Fractional ownership is a method of physical ownership for small investors. real estate through an alternative investment route. Online platforms like Strata, Hbits, PropertyShares, Bhiway etc. allow individuals to invest 25 lakh and above in pre-lease Grade A commercial properties and earn an average rental yield of 10%.
How does this work
for everyone commercial property Listed for investment, a Private Limited Company, also known as a Special Purpose Vehicle (SPV), is created by the Platform. This SPV pools in funds equal to the property value from investors through listing and once that is done, it buys the property. This means that the property registration takes place between the seller and the SPV, while each individual investor becomes a shareholder in the SPV.
“Investors get equity and compulsorily convertible debentures (CCDs) in proportion to their investments made in the SPV,” said Nihar Shah, director, investments and sales, Strata Property Management. The documents relating to the incorporation of the SPV as well as the listed documents are provided to the investor during registration on the platform.
No regulator oversees this alternative investment product. “The industry is governed by the Companies Act of 2013 and the platforms facilitating such investments are RERA registered,” said Shiv Parekh, Founder, Hbits.
To protect the interests of investors, these platforms employ a trustee company that provides custodian, escrow and trusteeship services. “The money collected from the investors goes into an escrow account and from there it is sent to the seller of the property. At no point does the fund come to us which ensures that we or any other platform following this structure can snatch the investor’s money,” Shah said.
what do you earn
Rental yields are generally pre-determined in the range of 8-12% per annum and are paid on a monthly or quarterly basis.
If the tenant defaults on paying rent or vacates the property during the lease contract, the investor does not receive the rent. “We thoroughly examine the balance sheet of the tenant company as a risk mitigation measure. Additionally, we do not choose properties where there is a lot of vacancy in the micro-market or have increased rents because tenant eases can exit under such circumstances,” Shah said.
Investors can exit their investments in two ways: one, selling in the secondary market on the platform itself; Or second, when the SPV finds a buyer for the property. Parekh said, “The sale of the entire property takes place only after 75 per cent or more of the investors vote in favor of the sale.
For taxation purposes, rental income is treated as interest and taxed at slab rates, while gains made on sales are treated as capital gains and taxed at 20% when investments are made. is for two or more years and is otherwise at slab rates.