Fractional real estate, as the concept is known, allows investors to buy, say, 2% of a vacation home for a minimum of ₹2 lakh and use it for their weekend getaways in addition to earning rental income
A growing number of Indians are acquiring slices of rent-yielding residential and commercial properties, owning a tiny portion of expensive property, in a way that is somewhat similar to investing in stocks of a company.
Fractional real estate, as the concept is known, allows investors to buy, say, 2% of a vacation home for a minimum of ₹2 lakh and use it for their weekend getaways in addition to earning rental income.
The more expensive commercial real estate space is attracting wealthy Indians and non-resident Indians (NRIs).
“The pandemic has actually created the catalyst and the stimulus for people to invest. Till now, a weekend property was important but not urgent. But covid-19 has changed that," said Vijay Naraayanan, co-founder and chief executive of Allspace Ventures, a provider of custom-designed super luxury villas, apartments and farm-spaces.
For instance, if an investor wishes to own a portion of a one bedroom-hall-kitchen property in Lonavala, the minimum investment starts at ₹2 lakh for 2%. Investors can, of course, buy more.
Many NRIs, Naraayanan said, are picking up stakes in multiple properties across India.
For any property, multiple owners form a special purpose vehicle (SPV), which buys the asset, and the owners get shares proportional to their investment in the SPV.
The SPV has a maximum of 50 investors. The property, when let out, is expected to bring in an annual rental yield of 8-9%.
When an investor wants to exit the property, he can sell his share to other investors.
In the commercial real estate segment, grade A office real estate is becoming a favourite with investors.
“Many white-collar professionals and NRIs are investing in grade A office properties," said Shiv Parekh, chief executive and founder of hBits, a platform providing fractional ownership in commercial properties.
The pandemic, Parekh said, has accelerated the pace of fractional real estate as it has forced many developers to sell their grade A commercial properties.
Though the minimum investment in commercial properties is ₹25 lakh, an owner is free to sell his stake at any time as there is no lock-in period for the investment.
While the rental yield is around 8-9%, if clubbed with property appreciation, it can go up to 15-18% annually.
Both real estate investment trusts (Reits) and fractional realty investments help investors earn rental yields while also benefiting from capital appreciation.
However, for high networth individuals who would prefer direct ownership in prime real estate, say, a commercial building in Mumbai’s central business district, fractional ownership is the better option as Reit investors have little control over the choice of property that they are investing in but depend on fund managers who decide where the capital is deployed and when to sell an asset.
According to Anuj Puri, chairman of Anarock Property Consultants, even though some tech platforms have warmed up to this concept, fractional ownership is still at a budding phase in India and lacks awareness.
“Lack of standardization prevented many investors—both global and national—to come forward and opt for this model. With more tech innovations happening, the model is slowly gaining ground, and it certainly has potential," said Puri.