Why High Net Worth Individuals are Turning to Fractional Ownership in Commercial Real Estate
Ever flipped through a glossy magazine and come across the photograph of a well-heeled, sharp-suited, suave CEO alongside a private jet, yacht or even luxury holiday home? Your first thought is – ‘Wow, he must be loaded to afford that 8-bedroom, sea-facing Villa’ you’re right- he is loaded. But that doesn’t necessarily mean that he owns the entire villa and paid for it himself. What it could be- is a case of him owning only part of the villa. Yes, you heard right! I’m talking about High-Net-Worth Individuals opting for Fractional Ownership in real estate. Now that I have your attention- let’s dive in! This trend is known as Luxury fractional real estate investing that is changing the face of the real estate investment landscape. Over the years- the luxury market has witnessed a shift with the emergence of fractional ownership. This allows individuals to invest in expensive properties by dividing their ownership cost into more affordable shares. Also known as co-ownership, it allows multiple investors to benefit from their share in any appreciation in market value and rental revenue of an asset. This innovative concept is revolutionizing the way HNIs invest in and experience high-end properties, making luxury living more accessible than ever before. Luxury fractional real estate, also known as fractional ownership or shared ownership, involves dividing ownership of a high-value property into smaller, more affordable fractions. Each fraction represents a portion of the property’s value and entitles the owner to usage throughout the year commensurate with their share size. This trend is particularly prominent in luxury vacation homes, resorts, and upscale urban residences. A significant portion of investments in this model are flowing into the residential and commercial real estate market by way of fractional ownership platforms. Such ventures provide the average high net-worth investor a relatively economical entry into assets that are otherwise dominated by wealthier counterparts. The hassle-free model is helping owners overcome the constraints of sole ownership—that is bogged down by large investments, complicated paperwork, a lack of transparency, and management concerns. Besides, fractionally owned properties often have professionally managed finances, maintenance, and legalities. These perks are further driving the trend by providing a hands-off investment experience to owners. And the appeal lies in the customized experience. From how many chilled beer cans need to be available to which room freshener should welcome the guests, it’s all on offer- and that’s what the HNI community is drawn to. According to data from Knight Frank, the market size of fractional ownership properties in India—growing at an annualised rate of 10.5 per cent—is expected to expand by 65 per cent, from $5.4 billion in 2020 to $8.9 billion in 2025. Although the underlying assets range from commercial property to farms and vacation homes, the second-home segment is the one seeing the most activity. Moreover, investors are flocking to popular tourist destinations like Alibaug, Lonavala, Goa, Kodagu, Rishikesh and Shimla, among others, for their second homes. Recently, the 2024 edition of the Neo-Realty survey by WiseX, India’s leading Neo- realty investments platform, revealed that 60% of overall investors out of 6578 respondents and 64% of high net worth individual with 2174 respondents prefer the fractional ownership model to invest in Commercial Real Estate (CRE) in India. The survey revealed that the majority of investors favour real estate investments with a medium-term perspective of 1-3 years ( 20%) and 4-6 years (55%). The tech capital of India Bengaluru has emerged as the top preferred location for HNI investors at 31% followed by Pune 24%, Mumbai and Delhi NCR. According to the industry estimates, amendments in the regulations of REITs to include SM REITs also add to the confluence on the rise of fractional ownership. The survey also mentions that of affluent investors shows that 60% of investors who haven’t previously invested in Fractional Ownership believe regulatory support from SEBI has bolstered their confidence in Fractional Ownership investments. So why is it so appealing? Diversification of Investment Portfolio: HNIs seek to diversify their investment portfolios beyond traditional assets like stocks and bonds. Fractional ownership offers exposure to commercial real estate without the need for full ownership, spreading risk. Access to Commercial Real Estate Investment: Direct ownership of commercial properties often requires substantial capital. Fractional ownership allows HNIs to invest in high-value commercial properties with lower entry costs. Enhanced Liquidity: Traditional real estate investments can be illiquid, tying up capital for extended periods. Fractional ownership provides liquidity by allowing investors to buy and sell shares in properties more easily. Risk Mitigation and Lower Barrier to Entry: Commercial real estate involves significant financial risk and management complexities. Fractional ownership spreads risk across multiple investors, reducing individual exposure and management responsibilities. Professional Asset Management: Managing commercial real estate requires expertise in property management and market analysis. Fractional ownership platforms often provide professional management, offering HNIs peace of mind and passive income streams. Access to Luxury and High-Value Properties: HNIs often seek investments in prestigious and luxury properties. Fractional ownership allows investment in upscale commercial properties, enhancing portfolio exclusivity and potential returns. Alignment with Sustainable Investing: Increasingly, HNIs prioritize sustainable and socially responsible investments. Fractional ownership platforms may offer opportunities to invest in eco-friendly or LEED-certified commercial properties. Flexibility and Scalability: HNIs value flexibility in adjusting their investment portfolios. Fractional ownership allows investors to scale their investments up or down easily, depending on market conditions and personal financial strategies. And that sums up why fractional ownership in commercial real estate represents a smart evolution in investment strategy for High-Net-Worth Individuals (HNIs). By offering access to prestigious properties with reduced entry barriers, diversification benefits, and professional management, it aligns perfectly with their quest for portfolio growth and risk mitigation. This innovative approach not only enhances liquidity and flexibility but also reflects a strategic move towards sustainable and lucrative investments in today’s dynamic market landscape. Fractional ownership thus stands as a compelling choice for HNIs looking to optimize their wealth management with sophistication