Wealth and real estate are synonymous to Indians, as about 80 percent of India’s household wealth is in real estate, making it the most preferred asset class by far. So, no discussion about wealth can start without due consideration given to real estate. But when it comes to real estate, there is a clear choice difference that High Net Worth Individuals (HNIs) or institutional money makeover retail investors.
Over 90 percent of the HNIs wealth allocation is in commercial real estate (CRE), and interestingly over 80 percent of the institutional investments in real estate over the last four years have been in CRE.
Some of the below factors lead to the rising interest of retail investors to invest in fractional ownership:
Commercial Real Estate as an Alternative Investment Class
As uncertainty remains high in public equity and bond markets, investors want to hedge their risks by diversifying their portfolios with alternative investments.
By definition, CRE is a property used for business purposes, be it an office, warehouse, or say a retail store. Besides superior return potential, what attracts smart money to seek Commercial Real Estate is predictable cash flows and capital preservation through an asset-backed investment. CRE has a low correlation with public markets and investors globally invest in this Alternative Investment class to hedge against volatility.
Innovation driving retail participation in CRE
Thankfully, recent market innovations have brought this high-quality commercial asset class within the reach of retail investors, who can now generate a healthy passive income through such high-yielding investment properties.
These are primarily listed Real Estate Investment Trusts (REITs) and private Fractional Ownership platforms.
India has seen three REITs go to the market to date and raise close to $1.8 billion collectively.
Currently, there are about 6-8 players in the tech-enabled Fractional Ownership space in India, who have collectively transacted over Rs 400 crore of inventory in the current fiscal. Unlike REITs, Fractional Ownership platforms have also offered warehousing and retail investment properties in addition to Offices.
Growth of Commercial Real Estate
The addressable market size within institutional-quality Office and Warehousing is over $100 billion currently and it is likely to double over the next 5 years. Grade A Commercial Offices had been growing at double-digit growth. Post-Covid the rate of growth is likely to be tempered but fundamental growth drivers remain robust. Also, Warehousing is undergoing a rapid transformation due to supply chain consolidation and demand driven by 3 PL operators. India is adding almost 20 percent of its total inventory of warehouses every year.
Understanding Fractional Ownership better
Fractional ownership, simply put, is a method of ownership where investors collectively put small sums of money to individually own a fraction of high-value property. The unified purpose is to gain superior returns over time.
While such kind of holding structures in Real Estate is quite old, the innovation is about how new-age platforms are using technology, to increase depth of its investor base and making the whole process of acquisition and management hassle-free, and leveraging professional expertise to differentiate.
An investor’s journey begins on an online portal, which lists pre-screened investment properties, accompanied by all requisite information accompanied by in-depth market analysis and third-party valuation reports. Once interested, investors complete their KYC process and make an investment against the issue of shares of a company that will hold the asset, making them the real but part owners of the property. Post investment professional managers take care of any matter related to property. Investors receive a respective shares of monthly rents and proceeds from the sale of the asset. They are also issued periodic reports on their investment.
The exit is either in a way of selling their shares to other investors on the platform or to any compliant third party. Moreover, they are given an automatic exit after the investment horizon say 5-6 years are over.
Fractional platforms charge an annual asset management fee and a performance-linked fee, once a minimum hurdle on investment is achieved.
Wealth-planning with Fractional Investing
Fractional ownership can help you meet multiple investment goals. You can target to build a Dividend-heavy portfolio, Growth-oriented portfolio, or a Balanced portfolio, diversifying across geographies and asset classes, using the same amount of capital that would otherwise be parked in a low-yield residential property.
An in-city commercial office is a typical example of a high dividend-yielding investment. A warehouse on the periphery of the city can give both dividends and capital growth through land appreciation, which has economics like a balanced portfolio investment. Investors can also eye purely growth opportunities by investing in collective buying of say a distressed property.
For CRE, one can expect an annual dividend yield of 7-9 percent growth on average at 5 percent per annum and a capital appreciation to give an enhanced annualized yield of 12-20 percent. This ranks above bank deposits, 10-year return on gold and residential property returns.
Typical investment size through Fractional Investing is from Rs 5 -25 lakh.
While this is an attractive space with its own dynamics and risk factors, the whole space of Fractional Ownership is in a nascent stage today and it will be increasingly shaped up by the smart use of technology, developing investor preferences, and emerging governance practices.
Caution: Investors should carefully evaluate each deal and should take financial and legal advice before making an investment decision. They should also give strong emphasis on the background of the professionals managing their investment.
The author, Amit Uppal, is CEO and co-founder at Frxnl. The views expressed are personal