Unknown in India until recently, fractional property ownership is the practice of owning a piece of property fractionally among a group of individuals. A fractional ownership scheme is one in which all participants own a share of the asset and can profit from changes in the asset’s value. Each fractional owner often owns a portion or share of the property and is listed as an owner on the title and deed. However, in some circumstances, a co-owner will only be able to use the property on certain days, weeks, or months. In other cases, the usage agreements will be specified in a separate document. When it comes to specific co-ownership agreements, several contracts can be used to specify usage rights and charges, as well as who is responsible for what.
Fractional ownership platforms
Fractional ownership is the apparent way to make money from incredibly valuable prime commercial real estate assets with relatively few resources, and it is quickly gaining popularity in India. Fractional ownership is based on a simple concept: what an individual cannot afford to buy, a group of people can pool their money and jointly own it.
As a rule, a fractional ownership platform (FOP) in India discovers eligible high-value properties and encourages investors to own a percentage of those properties to receive money through rental income generated or appreciation in resale value. Rent or income profits are distributed to investors in the form of interest or dividends. The investment platforms ensure the registration of sale deeds directly on behalf of the buyers of the property. Cryptocurrencies such as bitcoin and either could be used by high-tech operators to securely keep and maintain their owner registers. No SPV is created, hence no corporate compliance is required with the direct deed of ownership. This permits the FOP to bypass even the basic minimum corporate compliance.
Owner-investors in both circumstances can sit back and enjoy their profits without having to get their hands dirty with day-to-day property administration since the FOP assumes the function of a property manager. Only three choices are available for getting out:
- Secondary sale on the FOP’s marketplace;
- Private sale or, if the majority shareholders agree,
- The SPV’s sale of underlying real estate assets.
Existing legal framework on fractional ownership
Foreclosure prevention professionals (FOPs) act as real estate agents or brokers before a property is purchased and as property managers afterward, hence they would need to be registered under the Real Estate (Regulation and Development) Act, 2016 (RERA). Only one FOP advertises that it is ‘RERA Registered’ on its website, so it’s unclear whether other FOPs follow suit.
While RERA imposes some obligations on real estate agents, such as maintaining books or accounts, refraining from unfair trade practices, and facilitating the provision of all information to the allottees at the time of booking, these generic functions do not offer sufficient protection for investors because the context in which they have been introduced is significantly different from the context in which an FOP operates. SEBI (the Securities and Exchange Board of India) hasn’t issued any rules for FOPs in India, thus they’ve been able to stay under the radar and escape any big regulations until recently.
Disclosure and mandatory due diligence
There must be full title due diligence on the shortlisted property by the Full Ownership Panel (FPO) before it can be made accessible to potential investors. For leased properties, the FOP must conduct a thorough tenant screening procedure and submit all essential information to the property owners. Even as a post-purchase property manager, it must be obligated to disclose and provide regular updates on any disputes, problems, or difficulties that may occur.
Important watch-out tips for fractional investors
As an investor, you should be aware of the following points:
- Several factors affect the quality of due diligence conducted, including the selection criteria of the asset,
- The lock-in period and taxation of proceeds distributed to investors,
- The structure of the special purpose vehicle (SPV),
- Restrictions on the transferability of shares in the SPV,
- The lack of liquidity in the secondary market for shares in the SPV.
- In the lease deed, some clauses address the quality of the lessee as well as escalating rent.
There could be legal concerns emerging from disagreements with lessees/licensees. Documentation must specify how property will be used and enjoyed if fractional ownership is intended to include such rights.
Real estate fractional ownership is increasing in popularity and can provide new investment opportunities for a wide segment of smaller investors, channeling small household resources into the real estate sector, which in turn might help developers clear out vast unsold inventories of properties. The creation of a comprehensive legal framework for fractional ownership of real estate is proposed to ensure the investor’s protection.
Protecting investors from being cheated of their hard-earned money and having safeguards in place against any unforeseen turn of events are two significant reasons why regulation is necessary. To get to the bottom line, FOPs and market regulators must work together to stimulate economic growth while protecting investor safety. Assetmonk is one of the fastest-growing real estate platforms in India with investment options in key cities like Bangalore and Hyderabad. Property investment possibilities are carefully listed after thorough and competent due diligence has been performed. Visit us online to begin investing with us immediately!
