• January 5, 2024

Soaring property prices: Luxury in parts

Soaring property prices: Luxury in parts

In light of soaring property prices, fractional ownership has emerged as a lucrative investment avenue as owners gain access to properties which ordinarily might have been out of reach.

Fractional ownership in real estate assets has witnessed a significant uptick in recent years, primarily driven by changing economic conditions and an increase in leisure travel post-pandemic. This model allows multiple individuals to collectively own a share in a high-value property, thus providing them with the opportunity to enjoy the benefits of luxury living or derive rental revenue from premium properties without having to bear the financial burden of sole ownership.

In light of soaring property prices, fractional ownership has emerged as a lucrative investment avenue as owners gain access to high-end properties which ordinarily might have been financially challenging for an individual owner to acquire and maintain. Additionally, investors can diversify their real estate portfolio by owning a share in multiple luxury properties rather than just investing in a single property.

Fractional ownership platforms facilitate the pooling of investors’ funds and acquisition of real estate assets by utilising special-purpose vehicles (SPV) that issue securities to these investors.  These SPVs are legal entities such as a Limited Liability Partnership (LLP) or a private limited company.

On May 12, 2023, the Securities and Exchange Board of India (Sebi) issued a consultation paper on May 12 proposing a regulatory framework to govern fractional ownership platforms (FOPs) (bit.ly/3vnH2Ml). Presently, the modus operandi adopted by these FOPs is to garner interest from potential investors for investment in pre-identified commercial properties and set up companies in the form of a special purpose vehicle that owns such properties. Investors become shareholders of these SPVs and gain returns from the rents earned by such properties. Sebi was of the opinion that these SPVs are set up as private limited companies and there is very little governance oversight over the SPVs. Recognising these constraints, Sebi felt it was imperative to bring the FOPs under its regulatory purview, and has proposed to bring these under the real estate investment trust (REIT) structure, and has termed these as micro, small, and medium (MSM) REITs.  The May 12 consultation paper proposed that any person or entity (including FOPs) which facilitate or have facilitated fractional investment in real estate by any structure whatsoever shall be required to register with Sebi for operating as MSM REIT in the manner specified by the regulator.

Close on the heels of the May 12 consultation paper, vide a press release dated November 25, the regulator has approved amendments to Sebi (Real Estate Investment Trusts) Regulations, 2014 (REIT Regulations) to create a framework for the facilitation of small and medium REITs (bit.ly/47oc04a). These amendments aim to establish a regulatory structure that enables the operation of small and medium-sized REITs with assets valued at a minimum of `50 crore, in contrast to the current requirement of `500 crore for existing REITs. Thus, by recognising the demand for smaller-sized REITs, Sebi aims to attract a larger number of investors. This in turn will foster a significant expansion in the market for fractional ownership of real estate and increase regulatory oversight.

The in-principle approval granted by Sebi to amend the REIT Regulations is a progressive step which will go a long way in protecting the rights of retail and non-institutional investors. A migration by FOPs to the REIT structure ensures that the capital markets regulator has sufficient regulatory oversight over FOPs. This decision by Sebi will provide adequate comfort to retail and non-institutional investors as this will ensure higher corporate governance standards and timely disclosure of information affecting small and medium investors. Additionally, this decision should provide retail and non-institutional investors a robust mechanism to resolve investor grievances.

Economic and real estate market fluctuations can impact the value of the property and the returns for co-owners. Thus, a thorough understanding of market dynamics is crucial, especially since real estate investment is a long-term financial commitment. Furthermore, effective communication and decision-making mechanisms are essential to prevent conflicts among co-owners, especially concerning the use, maintenance, and potential sale of the property. Thus, a well-drafted agreement between co-owners that anticipates potential issues and clearly outlines procedures for resolution can mitigate disputes.

Vivek K Chandy, Joint managing partner, JSA Solicitors and Advocates, penned this piece for Financial Express.

Views are personal and do not represent the stand of this publication.

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