Now an already attractive asset class offering a source of passive income is what some of the new-age tech-empowered platforms in real-estate today claim to offer.
Despite its attractiveness, Commercial Real Estate (CRE) as an asset class has largely remained inaccessible to retail investors due to factors such as high ticket prices, illiquid long term investments besides difficulties related to administering and managing large assets. But those barriers have come crashing down, thanks to multiple tech-enabled new-age platforms available today.
Retail investors can now build wealth through CRE at a fraction of what it used to cost earlier. Now an already attractive asset class offering a source of passive income is what some of the new-age tech-empowered platforms in real-estate today claim to offer. But how do they function and what makes them so attractive? For those who want to invest in CRE without real estate and don’t want to sink all of it in one property, there are options like REITs (Real Estate Investment Trusts) and fractional investment.
Like mutual funds, REITs can help investors own income-generating properties such as commercial buildings and office spaces. While on the other hand, Fractional Investment enables one to invest in fractions in institutional grade-A while earning a monthly rental yield besides enjoying long-term capital growth.
Sudarshan Lodha, Co-founder, Strata, a fractional investment platform says,” Investing in commercial real estate has always be highly lucrative and fractional investment can be a fantastic way to invest in it. For starters, fractional platforms invest in high-quality rent yielding properties which may be otherwise exorbitant for a retail investor besides one can get all the benefits of owning a property without the upfront expense and ongoing hassles. The investors can seamlessly enjoy passive income in the form of rental yields, 3X superior vis-a-vis residential investments besides enjoying long-term capital growth and portfolio diversification.”
Brookfield’s (REIT) public issue which came early this month was a huge hit and raised up to Rs 3800 crore. It became the third listed trust in India to be successfully subscribed, close on the heels of listings of – Embassy Office Parks and Mindspace Business Parks. Strata, a player offering the fractional investment model raised Rs. 140 crore for a consortium of three grade-A warehousing assets amid the COVID-19 pandemic.
While they may seem to be similar, both are inherently different and cater to specific investment ambitions. In the case of REIT, an investor does not have direct exposure to a particular property but instead invests in a fund that has fund managers who decide how the capital is deployed and managed. Whereas a fractional platform connects you directly with investment opportunities in CRE, allows you to invest and own fractions in properties of your choice and while reaping its yield and capital appreciation over time.
According to Manish Kumar, Co-founder, RealX, “Fractional Ownership is a great way to open access to investing in properties to better and more stable returns. Property is widely considered as a safe investment, but some properties generate much higher than others. Many people could not access such investment options because they were generally high-value properties like a commercial office or a showroom in a high street mall or even an industrial warehouse. We at RealX follow a model that allows all the investors to become proportionate and legal co-owners in the property and assign the oversight etc. work to a professional asset manager.”
In terms of ownership, REIT holds the Special Purpose Vehicle (SPV) and manages the property unlike in fractional where individual investors are co-owners of the SPV. Fractional platforms conduct rigorous due diligence before selecting assets, as there is no minimum value that a property has to meet nor any lock-in period involved. This means an investor on availing fractional investment has the freedom to sell his ownership of the asset portion to the interested parties. REIT on the other hand has a minimum asset requirement of Rs 500 crore which makes REIT’s offerings limited w.r.t the number of properties that it can undertake. Besides, REIT does not offer transference of ownership or the rights to sell the stake involved.
As per SEBI guidelines, of the real estate portfolio held by a REIT, at least 80% of the assets should be completed and must be revenue-generating properties. However, by virtue of self-regulation, the fractional investment model, enables the expansion of investment structures across balanced to high income-generating assets which eventually offers higher returns in the long term. Besides, a continuous pipeline of prime properties offers investor multiple options to invest.
The entry cost in the case of REIT is quite low and once listed, the units can be traded on the exchanges, which helps you avoid the liquidity issue. On the other hand, the fractional model may seem to be a little on the higher end in terms of the average ticket size. While the minimum investment fairly depends on the asset listed and its location, it would range anywhere as low as Rs 5 lakh to Rs 25 lakh.
When it comes to considering real-estate as an investment class, due diligence is one of the most critical aspects that need to be factored in. Besides a sound due diligence strategy, continuous monitoring of the financial performance of investments is what helps yield much greater results for portfolio growth. While fractional offers continuous monitoring of asset valuations at regular intervals, REIT carries out full valuation once a year besides half-yearly updates to the same.