The past few years have witnessed a plethora of investment avenues opening up for the discerning investor in the country. With an increasing number of people veering towards an alternate income source, largely to fulfil their aspirations and fortify their retirement corpus, fractional ownership in Commercial Real Estate (CRE) has emerged as one of the preferred options that suggest a long-term and stable investment. Fractional ownership essentially splits an individual asset into segments and permits an investor to become the owner of a segment(s), on the basis of the investment that he/she makes. It entails the creation of a ‘Special Purpose Vehicle’ (SPV) through which a group of investors can invest in an income generating commercial property. The benefits ensuing from the asset are shared between all the investors proportionately.
Fractional ownership gaining ground as a viable investment avenue
While fractional investment is fairly popular in the US and in Europe, it is gradually gathering momentum in India as well. The fact that it allows easier access to CRE and enables individuals to invest in real estate in relatively smaller amounts, has led investors to explore this investment opportunity actively in anticipation of the returns expected of commercial grade A properties – an experience that was previously beyond their reach. Thus, commercial real estate sphere that was hitherto dominated by institutional investors, is now set to become a viable investment avenue for the middle class and retail investors in the country.
Till recently, most Indian investors stayed away from investing in CRE, given its high cost, and preferred to focus on residential real estate instead. However, with the residential market remaining subdued for a prolonged period, investors have been led to seek more efficient assets. With the advent of fractional ownership, investors would be able to diversify their portfolio, and at the same time gain ownership of an institutional grade commercial property. Besides, real estate being a stable sector when compared with other asset classes that demonstrate volatility, chiefly on account of their stock market linkage, it provides investors with sufficient amount of risk mitigation.
While the concept of fractional ownership in India is still evolving – its scope necessitating more clarity, several models regarding its structure are already being discoursed upon. Irrespective of models, the underlying intent is to enable one to invest in sections of premium commercial properties to earn a monthly rental yield and create long-term wealth. Indicative returns are offered on the property, typically ranging between a rental yield of 8-10% and IRR of 16-20% over a period of five years. Interestingly, the concept has found favour with young Indians who are intrigued by the benefits offered by this unique ownership opportunity in CRE, India being one of the stronger and resilient office markets in the world. As a matter of fact, according to a survey conducted by an investment platform, almost 30% of total investors pursuing an alternative income source are NRIs interested in fractional ownership of CRE in India.
The COVID-19 crisis resulted in creating considerable uncertainty in the investment environment. It led to the recognition of the fact that a diversified portfolio and a resilient asset class formed the bedrock of a strong investment. In this light, investment options such as REITs and fractional ownership in CRE have emerged as being definitively worthwhile in the Indian market context. Moreover, technology-enabled services such as transparency regarding transaction details of investors and dashboards for tracking their investments, amongst others, have augmented investor confidence and acceptance of these concepts. While the debate regarding REIT versus fractional ownership – as to which one yielded better results, has not reached any conclusion yet, it remains the investors’ onus to conduct their own due diligence and opt for the solution suited best to their requirements and investing goals. Currently, there are no regulations in place, thereby making it essential to develop a compelling legal framework in order to safeguard the investors.
Going forward, fractional ownership is expected to evolve into a comprehensive model, or models, that encompass a slew of other real estate segments, besides office. Assets in industrial & warehousing space, plotted land, apartment hotels, senior living, student living, co-living, resorts & holiday homes, are some of the segments that are likely to attract fractional ownership companies. The advantages of fractional investing are too significant to overlook as it can reduce portfolio risks, cushion market shocks, and improve returns through appropriate diversification. These factors would aid investors in a post-pandemic scenario greatly, helping them to deal with financial disruptions and meet their long-term financial goals by way of smart investing.