Fractional ownership: Putting luxury vacation homes within reach
In the words of Prashant Thakur, Director & Head-Research, ANAROCK Property Consultants:
Times are changing for luxury resorts and vacation homes market in India. Previously, the exclusive domain of high net-worth individuals (HNIs) capable of shelling out huge sums, this market may now attract a new set of buyers with a yen for owning a luxurious beach-facing property or mountain vacation home at a fraction of the total cost. The latest twist to timeshares, a popular concept from the 1960s, fractional ownership gives a cost-effective option with a lot more bang for the buck.
Fractional ownership is already fast catching up across various asset classes, including Grade A commercial spaces & luxury residential real estate. The concept opens doors to middle-income retail investors keen to diversify and set up multiple income channels at lower investment budgets. Various start-ups now use technology to popularise this concept in India after it has already been successfully implemented in Europe and the US. In the West, commercial properties or high-worth destination or vacation homes are the most popular categories.
In the newly-forged post-pandemic world, fractional ownership of vacation homes or high-worth resorts can potentially gain popularity for all the right reasons. COVID-19 has left many deep impressions on urban homeowners. Fractional ownership is a viable option for occasionally escaping the claustrophobic city and its virus containment areas or rent out the option if travel is not possible, with the proceeds being shared among the co-owners. In fact, one of the unique features of fractional ownership is that a property can be used as well as rented out.
What is fractional ownership?
In fractional ownership, multiple investors come together to hold combined ownership of a single asset. Each owns a fraction (or a small percentage) of the property. The ownership can be split among many investors as desired thus, enabling entry even for those with smaller budgets.
Fractional ownerships enable investors to secure a piece of prime property in high-demand city centres or popular vacation destinations. All investors reap a level of benefit proportional to their investment, in terms of rental yield, capital appreciation and, in the case of vacation homes, duration of personal use of the property.
The arrangement for the latter usually involves the allocation of property usage rights based on a certain period. Interestingly, the fractional owner is not responsible for the routine upkeep of the property. Fractional ownership has often proved to be a win-win for hoteliers abroad. The trend is quite vibrant in western vacation home markets, with resorts pricing their fractional offerings based on factors such as property, location, and amenities.
A new market for India
Various organised players have already forayed into this business model, with various differentiating factors but fundamentally offering a safe and viable investment opportunity. Besides commercial real estate, fractional ownership in the residential sector is also gaining popularity. In the last few years, luxury property players have started to warm up to this concept with the assistance of established players and specialised start-ups.
BRIKitt is one of the leading PropTech companies that offer fractional ownership within its premium residential and vacation homes segments. Similarly, Fracsn, Property Share, Strata, Myre Capital, Assetmonk, Grip and RealX also operate in the fractional ownership space. These PropTech companies amalgamate real estate, finance & technology and create a platform where retail investors can participate in a property with a foreseeable exit strategy.
Typically, these platforms take care of several critical aspects of investing from discovery to even liquidation as & when needed. Moreover, they help investors with all preliminary processes such as due diligence, research-related to the best options, procurement of the title document of the asset, and overall asset & peer group comparison. Fractional ownership platforms attract investors interested in not just building future income (in case of commercial or even residential properties) but also, in accessing the property (resorts or vacation homes) personally for a specific period, from a few weeks to a year.
In a situation where a pandemic has eroded most of the charms of inner-city life and raised the aspiration to escape it, especially with the benefit of working from anywhere, the appeal of such a model cannot be understated.
Fractional ownership vs REIT Investment
REITs in India are, so far, limited to commercial properties and are yet to make inroads into the residential segment. In fractional ownership of commercial properties, multiple investors hold combined ownership of a single asset while in REITs, investors own a portfolio that is invested in several assets. In fractional ownership, investors can cherry-pick the assets while in REITs, individual selection of invested assets is not possible as there are multiple assets in one portfolio.
Both REITs and fractional ownership are fairly new in India, but the former is a tried-and-tested risk-free investment option across major developed nations. In India too, it has received a very favourable response since its formal launch in 2019 and is yielding very favourable returns.
A word of caution
Like with any other real estate asset, caution is advised when selecting a property or even a platform for fractional ownership - professional advice is very much in order. While various start-ups are operating in this space, the fact is that fractional ownership is still very much a new game in town. There are no really established players, and even specific rules & regulations specific to this segment are yet to be formulated and announced.
Also, there are no standardised processes to depend on. At both, entry as well as exit levels, multiple investors can give rise to disputes regarding the division of usage of the property, expenses incurred on the property, etc. For a vacation home, there may be an overlap of usage of the property while the division of the upkeep and maintenance expenses needs to be carefully arrived at. Individual defaults also tend to be higher in a challenging economy, and this affects all co-owners.
Nevertheless, fractional ownership is an exciting emerging asset class. Amidst the volatility of the stock markets and low-interest rates on FDs, it provides an opportunity for smaller retail investors to participate in valuable commercial or even residential assets. As proper processes are eventually put in place, it will become a very viable investment model soon.