Fractional Ownership of Property: A New Investment Tool for Millennials

There is no need for your property investment strategy to be stodgy and old-fashioned, as millennials are now carving out a new method to do so in this fast-changing world. There are fascinating paths to explore now, with many more financial alternatives than your parents had decades ago. One of the most recent alternatives is the fractional ownership of property. The next question would be: What is fractional ownership in real estate and is it the next great wave in the investment landscape?

What is Fractional Ownership in Property?

You may interpret the term "fractional ownership" as the practice of purchasing real estate with a group of co-owners. Fractional ownership splits the cost of a commercial property into many pieces with the purpose of enabling ordinary investors to purchase a portion of it. Commercial real estate developments, such as office buildings and shopping malls, may cost an arm and a leg, putting them out of reach for most small-time investors. 

On the other hand, a smaller portion of the investment sum for purchasing property is made possible due to fractionalized ownership which allows retail investors to engage in a fast-growing sector that was previously out of their reach.

Thanks to sustainable returns brought by real estate, fractional ownership is becoming one of the most appealing investment choices among investors. For millennials, the dual benefit of rental income and capital appreciation makes it the ideal alternative for other investment options.

Tokenization made Fractional Ownership Possible and Much More Easier than Ever Before 

The usage of blockchain technology, ie: tokenization in the real estate industry is expanding to include fractional ownership of the real estate, regardless of residential or commercial. You can even say that tokenization benefits both property owners as well as potential investors, from democratizing access to real estate investing to boosting market liquidity.

You might be asking how tokenization works in order to fractionalize property ownership. In simple terms, tokenization is the act of generating a virtual token to represent ownership of a real estate stake is known as tokenization. Rather than dealing with traditional real estate interests in an archaic way with paper papers, buyers may now conduct deals digitally using tokens.

A token might represent ownership of the underlying actual asset, an equity stake in a legal organization that owns that asset, an interest in a debt secured by the asset, a right to benefit from the asset's usage, and more. As a result, an investor can choose to purchase a particular amount of tokens that represent the ownership of a property according to one’s affordability or preference instead of purchasing the entire property at the outset as in a conventional way.

It is especially true that millennials, being the first generation of digital natives who are approaching their prime spending years, are more welcoming of this revolutionary approach.

Why Millennials Would Prefer Fractionalized Ownership of Properties

Like it or not, the existence of education loans and also salary stagnation act as a huge barricade for millennials to purchase or invest in property. Due to the constraint of limited capital as well as stringent housing loan approval criteria, it is getting tougher for millennials to purchase a property outright. 

As mentioned above, the barrier of entry to purchase a property has been significantly reduced via fractionalization by leveraging asset tokenization technology. This in turn allows millennials to acquire just a fraction of a property without the trouble of garnering an enormous amount of down payment sum in order to get invested in real estate. 

Moreover, millennials are also exposed to the option of investing in commercial real estate which is not previously available to them due to the relatively higher cost of investment. By having the option to invest in different types of properties, diversifying their portfolio reducing their risk in the process.

Use Cases In Fractionalized Property Ownership

For the time being, tokenized real estate remains fragmented, with several initiatives offering their own fairly restricted platforms while negotiating often ambiguous legislative restrictions. However, there have been a few major market developments.

Overstock's regulated tZERO exchange platform began trading a security token representing fractional ownership of a luxury resort in Colorado in the summer of 2020. The introduction drew record trading volumes at the time, although the initial excitement was likely subdued by the market downturn brought on by the coronavirus outbreak.

RealX, a fintech company, introduced a blockchain-based registration system in September to allow fractional property ownership in India. According to a recent Cointelegraph story, tZERO also collaborated with real estate crowdfunding firm NYCED Group to tokenize $18 million in property.

Closer to home, Finnax, being the leading  property platform in the region which combines the strength of relevant expertise as well as in-depth understanding of the bottleneck faced by the real estate industry these days, offers a practical solution to the sector. Finnax provides property owners the option of converting real estate ownership into security tokens to be listed on recognized exchanges to unlock more liquidity that was not previously available, making it a sensible and timely solution to solve the property overhang issue.

Conclusion

The growing desire for fractional ownership may function as a catalyst for increased use of tokenized real estate. With millennials’ unstoppable growing demand for time to come, the tendency for adopting fractionalized property ownership may grow even more popular in the coming years.

This is especially true where the present emergence of the shared economy seems to gain more traction than ever before, presenting a shift away from the ownership framework that characterizes the prior economic paradigm. This inclination for sharing-based services can be seen from the other sectors such as ride-hailing, or entertainment streaming services, among others.

As such, fractionalized property ownership driven by the growing demand of the millennial consumer class is arguably one of the most exciting trends to keep an eye for!

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