Fractional ownership is a collective investment approach where investors pool their funds to buy an expensive asset and share passive ownership. Each investor receives returns and benefits based on their investment share, such as usage rights, priority access, income sharing, and reduced rates. This approach is popular for purchasing high-value assets like aircraft, vacation homes, and luxury cars. It allows investors to reduce their financial burden and form an investment strategy according to their risk appetite. Fractional ownership can also involve breaking up a real estate property into portions for investors to own.

Commercial Real Estate encompasses a wide range of properties including office buildings, industrial spaces, retail areas, schools, warehouses, hotels, and hostels. Fractional Ownership in Residential Properties typically generates lower returns due to lower rental yields, which can be as low as 2.5-3%, and the potential for tenants to vacate on short notice. In contrast, Commercial Real Estate offers more stability with rental yields of 8-10% and longer-term contracts, typically a minimum of three years, with professional tenants. CRE also offers potential for wealth creation through asset appreciation. As a result, Fractional Ownership in Commercial Real Estate is becoming an increasingly attractive alternative to traditional Real Estate Investments in India.

• The investment platform offering Fractional Ownership typically lists a high-quality commercial property that already has a tenant. An investor can commit a portion of the property cost, usually starting from Rs 25 lakh. 
• A Special Purpose Vehicle (SPV) is created for each property, with the pooled funds from investors sent through a trusteeship company or LLP. 
• The SPV purchases the property, with all Fractional owners becoming shareholders in the SPV in proportion to their investment-contribution. 
• The investment platform assumes responsibility for the SPV and the underlying property. 
• Investors must sign relevant SPV agreements to be registered with the Registrar of Companies (RoC) under the Ministry of Corporate Affairs (MCA), and the sale agreement is registered with the Sub-Registrar office. 
• All necessary documents, including the lease/rental agreement, title report, sale deed, and SPV agreement, are shared with investors and accessible on their dashboard. 
• The Property Sale Deed, along with the SPV agreement, serves as proof of ownership, recorded in government records, public databases, and the investor's dashboard. 
• Investors can track and monitor the asset in real-time and have multiple exit options available for a smooth exit.

• Fractional ownership allows an investor to enter real estate investment at lower ticket sizes.
• Access to institutional Grade-A commercial real estate which is generally not available to individual investors
• A non-volatile investment that compares favorably with gold, fixed deposits, and corporate bonds. It is not as dependent on the ups and downs of the market as compared to stocks and mutual funds.
• An investment that offers both passive income generation and long-term capital growth.
• Fractional Real Estate contributes positively to portfolio diversification and yields more profit compared to residential investments.
• Clear regulations are in place when you are investing in fractional ownership of a commercial property. All the payouts from the sale of the property, which includes income from rent, as well as the proceeds from the sale are managed by a trusteeship company.
• Greater liquidity and risk mitigation when compared to traditional real estate investments.

For residents, short-term capital gains are taxed at slab rates, while long-term capital gains are taxed at 20% with indexation. 

For Non-residents, short-term capital gains are taxed at slab rates, while long-term capital gains are taxed at 10% without indexation.

In terms of rental income received from interest on debentures, it is taxed at the slab rates of the investor. The SPV deducts a 10% TDS before remitting returns to resident Indians and a higher 30% TDS (plus applicable surcharge and cess) for NRI investors. However, resident Indians can submit Form 15G/15H to reduce the TDS, while NRI investors can submit TRC to lower their TDS. 

SEBI has introduced a consultation paper dated May 15, 2023, aimed at regulating fractional ownership platforms (FOPs) to safeguard investor interests, proposing their inclusion under Real Estate Investment Trust (REIT) Regulations with the designation of "MSM REITs." This initiative seeks to establish consistent standards in asset valuation, due diligence, regulatory supervision, investor protection, grievance redressal, and liquidity through listing or equivalent mechanisms, addressing concerns arising from the proliferation of FOPs. By migrating from the SPV (Special Purpose Vehicle) structures to the REIT framework, these FOPs may gain the treatment of business trusts, providing certain tax benefits available to SEBI-registered REITs, which were previously inaccessible to SPVs and investors. Under the proposed framework, FOPs will need to register with SEBI as MSM REITs, structured as trusts involving various parties like investment managers, trustees, and sponsors, with sponsors required to maintain a minimum net worth of Rs 20 crore and hold a minimum 15% of total units. Entities failing to meet the eligibility criteria and failing to register with SEBI will be compelled to cease operations. Additionally, SEBI has outlined guidelines for valuation, exit options for investors, disclosure of investment strategies, and capping the total expense ratio, among other measures. This regulatory move aims to enhance transparency, financial stability, and disclosure standards while addressing KYC, net worth, and deposit requirements. It also suggests listing FOP units on stock exchanges to facilitate robust risk management, equitable pricing, guaranteed settlement, and enhanced liquidity and exit avenues for investors.

