Real estate investments often come with the baggage of coughing up bulky down payments and seeking big loans with long payback tenures running into decades. While investing in residential real estate is commonly understood and offers tax advantages, commercial real estate investments are considered cumbersome.
Now, individuals not necessarily known to each other can become co-owners of a property by investing small sums of money and taking a proportional share in ownership and returns.
Welcome to the world of fractional ownership.
Simply put, fractional ownership means that a group of individuals can own a fraction of physical commercial or residential real estate instead of owning the whole unit. For example, a 1,000 sq ft office space for say, Rs 50 lakh in Gurugram can be owned by, say 10 diverse, unrelated individuals who each pool in Rs 5 lakh.
This way, each fractional owner owns 100 sq ft of the same unit, gets one tenth of the total rent yield and can exit the investment at the prevailing market value of the property once it appreciates.
“Fractional ownership is a trend that entered the Indian market about 5 years ago and since then it has made commercial real estate more accessible and lucrative for a majority of Indians. It has gained great acceptance from both the investors and the overall real estate industry as it is not only a safe but a feasible way for pocket-friendly investments in commercial real estate,” said Anshuman Magazine, Chairman & CEO, CBRE India.
“There are various advantages of going with a fractional ownership platform,” said Amit Uppal, co-founder of FRXNL, a startup that deals in fractional ownership.
“Access to previously unaffordable prime properties, carefully screened and professionally managed assets and in general a fully supported end-to-end process where investor has very little headache to take. Usually an investor will need to have only their KYC documents and an online bank account to participate as an investor,” he said.
Magazine agrees. “Fractional ownership in a quality commercial asset class is a great solution for someone who is looking for pocket-friendly investment, outside the volatility of share markets and low-interest rates on fixed deposits. Therefore, offering a whole new investment asset class to Indian households, who can now own commercial property according to their budget,” he said.
Uppal suggests fractional ownership in institutional quality preleased commercial real estate can generate an annualised return of 14-20% per year with at least a 5-year investment horizon.
The return is calculated keeping in mind the escalation in property price over and above the rental income, or yield on the investment that typically ranges between 8-9%.
It must be noted that other investment classes like equities have given a 12% annualised return over a 10-year period. Returns on gold have been similar too.
How can one invest in fractions?
There are emerging startups creating new platforms to lure investors.
FRXNL uses the Special Purpose Vehicle (SPV) route for making such co-ownership possible. “SPV based method is largely a private investing model, where a group of sophisticated investors converge to purchase an asset,” he said. “Investors need to be more careful while investing in a fractional ownership platform and need to get proper legal and financial advice prior to investing in such private models,” he added.
Another startup RealX is eliminating the SPV route in enabling fractional ownership.
“The SPV way of fractional ownership is a very old and traditional way of implementing fractional ownership,” said Manish Kumar, co-founder of RealX, that follows a Direct Deeded co-ownership model, in which a private trust is created by the startup that maintains an escrow account for all investors to pool in funds. This trust then registers the said property in the name of the investors directly.
“In the Direct Deeded Co-Ownership model that RealX has implemented, investors have RERA protection, but in the SPV model they don’t,” said Kumar.
The SPV route requires greater compliance as Company Law comes in and so does corporate tax that eats into the annual yield.
“We are looking at minimum ticket sizes of INR 10 lacs as of now with an investment horizon of 5-6 years, but investors can exit earlier if they want,” Uppal said. FRXNL is presently dealing in pre-leased commercial real estate like offices, warehouses and retail considering these are more inaccessible for average investors. “Most fractional ownership platforms are seeking investors who understand the risk return ratio, so one needs to have a minimum level of net worth to qualify as an investor,”
RealX, however, deals in both commercial and residential projects and offers a lower entry point.
“We are currently focused on onboarding properties primarily from Mumbai Metropolitan Region. This is the most expensive, most stable and fastest growing property region. Our proposition is most applicable here – allowing everyone part of a high value, high yield asset (from Mumbai) with ticket sizes as small as Rs 5 lakh,” said Kumar.
Real Estate Investment Trusts or REITs have been around for a while, investing invertors’ money into real estate projects and are tradable just like Mutual Funds. The REIT model is governed by SEBI laws and has better liquidity and clarity of risks and returns.
“SPV-based method is largely a private investing model, where a group of sophisticated investors converge to purchase an asset, while the REIT model is a public investing model,” Uppal said. “REITs do not allow the investors choice to invest in specific properties that they would like. REITs investments are also subject to market volatility as well while direct co-ownerships are stable investments,” said Kumar.
Fractional investing is still a fairly new idea in India and could become more mainstream in coming years.
“While globally the trend has seen significant traction, it is expected to become a dominant investment trend in the market over the next 3-4 years in India as it helps investors earn rental yields while also benefiting from capital appreciation. This trend is expected to help in the steady revival of the commercial RE sector especially post COVID,” said Magazine.
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