What is fractional real estate ownership?
Passing by a lavish office building, have you ever wondered if you could also be able to afford one such building and become an owner of such property?
Well, now that’s possible as the fractional real estate ownership concept, after deeply flourishing in Western countries, has started spreading its legs in India as well. The simple and basic idea of sharing things “mutually” is the core principle on which Fractional Real Estate Ownership prevails.
Here, a group of investors pool their funds together to invest in a property and purchase it under mutual ownership. This reduces the financial burden on the investors and helps them earn high returns on the property. Otherwise, they couldn’t be able to because of extremely high property rates.
With an average amount of investment, individual owners can own a fraction of such premium places and earn a good amount of return on these investments.
The concept of fractional ownership of property in India allows individual investors to get partial ownership of physical assets with a minimum of Rs. 25 lakh. Any resident or NRI (Non-Resident Indian) can own shares in commercial properties in India.
How does fractional ownership work?
One of the most basic fractional ownership examples is to imagine if a total of 20 flats are available in a building. You decide to purchase 2 of them, you now own 10% of the property, and the building is now being used for a boys PG, so you now get your share of the money generated, i.e. 10% of the total money generated by PG income.
In the case of a fractional property, members enter into an ownership agreement in which they all share both the costs (such as upkeep, repairs, and property management fees) and the benefits (such as personal use, equity, and profits from any future resale) of property ownership.
Generally, when you invest through fractional ownership, you get shared ownership in the property, and the transaction would happen under the name of a third party involved. This party is called SPV (a special purpose vehicle).
The SPV acts as an affiliate of a parent corporation, which sells assets off of its own balance sheet to the SPV, which further sells in parts to investors.
Hence, owning a property through fractional ownership would make you a shareholder and not an absolute owner of that property.
Why is fractional real estate ownership gaining popularity?
There are many reasons which uplift the concept of fractional ownership. Some amongst them are listed down below:
- Cost and benefit analysis: The return which comes from property income is typically higher than the investment amount.
- Simplicity, the concept is basic and involves no deep analysis like stock markets.
- One-time investment leads to regular, less risky income.
- It is a relatively low-risk investment. Property rates tend to appreciate over time and are relatively isolated from the equity market movements.
- If you block some funds for investing in a property, it can be a source of additional income.
- The fractional ownership company does not levy any charges on your investment. It may charge only a small, reasonable fee for the services.
What are the tax implications?
Since fractional real estate ownership is a new concept booming in India, there are no specific laws for this asset class.
However, currently rent received from a commercial real estate property is taxed under the head Income From Other Sources.
If you’ve taken a home loan to buy/construct a house property, then exemption can be claimed under section 24 and section 80C of the Income Tax Act 1969.
NRI can get benefits under the Double Taxation Avoidance Agreement (DTAA).
TDS under section 194I is deducted at the rate of 10%.
Profit on sale of property comes under the head Long / Short Term Capital Gain.
Models of fractional ownership
There are many models of fractional ownership, few of them are described below:-
- Joint ownership – All the owners have the individual title of the property and the right to use it without harming the other co-owner’s rights. A co-owner can sell their share of the property with the consent of other co-owners.
- Cooperative model – Potential investors form a cooperative society, become members of the same and then purchase an asset in the name of that cooperative society. They hold shares of property, and whenever they want to sell their shares, the cooperative society will transfer them to a new fractional owner.
- Company structure – Intended investors form a company and become shareholders. The company purchases the property in its own name. The company must comply with the provisions of The Companies Act 2013. With this option, you can save on stamp duty. This is more advantageous.
- Trust structure – The prospective fractional real estate owners form a trust, and the property seller is the author of this trust. He executes the trust deed for the benefit of the intended fractional owners.
Risks involved in Fractional ownership
A few of the risks involved in Fractional ownership are listed below:
- Due to increased demand for investment-oriented property rates, RBI can raise interest rates, resulting in demand and consumption falling. Eventually, the property’s value reduces, thus decreasing the return on investment.
- Credit ratings can reduce because of the high debt involved in the costs of such assets. So reduced ratings lead to lower demand for investment.
- Legal and Regulatory Framework in India can cause many compliances to be worked upon for the purchase of such investment and can be a cumbersome process.
- As a result of the concentration of such properties in one region, prices may be too high to be profitable, and demand may decline.
- Many geo-political reasons and turbulence between regions can lead to decreased property demand.
- Fractional ownership of assets does not guarantee any income certainty, as in bonds or shares.
- The value of physical assets depreciates with time and undergoes wear and tear.
Fractional real estate ownership, which is establishing itself steadily, may represent the next financial wave after Bitcoin and cryptocurrencies. Although there are inherent dangers, fractional ownership guarantees steady returns.
Due to its simplicity, attractive returns and easy transfer of rights, overall fractional ownership is a healthy investment meal for potential investors wanting high returns with safer risk margins.