Market regulator Securities and Exchange Board of India’s (SEBI) recent decision to allow the creation of small and medium REITs (Real Estate Investment Trust) along with guidelines for fractional ownership, is expected to open the doors to fractional ownership of rent yielding real estate assets, including uber-luxury second homes across the country.
SEBI has given two approvals for smaller REITs of ₹50 crore, and separately for fractional investments in real estate which in turn is expected to work very well for holiday homes.
What the rules on fractional ownership mean
A fractional ownership platform allows the cost of property to be split among several investors who own shares or securities issued by a special purpose vehicle established by a FOP (Fractional Ownership Platform). The real estate asset is purchased through a SPV. This means that for 20 assets purchased by a company in five locations, there will be five different SPVs.
To cite an example, the cost of a villa in Goa worth ₹8 crore will be split among eight owners, with each one of them paying ₹1 crore. All owners will receive one-eighth share of the property and one-eighth time in a year to use it. Stamp duty and registration cost usually form part of the cost. The co-owners also split the costs for regular maintenance and renovation work in future. An investor can buy one share in a property in Goa and another in Kasauli.
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Shravan Gupta, founder and CEO of YOURS, a platform for fractional ownership of luxury second homes in Goa, Alibaug, Nilgiri, Kasauli and Wayanad, is of the opinion that the guidelines proposed by SEBI are crucial for formalising the sector, instilling investor faith, and addressing the complexity of Special Purpose Vehicle (SPV) securities issuances.
These are expected to particularly benefit retail investors unfamiliar with such structures. The regulation is anticipated to contribute to the growth and acceptance of this innovative form of property ownership, aligning with established practices in developed nations, he said.
Amit Goyal, managing director, Sotheby’s International Realty in India is of the opinion that market regulator SEBI’s recent decision to allow the setting up of small and medium REITs along with guidelines for fractional ownership, are both excellent steps to broad base real estate as a financial investment.
Goyal is particularly enthusiastic about this SEBI move opening the doors of fractional ownership of rent-yielding real estate assets, including uber luxury second homes across the country.
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“There is immense potential in this segment as savvy investors see strong growth in it. We, as an organisation, have concrete plans of expanding into it,” he said.
Why the rules make sense to an investor
It makes sense to an investor because he is buying a fractional share of a holiday home asset. Also, since a second home asset usually remains idle for a large part of the year, this model proves to be viable because all the owners get to use it a few times a year. “It’s a win-win for all,” he added.
Besides, the responsibility and cost of maintenance is shared among multiple members and the cost of investment reduces to one-sixth or one-eighth of the total value of the property.
Formalisation of these guidelines is expected to lead to faster closure of second homes deals.
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The time taken to conclude these deals is expected to narrow, with there being more clarity and a regulatory environment around it.
“The previous opacity meant investors were trying out all sorts of investment formats. Some were forming LLPs, some Private Ltd companies or partnership firms with multiple stakeholders, for luxury holiday or second home assets. There was also a lack of confidence from investors,” he said.
Investors’ risk is also expected to get reasonably reduced with this formal mechanism being put into place under SEBI’s oversight.