Indians are looking to escape the hustle and bustle of cities and preferring to spend more time in the midst of nature. This has led to a surge in demand for second homes in vacation destinations. COVID has further boosted demand for this segment.
Recent studies confirm that the holiday home market is significantly expanding and is expected to grow by over 20% annually in the next five years. Buying a holiday home has now become easier with fractional ownership.
These Fractional ownership platforms allow multiple investors to collectively own an asset without worrying about its upkeep. The asset is owned by a Special Purpose Vehicle (SPV), of which these owners become shareholders. This type of asset is divided into 8 to 11 fractions.
The vacation home fractional ownership market is still at a very nascent stage and is estimated to be ~USD 25 million in terms of assets under management, having over 0.1 million square feet of usable area across 35 plus properties. It is less than 5% of the commercial fractional ownership market, which stands at USD 500 million.
The majority of these vacation homes are located in Goa, followed by Alibaug and Lonavala in the western part of the country. Of late, operators are venturing into newer micro markets like Kasauli and Mukteshwar in north India, Nilgiris and Wayanad in south, and Dooars and Puri on the eastern side of the country.
Benefits of owning a second home through fractional ownership
- Affordability: It is easier and affordable to own a holiday home along with co-owners, which is otherwise difficult. The minimum investment starts at around USD 8,000, buying a holiday home individually requires a minimum investment of USD 90,000 – 100,000.
- Option to stay: The buyers typically have a 35-45 day stay option in a year. Generally, holiday homes are used only for this much time period and remain unused rest of the year. If the home is not being used by the owner, some fractional ownership platforms provide an option to rent out the home on owner’s behalf.
- Higher returns: These properties witness a capital appreciation of 8-10% annually. In the case of homes which can be let out, the rental yields are 5-6% annually. Although the rental yields are lesser than commercial assets, they are double the returns of traditional homes.
- Easy exit: Generally, there is no lock in period and investors have an option to sell their share to other co-owners or to other investors.
- Property management: Professional management companies manage and operate the asset without the owners having to worry about it.
What lies ahead?
In India, the middle-income population is growing at a fast rate and its aspiration to own a holiday home is likely to propel the demand for this segment.
The Securities and Exchange Board of India (SEBI) has recently laid out a framework for Small and Medium REITs, primarily focusing towards commercial rent-yielding assets. With this, the fractional ownership market is expected to become more transparent, increasing investor confidence in these platforms.
If the demand for fractional ownership of vacation/holiday homes takes a significant growth trajectory, a proper structure and legal framework will evolve under the supervision of SEBI to boost investors’ confidence which will enhance the depth of this market.
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