Holiday homes are a dream for many, but a reality for only a lucky few. We all wish for that one self-owned home, but owning a second home is too expensive for most of us. Fractional investment, which has been gaining popularity in commercial properties, offers a great solution for holiday homes too. Alyf, a real estate player is considered one of the pioneers to think of this concept making it possible for regular folks to share ownership of holiday homes too.
In this article, we’ll understand what fractional ownership in holiday homes mean, why this phenomenon is a promising possibility, how it works, what are the charges, need of it, and how it’s making owning a holiday home more accessible for everyone.
Why is Fractional ownership required in Holiday Homes?
Fractional ownership in holiday homes emerged as a solution to the desire for vacation getaways coupled with the challenges of affordability and practicality. Real estate platforms like Alyf noticed a growing demand for holiday homes, particularly in metropolitan areas where space is limited.
Despite this desire, only a small fraction of families owned a holiday home, mainly due to high upfront costs and limited usage. This gap in ownership highlighted a significant opportunity for innovation. Many people wished for a holiday retreat but found the traditional ownership model financially prohibitive.
Recognizing this need, fractional ownership was introduced. This innovative approach allows multiple individuals to share ownership of a holiday home, dividing both the costs and the usage rights. By pooling resources, individuals can afford a share of a property they might not be able to afford outright. This model not only makes owning a holiday home more financially feasible but also addresses the issue of limited usage, ensuring that the property is utilized to its fullest potential.
Fractional ownership offers several advantages over traditional ownership, making luxury escapes more attainable for a wider audience.
Fractional Ownership in Holiday Homes VS Traditional Second Home Ownership
Buying holiday homes or second homes through traditional ways and through fractional ownership both have key differences.
Aspect | Traditional Ownership | Fractional Ownership |
Initial Investment | Starts from a crore or more | As low as 10 lakh rupees |
Usage | Typically used for 20 to 30 days/year | Similar usage pattern, but can own multiple assets across different locations |
Property Management | Owners responsible for maintenance, repairs, and caretakers | Property management handled by platform, freeing owners from maintenance tasks |
Exit Strategy | Selling on traditional real estate platforms may be challenging | Shares can be sold directly on platform for easier exit strategy |
Typical Fees for Asset Management
When it comes to managing your share of a holiday home, there are three main costs to consider:
Sale Fee
Sellers are charged when asset managers assist in selling a property. There’s no charge for buyers as they aim to make fractional ownership more accessible.
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Property Management Fee
For managing the property and renting it out, a fee of about 25% of the rental income generated is charged. This fee ensures well-maintained properties and rental income when not in use.
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Profit Share
If asset managers help sell your share of the property at a profit, a 10% share of that profit is taken. For example, if a share is bought for 10 lakh rupees and sold for 12 lakh rupees, asset managers would take 10% of the 2 lakh rupees profit, which is 20,000 rupees.
These fees offer peace of mind to buyers, knowing that profit comes from helping them sell at a premium. Additionally, the unique property management service ensures that the property appreciates in value over time, offering a higher return on investment compared to traditional ownership.
Fees are transparent and tailored to different needs. For those using the property solely for personal use, a 10% property management fee is charged. For those looking to generate rental income, 25% of the rental income is charged. Overall, asset management costs typically amount to around 1% of the property value, ensuring a fair and affordable service for all clients.
How to Decide the Buying Price?
Ensuring that you’re getting the best value for your investment is crucial when entering the world of fractional ownership in holiday homes.
Here’s how it is ensure that the properties offered are priced competitively:
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Locality Selection
It begins by carefully selecting the right locality for investment. Through extensive research, Alyf like platforms identify areas with high growth potential, rental income opportunities, and capital appreciation prospects. For example, in Goa, prime locations like North Goa and coastal areas with significant tourist activity are focused.
Benchmarking
A thorough benchmarking exercise is conducted to determine the fair market value of properties. This involves analysing factors such as land prices, construction costs, builder margins, and competitive pricing in the area. By comparing these benchmarks, it is ensured that the properties offered are priced competitively.
