Fractional ownership is the new buzzword in the real estate market.
Fractional ownership is nothing but owning a piece (‘strata’) of a
larger real asset. The concept of strata selling has existed for several
decades. Proprietors and owners of micro, small and medium enterprises,
and mom and pop retailers have traditionally bought offices, retail
shops, and warehouses for running their businesses or to build annuity. Let
us explain fractional ownership with a simple example- one of the
largest real estate developers in India builds a 3 million (30 lac) sq
ft IT park in Bangalore. The developer decides to sell 2 million (20
lac) sq ft to individual buyers, and thus demarcates 1000 units of 2000
sq ft each. A buyer has an option to buy one or more units in multiples
of 2000 sq ft. Priced at INR 6000/sq ft, a buyer can own a piece of the
IT park with just INR 12 million (INR 1.2 Cr). The benefit of fractional
ownership is that a buyer gets access to a top quality asset with a
smaller investment that, otherwise, would have been accessible to
HNIs/UHNIs and institutional investors only.
A top quality asset
is likely to attract more creditworthy tenants and command better lease
terms. The developer may keep the leasing and maintenance rights which
essentially makes fractional ownership a passive income generation
strategy. Otherwise, the tenancy risk (finding and closing a lease with a
tenant) has to be borne by the buyer. In this case, the developer would
have the leasing rights and expect to touch INR 40/sq ft in rentals for
a bare shell unit, exclusive of maintenance and car parking charges. A
back of the envelope calculation suggests a rental yield of 8% before
adjustment for occupancy. With yields of more preferred safe investment
vehicles such as government treasury and bank deposits on a continuous
decline, an increasing number of investors are evaluating fractional
ownership options in search for higher yields.
Fractional
ownership has its cons as well. An increasing number of corporate
tenants, especially global companies, prefer leasing from single owners
as doing so mitigates chances of disputes among landlords, and between
one or more landlords and the tenants. In the above case, a corporate
tenant that leases 200,000 sq ft (say) will probably have 10-100
landlords. As a consequence, the replacement risk in a strata sold
property becomes very high. It also becomes tougher to find an exit
(sell the piece) compared to a standalone asset for the aforementioned
reason.
From the supply side, with REITs coming into play, top
developers are looking to hold assets to go public. Consequently, the
availability of legally constructed, good quality properties (Grade A/A-
properties that command good lease terms) from top developers is going
to be flat or decline.
To understand more about fractional
ownership and/or to evaluate investment opportunities, please call us on
+91-9108447825 or +91-9108447829
To learn more contact us ONIX Advisors. All blogs by ONIX Advisors.
#RentalIncome #Income #PassiveIncome #Investment #India #RealEstate #IndiaRealEstate #NRIInvestment #Asset
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