REIT vs Fractional Ownership of Property: Which one is better for investment? | The Financial Express

REIT vs Fractional Ownership of Property: Which one is better for investment?

Fractional property and REITs both work differently and give investors different benefits. Which is more suitable for you?

REIT vs Fractional Ownership of Property: Which one is better for investment?
Just like mutual funds pool the money and make investments like government bonds, direct equity, stocks, etc., REITs pool money to invest in profitable real estate on your behalf.

Investing in real estate entails an obligation that a person can’t afford on his own. Most people opt for loans to invest in commercial and residential properties because they know that it’s one of the best ways to secure their financial future.

Compared to residential properties that buyers may use for themselves or for letting on rent, commercial real estate (CRE) properties generally require a lot of investment upfront. The CRE properties have prospects to generate higher income than residential properties.

While investing in CRE properties was once a privilege only available to HNIs/UHNIs, the introduction of concepts like Real Estate Investment Trust (REITs) and Fractional Ownership has enabled investors to buy premium CRE properties in an affordable financial segment.

But out of the two investment options, which one is better for the investment?

Both Fractional Ownership and REITs allow investors to procure premium commercial properties and gain monetary benefits generated by monthly rental income, therefore helping them to secure the long-term wealth. However, they operate differently.

Also Read: No ITR? You can still get a loan – Here’s how

REIT is much like mutual funds

  • REITs are no-frills investment vehicles that pool the money of different investors to invest in profitable real estate.
  • This makes them a better alternative for those who’d like to invest in real estate without having to own the property or worry about losing money if the market takes a dip.
  • Just like mutual funds pool the money and make investments like government bonds, direct equity, stocks, etc., REITs pool money to invest in profitable real estate on your behalf.
  • The properties are leased out to business organizations, through which the part-owner gets their share of the capital. But REITs do not allow you the freedom to pick the property to invest in. 
  • The rental yield from investing in REITs range from 8% to 10% per year with up to 20% IRR
  • The Government of India launched REITs to bring in long-term yield capital into the country and to boost private participation in infrastructure and real estate. India saw its first REIT in 2019.

Three years later there are now three popular REITS – Mindspace REIT, Brookfield REIT and Embassy REIT. REITs as an investment option have gained significant popularity among institutions & retail investors. These three REITs cover 87 million sq. ft. of commercial real estate assets– Mindspace 31 million sq. ft, Embassy 42 million sq. ft. and Brookfield 14 million sq. ft.

What is Fractional Real Estate Investing?

  • Fractional real estate investing allows you to purchase fractions of an investment property.
  • By purchasing fractions, you get to invest in real estate at a fractional rate in order to have a higher income potential than buying the whole property outright.
  • The amount of your fraction is based on ticket size and minimum share that you want to hold.
  • One example includes if there are a total of 10 tickets available and you decide to purchase 2 of them, you now own 20% of the property and get your share of the money generated through it (or keep purchasing more)
  • Fractional ownership market is expected to grow by 13% to 18% in the coming five years

“It is estimated that over the next three years, the fractional ownership market’s worth will reach five billion dollars. This is a shot in the arm for the real estate industry,” says Shiv Parekh, the founder of Hbits.

According to data compiled by hBits (fractional ownership realty firm) fractional ownership has seen a surge over the last five years with an estimated total transaction of Rs 750 crore. Out of this, Rs 350 crore worth of transactions took place in 2020, i.e., after the first Covid lockdown was imposed.

REITs Vs Fractional Ownership

The bottom line, of course, is to do due diligence on the asset class before investing. Fractional property and REITs both work differently and give investors different benefits. Ultimately, it all depends on your goals for your investment.

(By Haresh Motirale, Founder & Director, Brandniti)

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First published on: 06-12-2022 at 08:30:00 am
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