Fractional Ownership is an real estate backed investment opportunity, which compulsorily generates periodic income or yield and capital appreciation in long term
The Investors can invests in fractional ownership in 2 manner: Owning of a share (Equity Shares and/or Debentures- CCDs) of a Special Purpose Vehicle (SPV) or a Company, which directly owns the property OR Owning an allotted area in sqft at a designate floor along with other owners through a registered sale agreement.
The Asset Manager is appointed by the Investors through an agreement which details the scope of work entrusted to the Asset Manager. The Asset Managers brings in custodian, escrow manager, escrow bank, auditors, valuators, lawyers, property manager, facility manager to manage the property & investment on behalf of the investors in the process to:
Fraction Ownership is only in real estate backed investments. One can invest in an under construction property with fixed returns with security cover, it can be in a ready-rented property which generates rental income, it can be a property which is at a very advance stage of construction with firm commitment from prospective Lessee. The income, expenses and profits from the property are shared by multiple fractional owners managed by the Asset Manager for an annual fixed fee and a fixed performance fee at the time of exit.
Any resident having joint, savings or current account OR NRI’s with an INR denominated bank account with proper KYC can invest in fractional ownership. NRIs can invest through their NRE / NRO accounts. However, the income and profits generated will be paid in the NRO accounts only. NRIs in India and can be repatriated outside of India as per applicable laws.
The minimum investment can vary on the specific investment opportunity and the minimum amount could be INR 25 lacs. In some cases, the investors can have the option to pay the investment amount in instalments as well over a period of 12-24 months.
All income, expenses and profits are proportionate to the units of the Company or the area in sqft allocated to the Investors. The Asset Manager will publish the pay-outs on quarterly basis along with expenses to each Investor. The Asset Manager will also publish a quarterly Property Monitoring Report (PMR) covering all aspects of the projects including income, expenses and market valuation.
The Asset Manager will charge a standard fees of 0.5% as Asset Management Fees per annum deductible from the periodic payments and will take 20% of profits on post a performance trigger of 10% per annum on compounded basis. For clarity, if you invest INR 30 Lacs and make INR 50 Lacs from rent/regular income and appreciation in 5 years, there will be no charge till INR 48.31 Lacs. A exit fees will be INR 55 Lacs – INR 48.31 Lacs = INR 1.69 Lacs x 20% = INR 33,800. These calculations will be post asset management fees and pre-tax basis.
Typical cycle of investment in any real estate opportunity is 6-8 years to unlock its real value. Fractional Ownership is of no different cycle.
The Asset Manager after a certain point of time (say 5-6 years), based on the property type (rented/ under construction) decides the best form of exit, which may either be through sale of the Company owing the property to another set of investors or exit through REITs (if rented assets). If it’s an under-construction property, lease of the property to a good tenant and then sale to HNI’s for a yield.
The Asset Manager is in best position to determine the exit price due to the acess of the market intelligence it has. In case of a Company structure, the Asset Manager will publish a market value every 6 months. At the time of exit, the Asset Manager will also communicate the price to all investors, and only of 75% object to the price within a stipulated time, the sale offer will be rejected. As far as the regular income is concerned the yield or coupon will be distributed after the fixed expenses (property tax, asset management fees). The CAM expenses if borne by the property owner (in case the rent is inclusive of CAM) then the yield / coupon will differ month on month on 5-10% basis. This doesn’t account for uncalled contingencies, if any from time to time.
Typically, the Asset Manager doesn’t charge any annual fees if there is no income. However, the Asset Manager shall be entitled to claim the annual fee for the period when there was no income once the Company owning the property or the allotted Property starts generating income. In case it doesn’t generate income till it is sold then the same calculations will apply as described in Point No. 9 above.
Unlike where the investor owns the allotted units through a registered sale, the income generated from the Company owning the property cannot be considered as Income from house property since it is an investment in securities of a Company. Further, all income generated attracts applicable TDS and the gains attracts short term and long-term gains in the hand of the Investors. Every product will have its own tax liability. It is advisable to seek advice from a tax expert or request to the Asset Manager for clarification based on your invested product.
Yes, in case of the fractional ownership is registered in your name, one will be eligible for loan. In case if the investment is in the Company owning the property, then, all shareholders/debenture holders will have to agree on the structure of the loan including distribution on income and expenses.