Fractional Ownership in a Regulated By SEBI

Holiday Homes or Vacation Rental Homes have evolved at a brisk rate during the last 3 years in India. Rise in the preference for Holiday Homes is attributed to multiple aspects: improved connectivity, growth in domestic tourism, growing target audience, flexibility to work from anywhere, technology, transparency, and returns on investment. Holiday Home products have evolved significantly in terms of the product design and services offered.

With operators also offering fractional sale model, the product is becoming accessible to a larger target audience. Fractional ownership is owning a percentage of an asset that may grant the individual the benefits of usage rights and income sharing. In this model, the property is divided into shares or fractions, allowing multiple investors to own a part of it. Fractional ownership, which has been more popular in the Commercial Real Estate (CRE) or Office space, is seeing a gradual shift towards Holiday Homes as well.

How does Fractional Ownership work in Holiday Homes?

• A developer or a developer company develops the property (fully furnished apartment or villas). The property is held by a Special Purpose Vehicle (SPV) which sells the shares of the property, usually in a pre-agreed fractions for co-ownership.
• Under the terms of Fractional ownership in a Holiday Home, a single asset is jointly owned by multiple investors – generally 8 or 11 fractions. For an instance, in the case where a property is sold in to 8 fractions, each owner is entitled to use the property for 45 days and in case of 11 fractions it is usually around 30 – 32 days.
• The developer partners with an Operator which professionally manages and operates the property.
• Today, under the fractional ownership, Holiday Homes are available in two formats:
  • Exclusively for co-ownership – in this case the share owners have only the benefits from the property usage – as offered by YOURS
  • Co-ownership with the flexibility to lease out on short-term rent: in this case the share owners have only the benefits from the property usage as well as potential rental income. Brikitt, ALYF and SmartOwner are few such operators in this space.

Which locations are being preferred for Fractional Ownership?

• The Holiday Home or the Vacation rental home market in India is currently at a nascent stage. The preferred locations for investment on Fractional Ownership model are largely the established tourist locations namely Goa, Alibaug, and Lonavala in West Shimla – Kasauli, Dehradun – Rishikesh in North, Ooty & Wayanad in South and Darjeeling in East. In the coming 3 to 5 years, established locations will continue to be preferred for Fractional Ownership.

What are the advantages of Fractional Ownership Model?

• 1. Lower Ticket Size: The first and foremost advantage is owing the asset at 1/8th or 1/11th the value of the property. In the established locations, the share value for villas range between INR 50 Lakhs up to INR 2.5 CR and for apartments it ranges between INR 10 L and INR 25 Lakhs.
• 2. Professionally Managed: In the past three years, we have witnessed emergence of multiple operators that manage and operate the co-owned property. These operators ensure the property is well managed, assist in short-term renting and assist in sale and purchase of shares.
• 3. Access to the other properties operated by the Operator: There are a few operators that offer points basis the investment value (instead of specified days), akin to the model adopted by the Timeshare operators in the hospitality industry. Owners have easy exchange benefits and can rent properties other than the primary investment managed by the same operator.
• 4. Potential Rental Income: If the properties are rented out on a short-term rental basis, the annual gross rental yield can vary between 5% and 7%. The capital value appreciation for a Holiday Home in established locations has been significant – 12% – 15% per annum in the past three years; however, we estimate an average appreciation in the range of 5% and 7% per annum in the coming three years. The return on investment is expected to range between 10% – 15% annually.

How can an investor exit an investment?

Fractional owners can sell their units or shares as per their contract. The platform can sell to existing users or users looking to invest in these properties. Operating companies are likely to extend their support in sale and purchase of shares.

What are the key limitations?

(i) Limited right to the property (ii) As property shares are sold, raising finance or loan is not an option (iii) Not all the operators allow the fractional owners to let the property on rent (iv) Exiting the investment. These risks can be mitigated by opting for a reputed developer and opting for an established vacation destination for the investment.

To sum up, fractional ownership of Holiday homes in India is a very attractive substitute for traditional sole ownership. This model presents an affordable, practical, and easily accessible means for people to enjoy the benefits of Holiday Home ownership in aspirational locations. Its many property options, professional management, low time commitment, and potential for rental income are just a few of its many advantages. Looking at the benefits that Fractional ownership offers, we are likely to see emergence of operating companies entering this segment.

Fractional ownership of holiday homes, which is still at a nascent stage in India, is likely to gain more traction after the Securities and Exchange Board of India (SEBI) recently introduced guidelines to regulate all online platforms that offer fractional ownership of real estate assets.