of the product and its market. You need to consider the following points when making CRE investment.
- In-depth Market Research: Fractional ownership of properties is a relatively new concept in India and only a few companies provide opportunities for individuals to invest in CRE through fractional ownership. As an investor, you must conduct your research to find out the best company with capable leaders. As mentioned above, for each commercial property, fractional ownership is executed through a Specific Purpose Vehicle (SPV). Funds collected from each investor are routed through a trusteeship company or a limited liability partnership (LLP) within which the SPV operates.
- Always Look for the best Deal: You need to search for a property that offers the highest return on minimum investment. An experienced CRE investment company can help you secure a deal where you don’t need to pay more than market price for a property.
- Find Easy-to-Invest-and-Exit Solutions: Find a prop-tech company that provides hassle-free investment as well as exit options and ensures maximum returns with high yield in the long run.
Commercial real estate is an appealing investment option primarily because it is a stable source of income, independent from other market factors and provides comparatively better returns than other stable investment options.
While the concept of fractional ownership of CRE properties is in its nascent phase, it’s gaining popularity. Investors are viewing the fractional investment as an efficient way of diversifying their portfolio through such investment. The government is yet to come up with regulations on this business model.
So, have you started planning to invest in commercial real estate in India and make changes in your portfolio yet? Whether commercial real estate is a part of your portfolio?
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Yes, like residents, NRIs (Non-Resident Indians) can also invest in CRE in India. An NRI investor needs to have an NRO/ NRE account to invest in commercial real estate in India.
Retail investors can’t afford a premium commercial property in prime locations. Fractional ownership of property allows them to invest in pre-leased Grade-A CRE properties with minimum amount i.e. Rs. 25 lakh and earn an average 10% rental yield. Hence, individual investors can enjoy the dual benefit of rental income and capital appreciation.
Yes, it is legal. However, presently there is no specific legal framework regulating fractional ownership in CRE in India. Laws vary to different SPV companies, depending on their nature of incorporation, for example Companies Act 2013 or the Limited Liability Partnership Act 2008.
In commercial properties, tenants are required to sign a fixed lease agreement of five to ten years. Thus, it ensures regular rental income to investors and besides, the market value of a property increases over time. So customers can enjoy the capital appreciation as well.