Fractional realty ownership becoming popular with retail investors: Experts

Apart from being a pocket-friendly investment avenue, it also does away with the hassles of property management such as rent collection and maintenance

As the cost of real estate escalates and causes shifts in realty business models, fractional ownership through a real estate investment group or trust has become popular among retail investors in recent years, for its potential to allow a play into the investment opportunity without much strain on the pocket.

Experts feel that with the recent taxation changes on the gains from REITs and InVits, fractional ownership can be a new tax-efficient way to invest in commercial real estate through these avenues which act like mutual funds.

Fractional ownership also provides greater flexibility compared to traditional property ownership. Investors can choose the amount and the length of time for they wish to hold the investment without worrying about property management, as such tasks are usually handled by the investment group or trust.

“Commercial real estate in India has been a preferred investment avenue for institutional investors due to its favourable risk-return profile. However, retail investors faced entry barriers due to the high capital requirements. Fractional ownership overcomes this challenge, offering more flexibility to investors in managing their real estate portfolios,” said Aryaman Vir, founder & CEO, MYRE capital.

Another advantage of fractional ownership is that it provides a steady stream of passive income. Rental income from the property is typically distributed among investors based on their share in the asset, say experts.

"One of the primary advantages of fractional ownership is the high rental yield of 8-9 per cent, which can provide investors with a steady income stream," said Shiv Parekh, founder, hBits, an online platform that aims to achieve an AUM of Rs 1,000 crore in next 3-5 years.

Additionally, fractional ownership can offer investors an internal rate of return (IRR) of 15 per cent or more, making it a potentially lucrative investment option.

Fractional ownership is currently estimated at about Rs 3,000 crore and is expected to grow, fueled by increasing awareness and adoption of digital technologies, as well as government infrastructure development initiatives, say experts.

"Fractional ownership currently represents a small percentage of the overall real estate market, which is estimated at over $100 billion. However, this is expected to grow significantly in the years ahead as more investors seek alternative options to diversify their portfolios and mitigate risk," Parekh said.

Moreover, the ownership process is online and eliminates the need for physical documentation, saving time and effort for investors. Additionally, exit options are available on the platforms, making it easy for investors to liquidate their investment if necessary.

Industry experts say fractional platforms provide landlords and developers with access to reliable private equity capital that is diversified across a large investor base. Previously, developers had to seek individual HNI investors, greatly limiting the potential buyer pool and making the entire process time-consuming and cumbersome.

“Tech-oriented fractional ownership platforms are redefining how investors access and own real estate and are the need of the hour to bridge the gap between developers and investors in the realty ecosystem. Such platforms have given retail investors access to high-value commercial real estate properties that were previously out of reach owing to high entry hurdles,” Vir said.

They provide long-term professional property management, tenancy, rent collection and maintenance, making the entire experience for an investor hassle free, Vir added.

Most investors prefer properties with part ownership ranging from Rs 25 lakh to Rs 1 crore, owing to higher and steady returns. It can vary depending on specific market conditions and individual preferences, experts said.

Most recognised fractional platforms have a minimum ticket size of Rs 25 lakh, and the average investment in tier-1 cities is Rs 40 lakh.

Investors see a lucrative return on investment every month on a 25 lakh investment, which is another reason for the market's acceptance of this ticket size.

Properties in this range are likely to have a stable rental income, making it an attractive option for those seeking a steady income stream and a balance between affordability and potential for high returns, Parekh said.

However, some experts cite some drawbacks to fractional ownership. Investors may have limited control over the property, as decisions surrounding it may be made by the investment group or trust. There may also be restrictions on selling the ownership stake, which could limit the liquidity of the investment.