Real estate has provided generations of investors with wealth. However, it has historically been reserved for those with specialized knowledge, the right connections, and access to a huge amount of capital. This has kept investing in Commercial Real Estate(CRE) out of reach for most until a few years ago. However, to have a much-needed edge, people need to understand that CRE investments are a very important part of their portfolio.
The major traits that are common in the wealthiest individuals and separate them from the rest are their Real Estate investments. Further, their income is not correlated to their time spent working and they focus on cash flow through Real Estate. These insights play a crucial role in transforming the way people invest in the CRE sector. Hence, as a solution to have specialized knowledge, the right connections, and access to a huge amount of capital, Fractional Ownership is the inevitable change coming to the CRE market.
Concept of Fractional Ownership
There exists a premium commercial building worth 50 Crore, generates good cash flow and is a leased asset to a verified institutional-grade tenant. Aleksa (a new age investor) is looking to participate in the kind of asset with all the above said features but only wants to do it with just 25 lakh.
Traditionally, 25 lakh wouldn't allow Aleksa to invest in individual institutional-grade properties until Fractional Ownership. It enables to divide the 50 Cr worth asset into fractions or shares that represent equity and debt in the underlying asset. It means that this asset can now be accessed by a wider pool of institutional investors, individual investors, and fractional investors like Aleksa. Hence, enabling the new age investors to participate in new opportunities at a fraction of the cost previously required.
Investing in a CRE opportunity is the choice of experienced investors than any other opportunity. This is due to the fact that stock markets are volatile and banking products like Fixed Deposits give capital protection but with low returns if correlated with the inflation economics. Thus, the investors prefer to invest in CRE as the opportunity provides a balance of these features, has a physical underlying asset, the ability to preserve capital and generate monthly or quarterly cash flow as well.
Fractional Ownership is a concept that has caught up in various developed economies like America, Singapore, Hong Kong and is now gaining traction in India. The fractional ownership platform provides a portal where individuals can get together to purchase an asset, enjoy the yield it generates and finally be able to sell their fraction when they want, thus enjoying capital gains. The platform also manages the asset and facilitates any payouts from the asset and automatically distributes these payouts to fractional owners like Aleksa.
In simple terms, Fractional ownership enables a person, to own a fraction of a pre-leased asset worth 50 Crore, with a small capital size of 25L, and enjoy the financial privilege like that of a 50 Cr asset owner such as an institutional-grade asset, verified tenant, and a cash flow.
Fractional ownership helps in creating a diversified portfolio that distributes and minimizes the risk. Now with just 1 Cr, an investor may buy four different kinds of assets, at four different locations with the assistance of people having specialized knowledge and vast experience, to manage the asset while working on behalf of them.
Aligned with the message of technology i.e. empowering people to create financial futures, and, fractional ownership, is driving equality and transparency. With PropTech platforms for Fractional Ownership, people enjoy easy access to thoroughly vetted, post-strict due diligence, stabilized opportunities in an institutional-grade physical asset having a predictable cash flow.
Entering into the commercial real estate segment has always seemed difficult for people having small capital available or planning to diversify the portfolio. However, with Fractional Ownership, people will be able to overcome the barriers of high capital requirement, lack of experience, and liquidity.
The author, Varun Mohan, is Founder and CEO at Definite. The views expressed are personal