Fractional Ownership: The future of commercial real estate investment
Real estate investments for many urban households are now limited to small lots or apartments.
Indians have long invested their savings in gold and real estate. You can only agree with Theodore Roosevelt: “Anyone who invests in selected real estate in a growing part of a prosperous community uses the safest and most secure method to become independent, because real estate is the basis for prosperity.”
However, real estate investments by many urban households are now limited to small lots or apartments. Investments in residential housing have not performed well compared to investments in class A office buildings due to lower rents compared to commercial assets.
Indian Grade A Office properties remained a preferred asset class for investors due to solid fundamentals and asset resilience – even in the midst of work from home which sparked fear. This segment has attracted $ 15.4 billion in equity over the past decade. There have also been two successful REIT listings in the Indian market recently from Embassy Office Parks and Mindspace REIT with a total value of 9,250 rupees. Blackstone and Brookfield announced two largest deals in the Indian real estate market in the middle of the pandemic, valued at around 25,000 rupees, buying office parks from Prestige and RMZ, respectively. The most recent Brookfield REIT listing was oversubscribed a whopping 8 times. This is a testament to the vibrancy and long-term prospects of this sector.
Fractional investment, a new trend that has caught on in the real estate industry, is a new, safer, and workable way to make pocket-friendly investments in office properties. Several investors are pooling their money to jointly buy class A office properties. The assets are legally vetted and rigorous legal and regulatory clearance reviews are carried out before they are offered for sale to such individual investors. It works perfectly for the pocket of investors and is expected to be a dominant investment trend in the market in India over the next three to four years. The concept has already made significant strides in advanced markets such as the US, Singapore and Hong Kong.
The investors receive rental income in proportion to the investments made in the property. The capital growth achieved at the time of the sale is divided among the investors according to the same criteria. The merit of the shareholding is not limited to owning a commercial real estate property with institutional quality, but also to the following:
# Achieve regular rental income that is usually 2-3 times higher than renting residential units.
# Plant security in view of the Grade A quality of the underlying.
# Improved liquidity, as these units can be sold on the resale platform at any time and thus provide liquidity.
# When capital gains are invested over time, they add an unrivaled multiplier effect to the total return.
In contrast to other asset classes such as stocks and mutual funds, commercial real estate values or price fluctuations are less volatile. This is because the rental contracts are long-term with fixed rental income and inflation also escalates regularly. The potential to add a regular stream of income and a stable asset class will appeal to a future-minded Indian investor in the long run.
Owning Class A commercial real estate consisting of offices, warehouses, factories, etc., requires a significant amount of capital, typically several billion rupees! Therefore, it was an insider tip for high-ranking individuals, family offices and institutes. Fractional ownership in high quality commercial asset classes provides a great solution for someone looking for a pocket-friendly investment away from the volatility of the stock markets and low interest rates on time deposits. Hence, fractional ownership offers a whole new asset class to Indian households who can own commercial property on their budget. The broken property concept destroys the HNIs monopoly on commercial real estate investments.
(By Riaz Maniyar, Co-Founder of YieldAsset Real Estate Tech Pvt Ltd)
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