Many potential investors are dissuaded from purchasing genuine estate as an asset class offered the higher-ticket size, illiquid marketplace, worry of fraud and legal complexities. Real estate investment trusts (‘REITs’) is a achievable remedy to this issue, nevertheless REITs also have particular drawbacks, viz- REITs personal a massive portfolio of genuine estate assets wherein investors can’t cherry choose assets. Fractional ownership permits cherry choosing genuine estate assets.
The notion of fractional ownership of genuine estate assets was introduced in the United States of America in the early 1990s and steadily gained acceptance in European nations. Fractional ownership refers to a structure wherein groups of investors pool in monies to obtain ownership of a higher-worth asset.
Fractional ownership of genuine estate presents flexibility by minimizing the economic burden on a single investor of owning and sustaining a home- whether or not industrial, residential, industrial, and enables investors to get exposure to a higher-finish home with a smaller sized ticket size hence opening doors to owning smaller sized components in several projects and diversifying their portfolio of investments. The investors share the incomes and expenditures associated to such assets in proportion to their contribution.
One of the suggested models of implementing fractional ownership is setting up a specific goal car (“SPV”) which purchases the asset. The fractionally-owned asset is the SPV’s asset and contribution of every single investor is reflected in the shareholding of the SPV. Investments generally have a lock-in period. Subject to the lock-in, investors may well exit by private sale exactly where investors are no cost to sell their fractional ownership to any party (topic to valid KYC and regulatory compliance).
Fractional ownership of genuine estate assets is at a nascent stage and on the brink of attaining attractiveness as an investment model. Currently no regulations exist in this space. While some platforms claim to provide a title report and make periodic disclosures, there are no distinct requirements for it. Nevertheless, if regulated nicely, it can possibly be a excellent selection to enhance genuine estate sales and clear unsold inventories.
Investors call for getting cautious about the following:
i. Quality of due diligence performed along with choice criteria of the asset
ii. Lock-in period and taxation of proceeds distributed to the investors
iii. SPV structure- restrictions on transferability of shares of the SPV
iv. Poor liquidity in the secondary marketplace for transfer of shares of the SPV
v. Absence of regulatory framework or regulator creating such structures more susceptible to mismanagement
vi. Fees and other expenses charged by intermediaries along with expenses like audit costs for the home tax and other levies.
vii. Quality of the lessee, escalation of rent, lock in period in the lease deed
viii. Potential legal concerns arising out of disputes with lessees/licensees.
ix. In case fractional ownership is also meant to confer rights to use and appreciate the home, the manner of use and occupation will have to be specified in the documentation.
As the notion of fractional ownership of genuine estate is gaining momentum, it can open up new investment possibilities to a massive segment of smaller sized investors – thereby channelizing tiny household savings into the genuine estate sector, which in turn could help developers in clearing up massive unsold inventories. It is suggested that a robust legal framework in relation to fractional ownership of genuine estate is formulated for guaranteeing that investors are adequately protected.
(By Ashoo Gupta, Partner, Shardul Amarchand Mangaldas & Co. Views expressed are private)