Fractional Ownership: The future of commercial real estate investment

February 14, 2021 12:47 PM

Fractional investment, a recent trend that has gained acceptance in the real estate industry, is a new, safe and feasible way to pocket-friendly investment in office real estate.

Real estate investment for many urban households today is restricted to small plots of land or apartments.

Indians for long have invested their household savings in gold and real estate. You can’t but agree more with Theodore Roosevelt: “Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”

But real estate investment for many urban households today is restricted to small plots of land or apartments. Residential apartment investments have not yielded well compared to investment in Grade A office buildings due to lower rentals in comparison to the commercial assets.

The Indian Grade A Office real estate remained a preferred asset class for investors -even amid Work From Home which triggered fear – owing to the asset’s robust fundamentals and resilience. This segment has attracted equity investments to the tune of $15.4 billion in the last decade. The Indian market also saw two successful REIT listings of Embassy Office Parks and Mindspace REIT, totalling Rs 9,250 cr, in recent times. Blackstone and Brookfield also announced two biggest deals in the Indian real estate market, in the midst of the pandemic, amounting to around Rs 25,000 cr, acquiring office parks from Prestige and RMZ, respectively. The recent Brookfield REIT listing was oversubscribed by a whopping 8 times. This is a testimony of the vibrancy and long-term prospects of this sector.

Fractional investment, a recent trend that has gained acceptance in the real estate industry, is a new, safe and feasible way to pocket-friendly investment in office real estate. Several investors pool in their money, to buy Grade A office property jointly. The assets are vetted legally and rigorous statutory and regulatory clearance checks are done prior to offering them to such individuals investors for ownership. It works perfectly for investor’s pocket and is expected to become a dominant investment trend in the market over the next 3-4 years in India. In advanced markets like the US, Singapore and Hong Kong, the concept has already seen significant traction.

The investors receive rental income in proportion to investments made in the property. Capital appreciation attained at the time of sale is also shared among the investors based on the same criteria. The merit of fractional ownership is not just limited to owning an institutional grade commercial real estate property but also:

# Earning a steady, regular rental income which is usually 2-3 times more than rental from residential units.

# Investment safety given the Grade-A quality of the underlying asset.

# Improved liquidity as these units can be sold at any point of time on the resale platform, thus providing liquidity.

# If invested for a considerable time, capital gains add unrivalled multiplier effect to overall returns.

Unlike other asset classes such as equity and mutual funds, the commercial real estate values or price fluctuations are less volatile. This is because the lease agreements are for a longer term with fixed rental income, with periodic escalations covering inflation as well. The potential to add a regular income stream and a stable asset class is something which will appeal to a forward-thinking Indian investor in the long term.

Ownership of Grade A commercial real estate which consists of office spaces, warehouses, factory etc requires substantial amount of capital, typically running into several billions of rupees! Hence, it has been the privy of the high networth individuals, family-offices and institutes. Fractional ownership in quality commercial asset class offers a great solution to someone looking for pocket-friendly investment, outside the volatility of share markets and low interest rates on fixed deposits. Hence fractional ownership will offer a whole new investment asset class to Indian households, who can own commercial property according to their budget. The fractional ownership concept is demolishing the monopoly of HNIs in commercial real estate investments.

(By Riaz Maniyar, Co-founder, YieldAsset Real Estate Tech Pvt Ltd)

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