Traditionally, people have been investing in land, which is an appreciating asset. Due to increased land scarcity and high demand for it, such real estate properties have provided investors good returns and also helped them generate wealth.
Although investments in modern high-rise residential apartments contain very little land ownership and predominantly involve investments in depreciating assets, commercial real estate investment provides substantially higher cash flow through rentals.
However, investing in a premium property needs a large sum of money, which is possible only for High Networth Individuals (HNIs) or the Ultra HNIs.
“It has historically been reserved for those with specialised knowledge, the right connections, and access to a huge amount of capital. This has kept investing in Commercial Real Estate (CRE) out of reach for most until a few years ago. However, to have a much-needed edge, people need to understand that CRE investments are a very important part of their portfolio,” said Varun Mohan – Founder and CEO, Definite, an innovative start up in prop-tech space that provides fractional real estate ownership to investors in commercial real estate.
“The major traits that are common in the wealthiest individuals and separates them from the rest are their Real Estate investments. Further, their income is not correlated to their time spent working and they focus on cash flow through Real Estate. These insights play a crucial role in transforming the way people invest in the CRE sector. Hence, as a solution to have specialized knowledge, the right connections, and access to a huge amount of capital, Fractional Ownership is the inevitable change coming to the CRE market,” he added.
Started with an idea to democratise the real estate investment sector, the platform – Definite – empowers people with fractional ownership and helps them build yield generating commercial real estate diversified across asset classes and geographies.
Explaining how the platform can help not-so-wealthy people benefit from investments in commercial real estate through fractional investments, Definite Founder and CEO Varun Mohan explains the concept.
Concept of Fractional Ownership
There exists a premium commercial building worth Rs 50 crore, generates good cash flow and is a leased asset to a verified institutional-grade tenant. For example, Aleksa (a new age investor) is looking to participate in the kind of asset with all the above said features but only wants to do it with just Rs 25 lakh.
Traditionally, Rs 25 lakh wouldn’t allow Aleksa to invest in individual institutional-grade properties until fractional ownership. It enables to divide the Rs 50 crore worth asset into fractions or shares that represent equity and debt in the underlying asset. It means that this asset can now be accessed by a wider pool of institutional investors, individual investors, and fractional investors like Aleksa. Hence, enabling the new age investors to participate in new opportunities at a fraction of the cost previously required.
Benefits of Investing in CRE
Investing in a CRE opportunity is the choice of experienced investors than any other opportunity. This is since stock markets are volatile and banking products like Fixed Deposits (FDs) give capital protection but with low returns if correlated with the inflation economics. Thus, the investors prefer to invest in CRE as the opportunity provides a balance of these features, has a physical underlying asset, the ability to preserve capital and generate monthly or quarterly cash flow as well.
Convenience of Fractional Ownership
Fractional ownership is a concept that has caught up in various developed economies like America, Singapore, Hong Kong and is now gaining traction in India. A fractional ownership platform provides a portal where individuals can get together to purchase an asset, enjoy the yield it generates and finally be able to sell their fraction when they want, thus enjoying capital gains. The platform also manages the asset and facilitates any payouts from the asset and automatically distributes these payouts to fractional owners like Aleksa.
In simple terms, Fractional ownership enables a person, to own a fraction of a pre-leased asset worth Rs 50 crore, with a small capital size of Rs 25 lakh, and enjoy the financial privilege like that of a Rs 50 crore asset owner such as an institutional-grade asset, verified tenant, and a cash flow.
Diversification through Fractional Ownership
Fractional ownership helps in creating a diversified portfolio that distributes and minimises the risk. Now with just Rs 1 crore, an investor may buy four different kinds of assets, at four different locations with the assistance of people having specialised knowledge and vast experience, to manage the asset while working on behalf of them.
How Safe is Fractional Ownership?
Aligned with the message of technology i.e. empowering people to create financial futures, and, fractional ownership, is driving equality and transparency. With PropTech platforms for fractional ownership, people enjoy easy access to thoroughly vetted, post-strict due diligence, stabilised opportunities in an institutional-grade physical asset having a predictable cash flow.
“Entering into the commercial real estate segment has always seemed difficult for people having small capital available or planning to diversify the portfolio. However, with fractional ownership, people will be able to overcome the barriers of high capital requirement, lack of experience, and liquidity,” Mohan concludes.