JOIN USDH Deciphers | A primer on fractional ownership platforms (FOPs)
In the past 2-3 years, there has been a mushrooming of web based platforms offering fractional ownership of real estate assets, market regulator Securities and Exchange Board of India stated as it floated a consultation paper for regulation of these entities on May 15. In this edition of DH Deciphers, Shakshi Jain discusses the concept of fractional ownership platforms (FOPs) and how investing in them works.
What are fractional ownership platforms (FOPs)?
Fractional investment or ownership of real estate through FOPs is an investing strategy in which the cost of acquisition of real estate is split among several investors, who invest in securities issued by a special purpose vehicle (SPV) established by the FOP. The costs of upkeep and acquisition are divided among the investors/shareholders in SPVs, who also share the benefits and returns of the assets subject to management and maintenance fees levied by the FOP or its associates or specified third parties.
How are FOPs different from real estate investment trusts (REITs)?
Unlike REITs, FOPs allow real ownership of assets with the minimum investment ranging from Rs 10 lakh to Rs 25 lakh depending on the ticket size determined. For REITs this value may be as low as the price of one equity share of the entity.
Furthermore, when one invests in a REIT he/she buys shares of an organisation which invests in a portfolio of realty assets. In FOPs, there is higher flexibility of choice in terms of the property to invest in, including access to relevant data before purchase of property shares.
With REITs, which fall under the regulatory ambit of Sebi, at least 80% of the investment portfolio should be invested in income generating properties, meaning existing assets. The fractional investment model places no such cap, allowing investment in properties under construction.
How can one invest in FOPs?
The transaction structure of an FOP involves identification of a property by the FOP followed by its listing on the website of the FOP seeking expression of interest (EoI) from the public with token amounts ranging from Rs 10,000 to Rs 1 lakh. On receipt of 100% EoI, the placement memorandum to subscribe to the securities issued by the private limited company i.e SPV which will purchase the real estate asset or which owns the asset are forwarded to the investor.
The investor transfers the amount to an escrow account post which he/she is allotted the securities.
Why is a regulation mechanism for FOPs being proposed now?
In the said consultation paper, Sebi listed its reasoning as burgeoning value of investments with FOPs as well as the number of investors in the past 3 years, warranting an oversight in the form of registration and regulation to safeguard the interest of investors.
It would provide an impetus for the growth of this market, Sebi noted in the consultation paper adding that the migration of the current SPVs or other structures established by FOPs to the REIT structure may also result in treatment of such investment by investors as investment in business trusts as defined under the Income-tax Act, which provides certain tax benefits for Sebi-registered REITs that are otherwise not available to the SPV or the investors or both.
What does the said regulation propose?
It is proposed to bring FOPs under Sebi’s regulatory perimeter by introducing a chapter under REIT Regulations, 2014, with due modifications as required and labelling these as MSM (micro, small and medium) REITs.
After registration with Sebi, MSM REITs shall raise funds initially through an initial offer of units of a scheme, for which the size of the asset proposed to be acquired should be at least Rs 25 crore and not more than Rs 499 crore. A REIT on the other hand is required to have a minimum asset size of Rs 500 crore and the minimum offer size must not be less than Rs 250 crore.
FOPs versus REITs - which is better?
Experts DH spoke to unanimously pointed to REITs as being a better option, citing factors such as regulation by Sebi, zero maintenance charges, high liquidity and low initial investment.