In India, fractional ownership, which is similar to stocks and mutual funds, is a rapidly growing industry. These fractional ownership transactions are supported by private real estate or fractional ownership platforms. A fractional ownership platform is simply a firm that finds high-value real estate properties and allows investors to purchase shares or fractions of such properties to generate passive income.
In India, real estate is the most prized investment for everyone; we prefer to save our whole lives in anticipation of the day when we may finally acquire our dream home. This is not just a big fantasy, but it’s also an unreasonable and out-of-date way to spend your money. Real estate fractional ownership is a novel financial idea in which individuals spend a little amount of money to become owners of high-end properties. As a modern real estate investment paradigm, it is progressively gaining popularity.
What Will the Future of Laws Look Like?
We need to look at comparable systems that SEBI has governed to have a better picture of what these regulations could look like in the future. One of these is the Collective Investment Scheme. Any investment qualifies as a collective investment if it contains the following criteria, according to SEBI’s CIS Regulations.
- Contributions from investors must be pooled to be used collectively as a consolidated asset.
- Investors must only invest for the sake of profit.
- A third party must manage the property (to which all investors have contributed) on their behalf.
- Daily, investors must not have direct control over the property.
You’ve probably seen the parallels between fractional ownership and CIS based on what we’ve said so far. If SEBI finds these to be comparable, we may see some changes to the present laws for CIS and it being imposed on FOPs as well.
Key pointers to note
i. Due Diligence Is Required
In any event, FOPs may be required to undertake a company’s due diligence and adhere to a full transparency policy. Because investors do not manage their money directly, these approaches will help them gain their trust.
ii. Affirmed Investors
SEBI has been working for a long time to bring authorized investors to the scene, and this is an excellent chance for them to do so. To benefit from regulatory relief, FOPs may be limited to soliciting only authorized investors.
Since fractional ownership is handled and controlled by corporations, select a trustworthy investment platform with a track record of delivering on its claims. Assetmonk is a very transparent system that prioritizes investors at all times. You don’t have to be concerned about any hassles because we perform the company’s due diligence on our own. Not only has that, but Assetmonk’s team of highly skilled investment managers guarantees that the business, as well as your assets, remain profitable at all times.
Why is fractional ownership getting popular?
Real estate fractional ownership is an investment strategy in which a group of individuals pools their assets to obtain financing for the purchase of real estate property. Each investor receives a partial ownership interest in the property. It is the best type of investment since all participants share the expenditures, earnings, and financial obligations associated with the property.
Real estate investments have long been seen as beneficial forms of investment owing to strong asset appreciation; nevertheless, investing in real estate needs substantial quantities of money, making the asset class unavailable to the majority of investors.
Real estate fractional ownership allows you to invest in assets for personal use as well as commercial benefit, such as investing in private yachts or Special Purpose Vehicles, making high-end purchases and investments accessible to people of all financial levels.
As more MNCs relocate their headquarters to India, the demand for fractional ownership is projected to rise. Fractional ownership is often regarded as one of the finest financial possibilities for seniors.
Models of Fractional Ownership
i. Joint Asset Ownership
- The right to utilize the fractional property is shared by all owners.
- They can do so without jeopardizing the rights of other investors.
- If a co-owner wishes to sell their stake, they may do so at any moment with the approval of the other co-owners.
ii. Model of Cooperation
- Interested investors band together to form a cooperative society to purchase assets in the name of the cooperative society.
- Every investor must be a member of the society as well as a fractional owner of their property.
- If a fractional owner sells their shares, the shares will be transferred to the new fractional owner.
iii. Structure of the Company
- In this investing concept, investors establish a corporate structure and then acquire assets in that firm’s name.
- The corporation must follow the norms and conditions of their own firm’s Company Act.
- A business model might help you save money on stamp duty, but it also comes with additional duties.
iv. Structure of Trust
- In this case, all interested investors form a single trust, with the property seller as the author of the trust deed.
- A seller conducts the deed by the particular rules and instructions, to the benefit of all fractional owners.
Fractional Property Taxation
Since fractional ownership is still in its early stages, many tax restrictions do not yet exist; nevertheless, when the investing strategy grows in popularity, the government may impose certain tax repercussions. The tax treatment will be determined by the following factors.
- Whether the property is used for personal or commercial purposes.
- Whether or not it is used by co-owners. If a co-owner pays the rental charge, it is still considered personal usage.
- Personal usage does not include days spent fixing property.
- Non-owner usage under house exchanges or swaps is still considered personal use.
- A rental day is one on which the property is available for rent but is not inhabited.
Fractional ownership in India now
FOP laws are becoming increasingly important, particularly as fractional ownership becomes more widespread. These regulations are required not just to protect investors from fraudulent parts of the system, but also to restore investor faith in the system’s operation and to allow Fractional Ownership to be exploited as the asset it is.
The fractional ownership industry in India is constantly expanding, with the commercial real estate market predicted to rise by 16 percent over the next few years. As a result, demand for fractional property will increase. The rising requirement for office space, as well as a rise in big institutional investors and MNCs, as well as other commercial ventures migrating to India, is one of the drivers of this surge.
These factors are expected to contribute significantly to capital appreciation shortly.
Investors should bear in mind, however, that fractional ownership is a relatively new idea in India, and the investment may frequently lack transparency and communication among investors. As a consequence, investors must act with prudence before making any type of investment.
Many people confuse fractional ownership with real estate investment trusts (REITs), but they are not the same thing. While fractional ownership allows investors complete control over the type of property in which they invest, REIT investors do not influence because the asset is selected for them by the management business.
While fractional ownership is a type of partial ownership, REITs are a group of assets managed by a company and made available through mutual funds. When it comes to REITs, an investor’s options are restricted.