Personal Finance

Own a piece of a home

Meera Siva | Updated on April 29, 2018

Fractional ownership gives you proportional share of a property with lower investment

Equity shares let you own a piece of a company; gold ETFs (exchange-traded funds) allow you to own small portions of the yellow metal, virtually. Why should property assets be all or nothing? This is the idea behind fractional property ownership, wherein you can invest a smaller amount and get a proportional share of the asset.

Why only a part

Property is a big-ticket item and co-ownership is not uncommon — relatives or friends may pool together to buy a big home or commercial space. Pooling helps you buy properties that would have not been affordable individually. Co-ownership also lets you invest only a small amount to get started rather than wait or take a loan. Also, instead of betting big on one asset, you can diversify across geographies or multiple properties. This minimises your risks for potentially similar returns.

But in a small group, there may be issues without proper agreements and raise limitations in finding, managing and selling the property. Professional service providers, enabled by technology, are offering investors more options to earn rental income and returns with price appreciation.

How it works

The service provider sources multiple properties that meet their investment criteria — for instance, commercial property to maximise rents. There may also be investment themes. For example, the provider may specialise in resorts in certain locations. Commercial real estate is the focus in India. Property Share, for example, focusses on office space in prime locations; RealX focusses on commercial spaces and hotels. Prime Share Estate invests in homes in Central London.

After getting the required amount from a pool of investors, the provider purchases the property. Providers also manage the asset and pay the investors’ their share of the rent. Also, the property is likely to be insured to protect against loss of principal. After the holding period, typically over three years, the property is sold and the money returned to investors.

When the number of investors is fewer (seven in the case of Property Share), the property is held as co-ownership. Beyond this, a special purpose vehicle (SPV) is used, with each investor holding a stake based on the amount invested. Shares in the SPV that owns the asset, can be bequeathed like any other asset. RealX investors hold proportionate equitable property rights, at a granularity of one square inch. These can be bought and sold on the platform.

What it costs

There are different types of costs for the services — annual management fee and profit share. Property Share, for example, charges 1.5 per cent of the investment amount as annual asset-management fee; there is a 20 per cent performance fee when the property is sold. Prime Shares Estate charges a 5 per cent administration fee when investing, 15 per cent property-management fee on the rental income, and 15 per cent share of the profit on sale. Prime Share also manages foreign-exchange risk on behalf of the investors. Besides rent, owners also get stay-credit — they can stay at the property or exchange it for dividend.

RealX charges 2.5 per cent flat transaction charges; it does not provide management, but provides a platform for professional services. Rental fees deduction is 10-15 per cent. On exit, it charges a standard transaction fee. Providers may also have a minimum investment size. The minimum amount is £60,000 for Prime Shares and ₹5 lakh for Property Share. Others such as RealX do not have any minimum threshold.

Risks to consider

A key risk is illiquidity during the holding period, as you may not find someone who will buy your share. After the holding period, the property, especially larger or commercial ones, may take a while to be sold, as real estate is generally illiquid.

Two, in a fractional ownership arrangement, the majority holders must agree on the next course of action. For example, whether to sell the property or not, and the price they would like. If there is no consensus among the majority, decisions may be delayed.

Three, the concept is well evolved in countries such as the UK and the US, but there may be unknowns such as regulations in India and other countries where the concept is still evolving.

Four, there may also be provider-related issues. For example, the service providers may have conflicts of interest as they may promote some developers’ properties due to their relationship rather than get the best price/property for investors.

Five, there may be hidden fees that you must watch out for. Companies that charge no or very small fees may be disguising it in higher service charges, developers’ commission, and could have kick-backs in place with anyone in the cycle.

Six, your returns may be lower than a full ownership due to the various overheads involved.

The author is co-founder, Rana Investment Advisors.

Published on April 29, 2018

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