Back in the Roman Era, whenever there was a dire need to construct a public infrastructure or even a trading venture, Romans, including kings and merchants, pooled their resources to fund large-scale projects. The legitimacy of this account is still debatable, but the first ever recorded account of a professionally managed collective investment scheme could be traced back to the Dutch Republic. Abraham van Ketwich, a prominent businessman based in Amsterdam, is widely recognized as the visionary behind this milestone achievement.

Fast forward to 2023, the rapidly changing landscape coupled with technological innovation has led to the birth of newer and more lucrative investment opportunities through resource pooling. Some of the best investment opportunities in the spectrum empower you to own beyond dream assets such as a digital copy of a piece of a famous painting, a shopping mall or even a high-end luxury villa. 

Evolution of Asset Classes through resource consolidation

Rise of Mutual Funds – Mutual funds were one of the pioneers to initiate the phenomenon of collective resource allocation in the mid-20th Century in India. The lucrative nature of the business, easy access and pocket-friendly structure created a mass appeal and interest in the investor community for the asset class. Initiated in 1963 by the Government of India to promote private investment in the market and encourage saving sentiment, this trend witnessed a massive acceleration through private sector participation post the LPG in 1991.

Fractional ownership in US equities – With the emergence of fractional ownership in US equities, it is now possible for Indian investors to own a share of some of the technology giants such as Apple, Microsoft, Google, etc. New-age tech-enabled platforms have made it possible for aspiring Indian investors to get a pie of the esteemed shares at a fraction of the cost. 

Green Energy – Even though the green energy segment is relatively new, it is becoming a prominent avenue for fractional ownership or co-ownership in the country. Due to increasing emphasis on using renewable and environment-friendly ways of energy, there has been growing demand for infrastructure like solar/wind power plants, hydroelectric generators, etc. Given the rising need for energy consumption and awareness about global warming, these types of assets are expected to rise in the coming years.

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Fractional ownership of real estate

The ever-growing and stable characteristics of the real estate sector presented an opportunity to earn substantial returns along with the capital appreciation thereby bringing in REITS – one of the first forms of fractional ownership of commercial real estate. 

REITs were first introduced in India by the Securities and Exchange Board of India (SEBI) in 2007, almost 5 decades after they were first incorporated as an investment vehicle. Functioning like mutual funds of real estate, REITs allow investors to invest in Grade A premium commercial properties through REIT funds. Currently, there are three operational REITs in the country. Post the launch, there were several regulatory developments made and the modus operandi was modified according to the market demand.

However, in the next couple of years, the industry further evolved and direct fractional ownership of a share in a particular commercial property was made accessible. In order to truly democratize CRE investment and provide complete control to investors on their holdings, FOPs (Fractional Ownership Platforms) were launched. 

Along with CRE investment, there has been a rising number of players providing similar investments in high-end luxury homes, vacation homes, etc. 

Expansion of FOPs and Regulatory Developments 

Fractional ownership has opened up opportunities for a wider range of investors, including those with smaller capital amounts, to participate in the high-value real estate market. It has enabled individuals to diversify their investment portfolios by gaining exposure to the real estate sector, which was previously inaccessible to many. As fractional ownership gains popularity and more investors recognize its potential, the market, which is currently worth over Rs. 2200 crore and is spread across residential, commercial, and industrial assets, is expected to grow manifold.

Further to the rising popularity amongst the investor community, the Security and Exchange Board of India, (SEBI) took a major step in regularizing this asset class and released a consulting paper guiding in order to protect investor interest and incorporate a formal framework to this digital asset class.

Future of Fractional Investment in CRE

By bringing fractional ownership of real estate assets under the Micro, Small, and Medium Real Estate Investment Trusts (MSME REITs) rules, a structured and transparent approach to these investments will be established. 

The introduction of regulatory oversight will address concerns regarding selling practices, independent valuation, and the reliability of information provided to potential investors, ensuring protection against misleading practices. This evolving ecosystem will encourage broad investor participation and facilitate healthy competition, creating a robust and dynamic industry for fractional ownership in India’s real estate market.

The article is written by Sudarshan Lodha, Co-founder and CEO, Strata. Views expressed are personal.