In the past 2-3 years, there has been a noticeable surge in the accessibility of online platforms that facilitate fractional ownership of real estate assets. These platforms provide investors with the opportunity to participate in a diverse array of properties, such as buildings, office spaces, warehouses, shopping centers, conference centers, and more, at a relatively low initial investment, which was previously unavailable to retail investors. The common starting range for investment in Fractional Ownership Platforms (FOPs) typically falls between INR 10 lakhs and INR 25 lakhs. These real estate assets underlying FOPs exhibit similarities to properties governed by the Real Estate Investment Trust (REIT) Regulations.

• Difference in Cashflows & Lease Terms: Commercial Real Estate investments typically generate higher cashflow compared to residential properties. This is because commercial properties such as Office Spaces sign longer leases and pay higher rents compared to residential tenants. While businesses also have uncertain revenues, Residential real estate has a higher risk of unstable cashflows as the individual may move out after short tenures and the landlord may need to search for the next tenant and repeat due diligence procedures.
• Difference in Yields: Investments in Commercial Real Estate are capable of providing significantly higher rental yields (e.g. 8% to 10%) as compared to Residential Real Estate (2% to 3%).
• Tenant Base: Residential real estate investments typically have a more diverse tenant base such as families, young professionals and retirees. Commercial Real Estate on the other hand relies on businesses and companies as tenants, which may have different lease requirements, credit ratings and occupancy needs. In both cases, the investor may need to do due diligence of the tenant with regards to their income capacity & stability, credit rating, etc. Providers of FRE undertake due diligence and ensure that the business has a stable cashflow, with factors such as a track record of paying rent on time at previously rented properties, etc.
• Property Management: While commercial properties in isolation require more extensive property management than residential properties, FRE allows the investor to invest without hassle at a small fee.
• Low Ticket Size & Diversification Potential: Commercial real estate investments require significantly more capital than residential real estate. However, FRE enables low-ticket investments of ₹25 Lac. Through fractionality, the investor can invest in various commercial properties across the country and attain regional diversification benefits. For example, an investor with ₹1 Cr. may be able to invest in various cities such as Navi Mumbai, Chennai, Bangalore, Mumbai, etc.
• Market Volatility: CRE investments may be more susceptible to market volatility as compared to residential properties as they are more closely tied to business cycles and economic conditions.

• The Indian CRE market is a thriving multi-billion-dollar industry that shows consistent growth. With a formalized economy, it offers lucrative investment opportunities, particularly in premium properties like tech parks, data centers, and warehouses.
• The current market size of India's real estate sector is estimated at USD 477 billion, contributing 7.3% to the total economic output. By 2047, it is projected to expand to USD 5.8 trillion, contributing 15.5% to the total economic output. India's commercial real estate market has gained strength in recent years, attracting global occupiers and witnessing increased interest from small and medium real estate developers. 
• Initiatives like special economic zones (SEZs), software technology parks (STP), and export-oriented units (EOU) have significantly supported India's CRE. Leading global companies, such as Amazon and Google, have also set up large operations in India, further fueling demand. India's emergence as a preferred IT destination for global tech companies has been a significant driver of office space demand, boosting the commercial real estate sector. Growth in various sectors, including IT/BPM, BFSI, healthcare, and business consulting, along with the rise in flexible and co-working spaces, continues to support India's office real estate.
• Despite global economic challenges post-pandemic, India's office market remained strong in 2022, registering a total office transaction volume of 52 million square feet across the top 8 cities. India's thriving start-up ecosystem has driven demand for commercial real estate, fostering the development of robust office infrastructure and generating employment opportunities.
• Foreign Direct Investment (FDI) allowances in manufacturing and retail, along with the effects of globalization and evolving tax systems, have been pivotal in reshaping India's warehousing industry. Structural economic shifts, such as the introduction of GST in 2017, have further hastened the formalization of India's warehousing sector. Presently, this sector holds significant appeal for institutional investors, driven by factors such as robust domestic consumption, the growth of organized retail, favorable government policies, and the strengthening of supply chains.
• India's office real estate stock has significantly expanded, with a considerable increase in office space across Tier 1, Tier 2, and Tier 3 cities. Factors like business expansion, low costs, infrastructure development, and the availability of talent have fueled this growth. India's office real estate stock has significantly grown, from 278 million square feet in 2008 to 898 million square feet today, across both Tier 1 and Tier 2/3 cities.

Source: Research Report from Knight Frank – Indian Real Estate Vision 2047