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Fractional ownership is a system where multiple individuals or entities jointly own a specific asset or property by contributing according to their share. This arrangement allows them to collectively use, benefit from, and bear the costs associated with the asset. It typically applies to high-value items like real estate, luxury goods, and aircraft.
In fractional ownership, each participant purchases a proportionate share of the asset. Their share not only represents their ownership interest but also entitles them to a portion of the income generated from the asset (if applicable).
This model makes expensive assets more accessible by dividing the total cost into smaller units, which would otherwise be unaffordable for a single individual.
Additionally, fractional ownership is attractive to investors looking to diversify their portfolios. By owning shares in various assets, they can spread risk and generate income from multiple sources, rather than relying on a single investment.
Read more about: The Basics of Fractional Ownership Investing
Fractional ownership in real estate works by dividing a high-value property into multiple units, where each unit represents a proportionate share of ownership in that property.
Each unit has a specific value, and different individuals can purchase these units. Owners of fractional shares have rights like full owners, such as earning income from the property (if it generates rental income), and they may also have the option to sell their share back or transfer ownership.
Fractional ownership makes luxury and expensive properties more accessible and affordable. Instead of purchasing an entire property, individuals can invest in a fraction of it by buying units, allowing them to enjoy the benefits of ownership without the full financial burden. REITs are normally classified as Equity REITs, Mortgage REITs and Hybrid REITs.
Below is the flowchart which explicitly explain the overall process of REITs:
1. Investors buy the REITs via Investment Corporation.
2. (a) The investment corporation works together with asset custodian and (b) asset management contractor to get a good REIT portfolio.
3. (a) investment manager will choose the real estate company with the best portfolio performance and (b) potential locations and tenants.
4. Rental payment from the tenant(s).
5. Ownership will be transferred to the equity REITs investors via Investment Corporation.
6. Investment certificates are given to the investors.
7. Dividends will be given periodically to the investors.
8. If they want, investors can trade their REITs certificates to the stock exchange. (Asiva Noor Rachmayani, 2015)
Read more about: Conventional REITs vs. Islamic REITs, Exploring The Differences
Fractional ownership and traditional real estate investment are both methods of acquiring ownership of an asset, such as real estate, but they differ in several ways.
In fractional ownership, multiple individuals or entities share ownership of a specific asset, such as a property, with each owning a portion or share. The value of the asset is divided into units, and each owner holds a specific share of the property.
In contrast, traditional real estate investment involves a single individual or entity owning the entire asset or property, without division into units.
In fractional ownership, the use and income from the property are shared among all owners, while in traditional real estate investment, the sole owner controls all the income and use.
Fractional ownership makes it more affordable and accessible to invest in luxury or high-value items because the costs and responsibilities are divided. On the other hand, traditional real estate investment generally requires a larger capital outlay to fully purchase the property.
Fractional ownership can be considered halal if its terms, conditions, and overall process are in compliance with Shariah principles, ensuring that elements such as Riba (interest), gharar (uncertainty), and maysir (gambling) are not present.
Profit is distributed in fractional ownership according to the proportion of ownership in the specific assets, real estate etc. And the profit is normally generated from rent and the sale and purchase of the units in primary and secondary markets.
Shariah compliance in hotel investments can be ensured by focusing on hotels that do not engage in activities, products, or services prohibited by Shariah law.
In cases where a hotel has a combination of Shariah-compliant and Shariah-impermissible activities, any revenue generated from the impermissible activities should be allocated to charity rather than being distributed to unit holders.
For example, if a hotel has a total area of 1,000 square feet, with 100 square feet allocated to the sale of alcoholic beverages (which is impermissible in Shariah),
while the remaining 900 square feet is used for activities that are Shariah-compliant, then 10% of the total rental income (representing the impermissible portion) should be donated to charity.
The remaining 90% of the rental income, which corresponds to the Shariah-compliant portion, can then be distributed among the unit holders.
From a Shariah perspective, alcoholic products and gambling activities are impermissible, making hotels that offer these services strictly impermissible for investment.
If the hotel offers entertainment activities that are Shariah-compliant and there is no violation of Shariah laws in those activities, and the food and beverage services are free from any Shariah impermissible factors, then from a Shariah perspective, such activities and services are permissible.
Read more about: The Advantages & Disadvantages of Fractional Investing
References:
Asiva Noor Rachmayani. (2015). Fundamental of Islamic Money Market. 6.
Disclamer:
This post is for educational purposes only, and the Firm does not directly or indirectly provide these services.
