The term ownership usually signifies exclusive right over an asset. But what if the starting price of such an asset is out of reach of the ordinary guy? To solve this problem, the financial world has come up with fractional ownership, which allows investors to own a bit of a pricey asset.
What is it?
Millennials love the concept of BYOL/BYOB (Bring Your Own Liquor/Food) where everybody brings something to a party. In fractional ownership, unrelated parties can share passive ownership of a high-value asset, thus democratising ownership. This can be a jet, a yacht, commercial real estate, a luxury villa or warehouse. Both income and expenses related to this asset are then shared by investors in proportion to their investment.
Nowadays, physical assets such as vehicles, equipment and furniture leased to corporates are also tapping into the fractional ownership craze. In such assets, the minimum investment can be as low as ₹20,000. In property, fractional ownership legally divides ownership rights across many owners. Pre-leased commercial real estate for instance, can be yours for investments as low as ₹5 lakh.
Typically, fractional ownership investments in commercial real estate are done through a Specific Purpose Vehicle (SPV) in which funds are raised to own and manage the property. As an investor, you will own shares of the SPV holding the property.
Why is it important?
The fractional ownership route is often marketed for assets that are less liquid, unaffordable or difficult to manage for small investors. One reason people do this may be for the cool quotient. Owning a piece of commercial real estate, a jet plane, a yacht or an army of pre-leased vehicles, sounds aspirational. But the model can have pitfalls too, due to the very nature of the underlying asset which offers no income certainty like a share or a bond. Fractional ownership or co-investment is fertile ground for scamsters too. In the 90s, this model was used to sell ownership rights in ‘assets’ such as teak trees, emu farms and orchards to the public and that experiment with collective investing ended badly for investors.
Physical assets depreciate and undergo reduction in the value over time, due to wear and tear. Even as a fractional owner, you need to generate a return on your investment that more than makes up for this. To do this, you will need to correctly understand the nature of the asset and purchase it at the right price. Fractional ownership merely makes it easier to buy into an asset, but does not take away your need to put in homework on where you’re going to get returns from.
Why should I care?
Increasingly, fractional ownership ‘opportunities’ are being targeted at ordinary investors. With many individuals having already invested in bonds, shares, mutual funds, ETFs and even cryptocurrencies, fractional ownership assets are usually marketed using the ‘portfolio diversification’ card. To sweeten the deal, double-digit percentage return/yield and terms such as ‘steady projected income’ can be thrown around. Fintech platforms are now the new intermediaries in fractional ownership deals. They claim to have stringent processes to select assets, complete due diligence and execute sales.
These platforms also often assume the responsibility of oversight, reporting, and major decisions on behalf of investors. In return, do watch out for multiple fees — annual management fee, performance fee above a certain hurdle rate and/or fee on the income earned from the asset. Certain platforms allow investors to sell the investment after a lock-in period, but in practise, this depends on the availability of a counterparty.
Bite-sized ownership can bite you back if you are not careful.
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