Five reasons why fractional ownership is the future of India’s real estate
Posted by Shiv Parekh
If there is one thing this pandemic has done, it has forced us to reevaluate how we make financial decisions. especially how we save and invest. 2020 was a year of hardship and uncertainty; As if the wage cuts and layoffs weren’t bad enough, thousands of people lost their hard-earned investments in stock markets and mutual funds while some had to break their time deposits or sell real estate to get access to their funds.
The questions lie in how to make an investment that is pandemic-proof and stable, generates regular and liquid returns, flows straight into our pockets and offers long-term capital appreciation. Interestingly, one form of investment stood out on all three points last year – fractional ownership of commercial real estate (CRE). In India it is still in its infancy, but the market is already valued at $ 5 billion and is growing. Fractional ownership has been called the future of the real estate market as it solves one of the biggest problems with commercial real estate – the high barrier to entry or the capital investment required.
Make real estate affordable
Imagine premium office space for sale for 100 rupees. Normally such a large investment would only be achievable for wealthy individuals (high net worth individuals, HNWI). But with a fraction of the property you can now only invest Rs 10 lakh and be a partner in the property and get rental returns of 6 to 10 percent per year. Such an investment could bring an investor a rental return of 60,000 to 1 lakh per year. Compare this to residential real estate, where an investment of the same amount would have returned only 1.5 to 3 percent (or 15,000 to 30,000 rupees per year). Not to mention, residential properties have been hard hit by the pandemic, with property values falling 2 to 7 percent over the past year.
Stable asset, growing market
In contrast to the rest of the financial market, commercial real estate slowed only slightly in the first few months of the lockdown last year and quickly recovered in the third quarter. Since then, CRE’s net absorption has increased 63 percent while new business is up 59 percent from the previous quarter.
In other parts of the world, in major cities like London, Dubai, Stockholm, etc., real estate has been hit hard after the Covid-19 outbreak. However, industry experts have reported that office leasing has continued to grow in India over the same period due to its strong outsourcing sector. In fact, international companies (primarily based in the US and EMEA) make up more than 63 percent of the office space rented in our country. This should serve as a healthy indicator for Indian investors – both resident and NRIs – that it is time to grab a piece of the real estate pie as well. Indeed, this is the right time to invest as CRE prices will boom going forward.
In residential real estate, tenants tend to leave the home frequently and the owner loses rental income until they find another tenant. For commercial real estate, the lease usually lasts three years and sometimes longer. In Class A properties, tenants are usually multinational companies, banks, or IT companies with deep pockets. These tenants are not in arrears with the rent but make timely payments. They also prefer to decorate the premises themselves as they wish. In addition, such tenants tend to renew the lease due to the time, money, and labor involved in converting the property into their offices. It is advisable to buy a property that is pre-let for a better return.
Straight into your pocket
Rental returns are credited directly to your bank account every month. This is different from bank deposits or bonds where you have to wait for the investment to mature and for the lock-up period to expire before accessing your earnings.
The increasing return
Broken ownership of commercial real estate ensures increasing returns in terms of both regular rental returns and capital growth. Commercial real estate has achieved a CAGR of 16 percent in India over the past five years. When you invest with a reputable real estate company, you can count on an increase in net present value as well as a 15 percent increase in rental yields every three years. This increase is integrated into the lease in order to protect yourself against inflation in the future and to keep your investment stable in the long term.
Fractional Real Estate is a unicorn investment – that rare combination of high returns and low risk. It brings the hefty returns on commercial property within easy reach of the common man. Investors need to carefully consider the property for location, local zoning laws, rental yield, potential for capital appreciation, and the types of tenants it will attract.
Shiv Parekh is a real estate technology entrepreneur and founder of hBits, a fractional real estate platform