Fractional real estate investment is when you own a part/fraction of the property. (Similar to holding a share, which makes you part owner of the company)
This fractional real estate investment, will get you recurring rental income and a possible appreciation on exit/sale. You will also bear expenses on the property like maintenance as per your ownership percentage.
Typically these are properties already leased/rented out to good tenants and therefore are a great way to generate passive income/recurring income.
Any Indian citizen, NRI or an institution can invest in fractional ownership properties subject to valid KYCs.
Typically, your PAN card, address proof (Aadhar/Passport), bank account details for remittance of money and sometimes your demat account number.
An in depth study of the following parameters are done by the Asset Management Company for maximising returns:
- Tenant Credit Worthiness & their financial capability
- Asset Grade
- Asset Location
- Demand and Supply in the micro-market – scope of appreciation
- Legal and technical due diligence.
The Asset manager creates a Specific Purpose Vehicle (SPV) either in the form of a LLP or Private Ltd Company. The SPV is independent of the asset manager and ownership does not get affected by what happens to the asset manager.
Your ownership, governance and compliance records are stored in public databases and in government records.
All investments carry risks. All risks inherent to properties are also applicable in fractional ownership. Typical risks include liquidity, re-leasability if the tenant leaves and potential loss of capital.
Most asset managers have a reputed law firm that takes care of the legal due diligence, however if you wish we can arrange for the relevant documents for your lawyer to give their feedback.
For each property a Specific Purpose Vehicle (SPV) is created for owning and managing the property. Each fractional owner of the property holds shares proportionate to their contribution in the property. The SPV could be a Limited Liability Partnership (LLP) or a Private Limited Company.
A Special Purpose Vehicle (SPV) is a distinct company created for a specific purpose with its own assets and liabilities. Properties are owned in the SPVs and the customers are shareholders/partners of the SPV. SPVs only purpose is to hold the property on behalf of the customers and no other operational activities are carried out in them.
After successfully verifying your KYC, you pay 5-10% to block your investments in the asset. Post this, you can access and vet all the property/SPV related documents. In a couple of weeks or as soon as the asset has been funded, you will be required to pay up the balance amount. The asset is then registered in the SPVs name and will be available on your personal dashboard on the asset manager’s website.
No, for most asset managers, the whole process is paperless and digital.
All SPV related compliance documents and SPV related property ownership documents. This will also involve a mandate to the asset manager for managing the asset.
There are 2 kind of fees:
- Asset management fee: About 0.5 to 1% of your investment to cover the cost of managing the property.
- Performance fee: Around 10-20% above the annual hurdle rate of 8-10%
A hurdle rate is the minimum rate of return ONLY above which a performance fee kicks in. If the hurdle rate is 8% per annum and after a year you have earned 12 rupees on a 100 rupee investment, you’ll be paying 10% on 4 rupees (12-8) = 40 paise.
Note: Some asset managers charge a fee on IRR (which includes your rental income). Performance fee should ideally be ONLY on capital appreciation and not on rental income in our view.
Asset managers work with reputed law firms for the legal due diligence. You are however free to access relevant documents(property ownership documents, rental agreement, market research reports, due diligence reports, etc.) on expressing interest in the property.
No. By law most ‘assured returns’ schemes are banned by SEBI. And no asset manager can guarantee returns – even if they claim so. Potential risks include downtime on finding a new tenant if the current tenant vacates the premises, loss of capital due to market conditions and other such uncertainties.
- Rental return – 7-9% annually.
- Appreciation – 3-7% annually.
Fractional ownership is better in the following conditions:
- When you want access to A grade properties/tenants at 25 Lacs.
- Don’t have the time and inclination to manage, rent out and maintain your own property.
Expected returns in carefully selected A grade properties, purchased at an appropriate price and with MNC tenants has the potential to give you 10-18% IRR.
Unlike other assets, real estate is a physical asset and traditionally Indians have been known to be heavy real estate investors. A good comparison with other asset classes is as follows (Courtesy: Myre Capital)
Once the property has been booked by enough co-investors by paying 10% token amount (with a few investors in the waiting list) the drawdown is declared and investors are expected to pay up the balance. As soon as the asset is fully funded, the investment process is complete. Investors in the waiting list would get a chance if anyone backs out.
25 Lacs generally. Though, it varies from property to property.
The following outgoings are deducted before distribution:
- Property Maintenance and taxes
- Property Management Fees
- TDS – Tax deducted at source
Post - Investment Questions
Lock-in for exit varies for different asset managers and their properties. For example: Strata has 6 months lock-in whereas Myre has a 1 year lock-in.
(Both these are subject to change, please refer their website for the latest udpate)
Monthly/Quarterly payouts are made and credited to your bank account directly.
We recommend a minimum holding period of 3-5 years, anything below that may not be advisable.
The asset management company takes care of tenancy and asset management.
You’ll own equity or debentures or both depending on the structure of the SPV.
Fractional ownership is heavily tech enabled and hence you will be able to get an online dashboard that will show you NAV (Net Asset Value) of the property and other metrics like other recent transactions in the project/vicinity, etc.
No rentals will be paid out and hence management fees are not charged when the property is not tenanted in most cases.
Generally it covers the cost of insurance, compliances of the SPV like GST, TDS, IT filing, costs of collection of rents and payouts to investors and any other costs to run the SPV efficiently.
Reserves are used to pay for any unexpected/unforeseen expenses that may arise in the property. If unused, it is refined back to the investor on sale of the property.
Exit Related Questions
- Total asset sale – at an appropriate time (after a few years) the asset manager will sell the asset to a new investor (typically a fund house) after getting approval from 2/3rd investors.
- Annual sale – Asset managers offer an annual sale window wherein you can exit your investment at a discount to new investors.
- Private sale – You can sell your investments privately to a buyer you have found.
- Exchange platforms – We expect an investment exchange platform by 2022 that will help you sell your investments. We would love to be that platform 🙂
As an investor, you will have rights to vote and take part in all the decisions related to pricing and timing.
Tax Related Questions
Depending on the SPV structure i.e Private Limited or Limited Liability Partnership, the TDS is could be deducted before giving you returns or you could get post tax returns as all taxes are paid at the SPV level. NRI’s are charged 30% TDS or as applicable.
Yes, the investors PAN is quoted and is liable to be claimed while filing your IR returns.
Like fully owned properties, capital gain tax is applicable as follows:
- Short Term (held for less than 24 months) – Taxes applicable as per your IT slab.
- Long Term (held for more than 24 months) – 20% – Indexation benefit is applicable.