Negotiation
When negotiating with developers, asset managers leverage the bulk purchasing power to secure prices that are 5 to 8% lower than the market rate. Developers are willing to offer competitive prices because asset managers purchase entire projects in bulk, ensuring that all units are sold.
Value-added Services
In addition to competitive pricing, asset managers also focus on providing value-added services such as fully furnished homes and quality interior fittings. This ensures that the overall cost of the property, as well as the cost per share, remains controlled and affordable for the customers.
Understanding The Developer Dynamic
Understanding how the developer dynamic works is essential in ensuring a smooth process for both buyers and sellers.
Here’s how Alyf manages relationship with developers:
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Agreements and Deposits
They work closely with developers and enter into agreements to sell the properties on the platform. This ensures that the control over the entire asset and the sales process is with Alyf, including marketing and pre-sales activities.
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Quality Assurance
Before partnering with developers, Alyf conducts thorough checks to ensure their credibility, project quality, and background. These checks and balances are essential in selecting the right projects to offer to the customers. Alyf prioritizes working with developers who meet the stringent quality criteria.
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Project Selection
While Alyf primarily focuses on properties that are nearing completion, they may also consider projects that are still under construction, provided they meet set standards.
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Investor Safeguard
When dealing with properties that are under construction, Alyf prioritizes investor safeguards to mitigate risks. This includes implementing stringent checks and balances to ensure the security of the investors’ interests.
Assisting with Selling Shares
When it’s time to sell your share in a holiday home, platforms like Alyf are there to help.
Here’s how the process made smooth:
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Understanding Your Needs
Alyf knows every investor is different. Some prefer to hold onto their shares longer, while others may want to sell sooner. They keep track of this and suggest options accordingly.
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Regular Check-ins
Alyf stay in touch with investors, suggesting when might be a good time to sell or explore new opportunities. For example, if you’ve enjoyed a property in one area, they might recommend looking at other options while helping you make a profit on your current investment.
Investing 1 Crore: What to Do
If you have 1 crore to invest, here’s what you could consider:
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Focus on Villas
If you love villas, you could spread your investment across two or three villa shares in different locations.
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Mix it Up
Want to diversify? You could put some of your money into villa shares and spread the rest across different types of properties.
SEBI Regulation Impact on Fractional Ownership
The looming SEBI regulations have sparked discussions about how they’ll affect the fractional ownership market.
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Preparedness
Whether SEBI includes holiday homes in their regulations or not, Alyf like platforms are equipped to adapt. Their current setup ensures compliance with existing laws, and are poised to adjust the business model if needed.
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Potential Changes
If SEBI regulations dictate, asset managers are prepared to consolidate ownership structures. For instance, they may transition from individual LLPs for each apartment to a single Special Purpose Vehicle (SPV) owning multiple properties. This would streamline operations and align with regulatory requirements.
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Growth Outlook
While regulations may introduce challenges, they also present opportunities. A regulated market instills confidence among investors and can lead to exponential growth. They anticipate a significant uptick in the fractional ownership market if SEBI brings holiday homes under its purview.
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Increased Demand
The demand for holiday homes remains high, and fractional ownership offers an attractive solution by making these properties more accessible. SEBI regulation could further boost investor confidence, driving even greater demand for fractional ownership opportunities.
LLP vs. Pvt. Ltd.: Choosing the Right Structure
Aspect | Limited Liability Partnership (LLP) | Private Limited (Pvt. Ltd.) |
Entity Formation | Cost-effective and manageable structure, suitable for assets valued between 1 to 5 crores | Common choice for many companies, including fractional ownership ventures |
Taxation | Income taxed only at LLP level; distributions to co-owners are tax-free | Often subject to double taxation, first at company level and then on individual shareholders’ dividends |
Legal Framework | Clear ownership structure with each co-owner holding shares or equity in the LLP | Similar legal framework with shareholders holding equity in the company |
Contracts | Incorporation, property ownership transfer, and property management agreements with Alyf | Similar contracts but with different legal entities involved |
Should Investors Seek Approval for Decisions?
