REIT v/s Fractional Ownership: Which is a better option to invest in commercial real estate?

Investors need a bigger amount to purchase Commercial Real Estate (CRE) properties that have prospects to generate higher income than the residential properties.

REIT v/s Fractional Ownership: Which is a better option to invest in commercial real estate?
To purchase a real estate property, a person needs to invest a huge amount of money.

To purchase a real estate property, a person needs to invest a huge amount of money. As most people can’t pay such a big amount outright, they need to take out home loans to buy their residential properties.

Compared to residential properties that buyers may use for themselves or for putting on rent, investors need an even bigger amount to purchase Commercial Real Estate (CRE) properties that have prospects to generate higher income than the residential properties.

So, traditionally, rich people were able to invest in CRE properties. However, things have now changed after the introduction of concepts like Real Estate Investment Trust (REIT) and Fractional Ownership, where investments from retail investors are pooled to buy premium CRE properties.

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

Sudarshan Lodha, Co-founder and CEO, Strata Property Management explains the pros and cons of the two investment options:

Both fractional model and REIT allows one to invest in premium commercial properties and earn a monthly rental yield thereby helping build long-term wealth. However they both operate differently.

REIT is much like a mutual fund

REIT offers a portfolio with a set number of assets wherein the investor has no control where his money is being used. This makes the REIT model a bit less reliable as underperformance or inefficiency of an asset within the portfolio will have a negative impact on the cumulative yields. Positively, its impact on individual holding will be less as it will be spread across an array of REIT investors instead of few large active investors.

Fractional Ownership provides higher control

A fractional ownership on the other hand offers complete control of the asset in the hands of the investor. It is the investor who chooses from across multiple assets based on his investment goals and appetite.

REITs are directly monitored by SEBI

Fractional ownership does not come under the purview of SEBI. The properties listed on the platforms are registered under RERA. The whole business model is registered under companies act.

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