Fractionalization: How is it changing the real estate landscape?

As we speak, the prices of properties are surging at unprecedented levels, making it challenging for many to purchase a property without a mortgage. To overcome this, one of the most secure and affordable investment options grabbing the attention of many investors worldwide is Fractionalization. Pioneered by the United States of America in the 1990s, a fractional investment allows investors to diversify their investment portfolio by allowing them to invest a proportionate smaller amount of money and obtain co-ownership of a higher-value real estate asset without having to manage it physically. Simply put, fractionalization is owning a fraction of one or more properties reducing the financial stress of single property ownership and can provide impressive returns.

The concept of fractional ownership differs from timeshare which provides the right to use a vacation property without a title deed for a stipulated time. Under fractional ownership, you acquire the ownership of the property along with usage rights, superior amenities, income sharing, and access to shared assets in proportion to the fraction of the assets you own. Fractionalization is now gaining momentum with the advent of blockchain technology and has the potential to unlock new investment opportunities for investors and it is anticipated that fractional ownership in India will reach $5 billion in the next few years.

Implementing fractional ownership is executed by a special purpose vehicle (SPV) that purchases the asset. The fractionally owned asset is recognized as an SPV’s asset with the contribution of each investor reflected in the SPV’s shareholding. Investors have the option to sell their fractional ownership to any party, subject to a lock-in period.

Let us dive deeper into the unique benefits of fractional ownership.

1. Quick and hassle-free

Owning a property through fractionalization is easier compared to the tedious process of purchasing a property through traditional methods which involves a lot of paperwork and other formalities as all the relevant information pertaining to the property is readily available on an online platform that is accessible from anywhere

2. Affordable Investment Option

A cost-effective opportunity that provides investors with the benefit of owning a real estate asset without paying a large sum of money upfront. For example, a lavish property worth 50 crores may be outside your budget as it requires heavy investment. With fractional ownership, a group of investors can step in and divide the asset equally, thus allowing each one to get an individual share of the property and reaping the various benefits associated with it.

3. Diversification of Portfolio

A significant advantage of fractionalized property investment is diversification which allows an investor to reduce the volatility of portfolio and safeguard the future by enabling him to buy shares in various properties for a relatively small initial investment.

4. Capital Appreciation

With fractional ownership, investors can take advantage of the property's capital appreciation in addition to the regular flow of rental income.

5. Provides Liquidity

Fractionalization is an attractive investment avenue as it is liquid in nature and allows an investor to withdraw their investments by selling their shares to other willing investors. Investors have the option to sell their stocks on a regulated exchange platform if they are in the form of tokens and stored on the blockchain system.

6. Highly Lucrative for investment in Second/Vacation Homes

With new trends entering the real estate industry, vacation homes are gaining traction. While one does not stay in these homes for the entire year and occupy it only for a short duration, these homes can serve as perfect weekend getaways to escape from the chaotic city life or even lease out to generate additional income. Indian millennials are increasingly embracing the second home trend amidst the pandemic with 50% surge in inquiries. Investment in vacation homes is on the rise as homebuyers are searching for large homes with scenic views and world-class amenities. Second homes also serve as an excellent source of rental income while you’re away.

Ever dreamt of waking up in a luxurious apartment with a magnificent view of the beach and world-class amenities, but your budget is preventing you from fulfilling this goal. With the rise in fractional ownership, investing in high-grade assets is no longer a privilege for only the High-Net-Worth Individuals (HNI), but is now more accessible to even the small investors.

The Dubai Land Department recently granted fractional ownership of ultra-luxurious hotels and branded residences, creating another avenue for people to own second homes. Dubai continues to grow as an attractive global tourist and key business destination and individuals aspiring to own a home in Dubai can acquire a portion of it, instead of purchasing the whole asset by paying a price within their budget with the introduction of fractionalization. Launched in conjunction with one of the world’s leading hospitality groups, Accor, SLS Dubai has been designed to seamlessly collate a plethora of holistic experiences and offer an unmatched lifestyle to its owners. One can enjoy the breathtaking view of the skyline while owning a fraction of this lavish property. Investing in SLS Dubai means acquiring 4 fractions ownership certificates, 7% guaranteed net returns for 10 years, 7 nights free stay annually, and much more. Isn’t this amazing?

To conclude, fractional ownership is a promising investment avenue for new-age investors willing to grow their wealth. Offering high returns and low risk, it is gaining traction globally and is all set to pave the way for creating a highly liquid real estate market in the coming years.