In the day-to-day operations of this fractional ownership model, Alyf takes care of everything from property management to contractual matters. However, there are instances where major decisions require the consent of all co-owners. For example, decisions regarding selling the entire property or changing property management services would necessitate the approval of all stakeholders. These crucial decisions are outlined in the LLP contract, ensuring transparency and collective decision-making among all partners.
Selecting the Right Property as a Buyer
When it comes to investing in real estate, several key factors come into play:
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Clear Objectives
Define your investment goals clearly. Whether it’s for personal use or as an investment, having a clear objective is crucial.
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Developer and Past Projects
Research the developer’s track record and past projects. Understanding their delivery history and reputation is essential for making a wise investment choice.
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Property Management Services
Assess the property management services offered. Look into the quality of services provided, as well as the team responsible for managing the property on the ground.
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Exit Potential
Consider the potential for liquidity in the future. Evaluate whether the real estate asset has the potential to be sold when needed.
For second-home investments, focus shifts slightly towards experiences and property management:
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Experiences
Prioritize experiences over just property ownership. Look for a property management team that offers a range of experiences and services, ensuring that your investment translates into enjoyable getaways.
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Vendor Partnerships
Ensure that the property management team has strong partnerships with reliable vendors. This ensures seamless planning and execution of experiences for guests staying at the property.
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On-Demand Experiences
Seek a property management service that provides on-demand experiences. A dedicated relationship manager can assist in planning and organizing experiences tailored to your preferences.
Impact of Supply on the Market
The increasing supply of holiday homes undoubtedly has an impact on the market dynamics, particularly for investors seeking rental income. Here’s how it plays out:
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Increased Options
With a growing number of holiday homes entering the market, investors are faced with a plethora of options. This abundance of choices can lead to competition among property owners to attract renters.
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Rental Income Competition
As more holiday homes become available, the competition for rental income intensifies. Property owners may need to offer competitive pricing or additional amenities to stand out in the market and attract renters.
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Quality of Supply
The quality of the holiday home supply is crucial. While increased supply can provide more options for renters, it’s essential that the properties meet certain standards to maintain demand. High-quality properties with attractive amenities are more likely to attract renters and generate consistent rental income.
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Demand Dynamics
Despite the growing supply, demand for holiday homes remains strong. Factors such as the expansion of tourism, destination weddings, and corporate events contribute to the sustained demand for rental properties. Additionally, more individuals are recognizing the value of owning real estate, especially as an investment opportunity.
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Entry-Level Ownership
For some investors, holiday homes represent an entry point into real estate ownership. The availability of properties at relatively lower price points, such as the 10 lakh Rupees investment option offered by Alyf, provides individuals with the opportunity to enter the real estate market and diversify their investment portfolios.
Impact of Tokenization on the Customer Journey
Tokenization holds the promise of revolutionizing the customer journey in real estate investment, but its full impact is yet to be realized.
Here’s a look at how tokenization could influence the customer journey:
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Streamlined Processes
Tokenization has the potential to streamline the entire investment process by eliminating traditional paperwork and administrative hassles. Through tokenization, investors can seamlessly transfer and manage their shares in real estate assets, reducing friction and complexity in transactions.
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Accessibility
By fractionalizing real estate assets into tokens, tokenization could democratize access to investment opportunities. It may open up real estate investment to a broader range of investors, including those with smaller capital amounts, thereby increasing inclusivity in the market.
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Efficiency and Transparency
Tokenization could enhance transparency and efficiency in real estate transactions. Smart contracts enabled by blockchain technology can automate various aspects of the investment process, such as property management, rental distribution, and profit-sharing, ensuring greater transparency and reducing the potential for disputes.
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Legal and Regulatory Considerations
Despite its potential benefits, tokenization faces legal and regulatory challenges in India, particularly concerning ownership structures and investor protection. As regulations evolve and the legal framework adapts to accommodate tokenization, its impact on the customer journey may become more pronounced.
Conclusion
Fractional ownership with platforms like Alyf is transforming the real estate landscape, democratizing luxury and making it accessible to a broader audience. By understanding the differences between traditional ownership and fractional ownership, as well as the nuances between entity structures like LLP and Pvt. Ltd., investors can make informed decisions and embark on a journey towards owning a share in their dream holiday home.
