As Covid-19 posed unprecedented economic challenges for real estate, investors were forced to explore emerging and alternate investment classes like fractional ownership, which though in nascent stages is gaining traction, especially in office space leasing and industrial warehousing.
For Sunil Arora, a top analyst with an investment advisory firm in Mumbai, owning a part of an office floor on Bannerghatta road in Bangalore was a sensible investment decision. “I had money to invest in commercial [real estate], but not enough to own a floor. Fractional ownership offers me a slice of action as yields are around 7-8.5% against 2-4% in residential,” he said.
Arora is part of a growing number of NRIs, HNIs and C-suite executives who are interested in owning a portion of rent yielding Grade-A office space. As Covid-19 posed unprecedented economic challenges for real estate, investors were forced to explore emerging and alternate investment classes like fractional ownership, which though in nascent stages is gaining traction, especially in office space leasing and industrial warehousing.
Fractional ownership offers an individual or a retail investor a share in a high value tangible asset. At present, this type of investing in India is largely concentrated in office spaces, but post-Covid, industrial warehousing and luxury holiday properties are also emerging as preferred assets. These platforms generally charge an annual asset management fee and/ or a performance-linked fee.
Prashant Thakur, head of research at Anarock Property Consultants, said an investor enjoys a stable rental return of around 8-9% in commercial real estate, and if the market is good, capital appreciation as well. “This will encourage individual buyers. Advantage is one, I’m investing in a Grade A commercial property where rental yields will be higher than residential. Second, I’m assured of due diligence. Third, I don’t have to worry about managing tenants, and fourth, I can exit any time,” he said.
Though fractional ownership is a developing concept in India, compared to markets like the US or Singapore such platforms have immense scope, according to Strata’s CEO Sudarshan Lodha. “In 2020, around 2.6 lakh apartments were sold. Of that, 55% is end use and 45% investment. So you are talking about 1.2 lakh apartments acquired as an investment. One apartment on an average is Rs 50 lakh. So Rs 60,000 crore investment went into residential for a 2-3% return. That itself is my market,” he said.
Lodha said around 15-20 lakh people make Rs 25 lakh to Rs 5 crore a year in India, as per income tax data. “For me to fund a Rs 50 crore asset, I need 200 people with minimum Rs 25 lakh. To be at Rs 5,000 crore, I need 20,000 people. My target audience is sitting there,” he said.
Shiv Parekh, founder of leading platform hBits, said developing trust among clients is crucial. “There is a large trust deficit in real estate and we try to solve this. Here, we cannot withdraw money from one property and put it in another. An investor in a fractional ownership platform has complete visibility. Properties are completed with tenants so there is no risks in terms of completion,” he said.
Besides, hBits works with respected partners, Parekh said adding, “We work with Shardul Amarchan Mangaldas for title reports, for valuation we work with JLL, to create the whole structure we work with Deloitte. All the money is wired through an escrow and trustees. So money goes into escrow and from there to purchase the property.”
Anarock’s Thakur said fractional ownership will remain the playground for NRIs and HNIs for five to six years. “It started with Grade A office properties, but now we are seeing that during Covid-19, there is a sudden demand for holiday homes and this is fuelling interest in luxury holiday homes and resorts,” he said.
However, small retail investors will refrain from this as the market in India is not regulated. Such investors would prefer a REIT, as it is more transparent and better governed, he said.