When people have funds to spare, they start to think about investing. Some normal questions that arise are where to invest, how fruitful it will prove and how safe it is to invest in a particular area. Fractional investment has been more mainstream in the west, but is gaining popularity in India. It allows investors to buy commercial real estate, even if on a fractional basis. This may not be possible as an individual. Commercial real estate investing also allows for portfolio diversification.
Prime commercial property which would have been impossible to buy becomes a possibility through fractional ownership. Regular middle class people can have access to this asset class. Indian investors were more likely to invest in residential real estate rather than CRE earlier. Since residential real estate sales were stagnant for some time, investors started looking for other more lucrative options.
Real estate is a relatively more stable area to invest in. This gives investors a less riskier option. In CRE the estimated rental yield is 8-10% and the IRR is 16-20% over a period of 5 years. Young Indians and NRIs are a large percentage of the people seeking an alternative income through commercial real estate.
What is Commercial Real Estate ?
Commercial real estate is a property used for business purposes. It is used to provide a workspace as opposed to a living space. Living space comes under the category of residential real estate. Commercial real estate is often leased to tenants in order for them to engage in income generating activities. Commercial real estate can encompass a single storefront to a large shopping center. Office space, hotels and resorts, malls and healthcare facilities are examples of commercial real estate.
What is Fractional Ownership ?
Fractional ownership is a percentage ownership of an asset. Fractional ownership shares in the asset are sold to individual shareholders. They share the benefits of the asset such as usage rights, income sharing, priority access, and reduced rates.
What is Risk like in Real Estate ?
- It is an immovable asset that is relatively unaffected by market risk
- This makes it an illiquid asset
- Lack of Occupancy
- Tenants Leaving Early
Fractal Ownership in Commercial Real Estate
- Permits a higher number of investors to pay their share of a larger investment in the asset
- Their return is linked to their percentage contribution of the total amount
- Each investor is the owner of the asset based on the investment they made
Risk Assessment
- Real estate is a relatively risk-free asset due to being immovable
- Thorough research and financial modeling must be done about the asset. The reputation and prior experience of the builders for instance, is something you should be knowledgeable about.
Commercial Real Estate vs Residential Real Estate
- Commercial Real Estate generally proves a better deal than residential real estate
- Strict lease terms, longer lease periods and a lock in period make it so that investors can count on returns from a CRE investment
- Residential real estate requires significantly more time and effort to maintain the returns from the asset
- CRE offers more income (2x profit over residential)
- CRE has higher annual rental appreciation
- CRE is highly sellable
- CRE has much better returns once sold
Investing Individually
- Property validity, claims, rent value in the market and the history of the price of the asset all become the responsibility of the individual
- Investment firms charge to take care of all of the above
REIT vs CRE
- In order to avoid all of the above mentioned hassles one could become part of a Real Estate Investment Trust (REIT) and invest in CRE.
- This would not allow you to choose the amount of your investment that is distributed within which assets in the REIT
- Fractional Ownership would allow you this choice.
REITs are companies that own or finance income-generating real estate across a range of property sectors. These companies have to meet several criteria to qualify as an REIT. Most REITs trade on major stock exchanges and offer many benefits to investors.
Fractional Ownership
- Usually, an SPV (Special Purpose Vehicle) is employed in order to manage the investments in an asset
- The SPV manages the asset and the rental return payout.
- Investors can decide how much they want to invest and the risk level, since the investment amount is distributed.
SPV and Safety
An SVP is a legal entity that has been created specifically to guarantee the safety of the stakeholders and their investment. There is an established process for setting terms and conditions, performing due diligence and conducting other legalities. Investors are kept informed at all points.
Commercial Real Estate via Fractional Ownership Requirements
- Investment Amount
- Desire to remain invested in CRE for long
Careful Risk Analysis
Due Diligence and extensive research must be performed before any investment is made.
Asset Diversification
Any portfolio should be diversified for the best returns.
Market Knowledge
Ensure that you have exhaustive market knowledge.
Paperwork
There is a considerable amount of complex paperwork involved. You can get legal help in order to process it.
CRE Fractional Investment is on the upswing in India. Its various benefits such as making prime real estate affordable and offering portfolio diversification make it stand out and are attracting more investments. It is a new and exciting asset class. We can help you with thorough research in all of the above areas.
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FAQs
Commercial real estate is a property used for business purposes. It is used to provide a workspace as opposed to a living space. Living space comes under the category of residential real estate. Commercial real estate is often leased to tenants in order for them to engage in income generating activities. Commercial real estate can encompass a single storefront to a large shopping center. Office space, hotels and resorts, malls and healthcare facilities are examples of commercial real estate.
Fractional ownership is a percentage ownership of an asset. Fractional ownership shares in the asset are sold to individual shareholders. They share the benefits of the asset such as usage rights, income sharing, priority access, and reduced rates.
An SPV is a special purpose vehicle. It is a legal entity that has been created specifically to guarantee the safety of the stakeholders and their investment. There is an established process for setting terms and conditions, performing due diligence and conducting other legalities. Investors are kept informed at all points.
Real Estate Investment Trust. REITs are companies that own or finance income-generating real estate across a range of property sectors. These companies have to meet several criteria to qualify as an REIT. Most REITs trade on major stock exchanges and offer many benefits to investors.
Yes, it is certainly a worthwhile investment.
