Fractionalization of Real Assets

Fractionalization of Assets is the division of an asset into smaller chunks or denominations to allow more than one person to pool in their funds and purchase a large asset. The scope of thai article is particularly confined to “real estate assets.” The goal of Asset Fractionalization is to provide an opportunity to small investors to invest in highly prestigious real estate assets and reap the monetary benefits as upmarket projects provide better returns.

Is fractionalization of real estate assets legal in Pakistan? Keep reading to find out!

What is Asset Fractionalization?

Asset Fractionalization is a modern concept that allows small investors to invest in illiquid assets i.e. real estate, commodities, or other expensive assets by dividing it into smaller denominations.

The value of the asset is divided into small proportions which allows the investors to buy a segment in the asset proportionate to his contribution. The returns are also divided proportionately. Hence, this allows an investor to invest in projects that are otherwise unaffordable and potentially earn a higher return.

This business model is now being practiced in many countries worldwide including Malaysia, USA, UAE, and Singapore.

This article will elaborate on this nascent business concept: how this works and what are the benefits. Read on to find out.

Why is there a need to legalize Asset Fractionalization?

While asset fractionalization allows small-scale investors to invest in larger and more expensive projects, especially in the real estate sector, there is a high risk of mismanagement on the part of fractionalization companies. Essentially, a number of investors pool in their funds to purchase a large asset. They need an intermediary to handle the transaction, documentation as well as serve as a trustee among the members.

Informally, a number of friends can pool in their funds to perform such a transaction. However, it is illegal to collect funds from the public for asset fractionalisation. So, how can one participate in asset fractionalization?

In order to eradicate fraud, fractionalisation of assets is NOT allowed unless authorized by concerned regulatory authority. Regulatory authority that is responsible for such regulation is called SECP, Securities Exchange Commission of Pakistan. This is the same authority that regulates the stock markets, public and private limited liability companies.

In Pakistan, SECP is considering legalizing fractionalization in order to enable small-scale investors to invest in large real estate projects that would be unaffordable for them otherwise. STAY TUNED FOR UPDATES on this one!

Who benefits from the legalization of Asset Fractionalization?

This will be mutually beneficial for investors and real estate developers.

Investors:

On the one hand, it increases the accessibility of assets for small investors.

Furthermore, it provides an excellent opportunity for all types of investors, including large ones, to diversify their real estate investment portfolio.

Besides earning the better profits while utilizing their small investment, investors will also be contributing to the growth of the country’s economy. As a country’s real estate assets make up 60 to 70 percent of its economic wealth.

Legalizing fractionalization of real estate assets will also eradicate the problem of illegal work under the name of fractionalization and save investors from fraud.

Developers and Sellers:

The sellers and developers will also benefit from this phenomenon as it will make it easy for them to find a buyer for their property. Since real estate assets are quite expensive, it is quite difficult and time consuming to find a buyer, especially in times of need. Fractionalization will allow the seller to get exit from his investment more efficiently as compared to conventional method.

How does Fractionalization of Real Assets work, if legalized?

SECP (Securities & Exchange Commission of Pakistan) had recently announced to legalize Fractionalization by providing a regulatory mechanism that will allow a business to register and operate as an asset management company and collect funds for asset fractionalization in the real estate industry; business model which, earlier, was not a legal practice in Pakistan.

How would it work? Here is a rough outline of the regulatory process.

An SECP authorized company would prepare a proposal about the asset that it wants to sell through Fractionalization and submit it to SECP. The proposal is reviewed and if accepted, the company would be permitted to seek clients or investors by spreading the word out.

This whole activity will be regulated by SECP which makes the investments safe. The investors’ money would be held in an escrow account that is controlled by some financial institution that has also been approved by SECP.

How does SECP’s Fractionalization Benefit a Small Investor?

In short, this is an opportunity for all investors to work on an equal level that has never been possible before. The profits from upmarket projects are considerably higher than the average profit one earns from investing in small properties.

There would be little to no risk of fraud as the transfer of money would be regulated under the supervision of SECP.

Legalizing the fractionalization of real estate assets would certainly create a new environment for investors to flourish in the real estate industry. Our country is in need of the introduction of a safe and sound mechanism to allow for fractionalization of real estate properties. SECP has recently taken a step forward towards providing a safe platform by legalizing Fractionalization where all investors can play a part to keep the market alive. The public can share their feedback on SECP’s Concept Paper for fractionalization of real assets in Pakistan at feedback@www.secp.gov.pk. We look forward to the final announcement! Stay Tuned for Updates!