When people have excess money, they start thinking about investing. Some often asked issues concerning where to invest, how profitable it will be, and how secure it is to invest in a given place. Fractional investment has traditionally been more popular in the West, although it is gaining popularity in India. It allows investors to buy commercial real estate in fractions. As an individual, this may be difficult to achieve. Investing in commercial real estate allows you to diversify your portfolio.
Prime commercial property that would have been difficult to buy becomes a possibility through fractional ownership. This asset class is affordable to the average middle-class person. Previously, Indian investors preferred to invest in residential rather than commercial real estate. Investors were looking for more profitable options after residential real estate sales had remained stagnant for some years.
Real estate is a more dependable investment. This gives investors a less hazardous option. Over a 5-year period, the estimated rental return in CRE is 8-10%, with an IRR of 16-20%. Young Indians and Non-Resident Indians (NRIs) make up a large part of people seeking an alternative source of income through commercial real estate.
Understanding Commercial real estate and fractional ownership
A commercial real estate property is one that is primarily utilized for commercial purposes. It is used as an office rather than a residential space. Residential real estate is defined as living space. Tenants commonly lease commercial real estate in order to engage in revenue-generating activities. Commercial real estate can range from a small storefront to a large retail center. Office space, hotels and resorts, shopping malls, and healthcare facilities are all examples of commercial real estate.
The term “fractional ownership” refers to a proportional ownership of an item. Individual shareholders are given partial ownership of the asset. They benefit from the asset’s benefits, such as usage rights, income sharing, priority access, and cheaper fees.
- It is a fixed asset that is not affected by market risk.
- As a result, it is a volatile asset.
- Tenants who depart early contribute to the low occupancy rate.
Fractional Ownership in Commercial Real Estate
Fractional ownership in commercial real estate allows a larger number of investors to contribute to a larger investment in the asset. Their remuneration is proportional to the percentage of the total they provide. Based on their investment, each investor owns the asset. Here are some reasons why you should invest in commercial real estate through fractional investment.
I. Quick method to invest
Initially, owning a home necessitates a significant amount of paperwork and is a time-consuming procedure. Experts believe fractional ownership systems, on the other hand, make investing easier because all of the necessary documentation and information are already available online on the platform and can be accessed from anywhere.
II. Low cost, high return
According to industry experts, fractional ownership is a low-risk investment. It provides investors with all of the benefits of owning a business property without requiring a large initial investment. Along with the steady flow of rental revenue, investors profit from the capital appreciation of the property.
III. Consistent income
On fractional ownership platforms, pre-leased Grade A homes are listed. Grade A properties host MNC tenants that have long lease contracts, lock-in, and contractual rent-escalation, ensuring a consistent flow of cash.
IV. Portfolio diversification
Investors with fractional ownership can pick the property in which they want to invest and diversify their portfolio by investing in many properties in different markets and sectors.
V. Market turbulence
According to experts, fractional ownership has an advantage over all other investment alternatives in terms of safety, stability, and outcome.
Commercial real estate is a hard asset, and its returns do not vary with the market, offering a safe and reliable investment. Furthermore, the investment in fractional ownership is not locked down, and analysts believe investors may quit whenever they choose. If you opt to invest through platforms such as Assetmonk, then you need not worry about any risk in your investment. They provide one of the best investment opportunities in India with top return on investment.
Viability and outlook of fractional ownership in commercial real estate in India
In recent years, the country’s discriminating investor has seen a wealth of investment options come up. With a rising number of people looking for an alternative source of income, mostly to fund their retirement plans, fractional ownership in Commercial Real Estate (CRE) has emerged as one of the favored alternatives that suggests a long-term and reliable investment. Fractional ownership divides an individual asset into segments and allows an investor to become the owner of a segment(s) based on the amount invested.
It requires the formation of a ‘Special Purpose Vehicle’ (SPV) through which a group of investors can participate in an income-generating commercial property. The asset’s advantages are proportionately distributed among all investors.
I. Fractional ownership is becoming more popular as a viable financial option.
While fractional investing is very common in the United States and Europe, it is progressively gaining traction in India as well. Because it allows for easier access to CRE and allows individuals to invest in real estate in smaller amounts, investors are actively exploring this investment opportunity in anticipation of the expected returns on commercial grade A properties – an experience that was previously out of reach for them. Thus, the commercial real estate arena, which was formerly controlled by institutional investors, is expected to become a viable investment option for the country’s middle class and individual investors.
Until recently, most Indian investors avoided CRE due to its high cost, preferring to focus on residential real estate instead. However, with the residential market continuing low for an extended length of time, investors have been pushed to seek for more efficient assets. With the introduction of fractional ownership, investors would be able to diversify their portfolio while also gaining ownership of an institutional quality commercial property. Furthermore, because real estate is a stable industry as compared to other asset classes that exhibit volatility, owing mostly to their stock market linkage, it offers investors an adequate level of risk reduction.
While the notion of fractional ownership in India is still growing – its scope demanding further clarification – numerous concepts addressing its structure are currently being discussed. Regardless of model, the basic objective is to enable one to invest in parts of quality commercial buildings to generate a monthly rental income and develop long-term wealth.
On the property, indicative returns are provided, often ranging between a rental yield of 8-10% and an IRR of 16-20% over a five-year period. Surprisingly, the concept has found favor with young Indians who are captivated by the benefits presented by this one-of-a-kind ownership opportunity in CRE, despite India being one of the world’s strongest and most resilient office markets. According to a poll done by an investment platform, about 30 percent of total investors exploring an alternative income source are NRIs interested in fractional ownership of CRE in India.
II. Outlook
The COVID-19 crisis created significant uncertainty in the investment climate. It resulted in the realization that a diversified portfolio and a robust asset class constituted the foundation of a sound investment. In this view, investment choices such as REITs and fractional ownership in CRE have emerged as unquestionably valuable in the Indian market scenario. Furthermore, technology-enabled services such as openness about investor transaction data and dashboards for tracking their investments, among other things, have increased investor trust and adoption of these notions. While the dispute over whether REITs or fractional ownership produced superior outcomes has yet to be resolved, it is the responsibility of investors to undertake their own due research and choose the option that best meets their needs and investing goals. There are now no laws in effect, making it critical to create a convincing legal framework in order to protect investors.
Going forward, fractional ownership is projected to expand into a comprehensive model, or models, that include a host of other real estate divisions than office. Assets in industrial and warehouse space, planned land, apartment hotels, elder living, student living, co-living, resorts and vacation homes are some of the categories that are anticipated to attract fractional ownership firms. The benefits of fractional investing are too substantial to ignore, since it may decrease portfolio risks, cushion market shocks, and boost returns through suitable diversification. These variables would considerably assist investors in a post-pandemic environment, assisting them to deal with financial shocks and fulfill their long-term financial goals through wise investment.