Commercial real estate is a playground for the rich. Well, it used to be. Thanks to the brimming new opportunities in real estate, retail investors can now invest and play along with the wealthy in the commercial real estate market. So, what are these trends that make commercial real estate accessible to retail investors? REITs and fractional ownership are two of them.
Physical character, consistent returns, and collateral value, commercial real estate has been a popular asset class for HNIs and institutional investors. On the other hand, the expensive capital outlay and extreme illiquidity have only made it a dream for regular investors. For example, if you buy a premium commercial property, you must invest in crores, maintain it, pay property taxes, and locate renters.
These properties produce strong rental returns while also being incredibly promising in terms of capital appreciation. However, given the average ticket size of the investment required, they remain unavailable to a retail investor.
However, thanks to modern technology and investing platforms, investors may now add commercial real estate assets to their portfolios. They can invest in real estate without owning, running, and managing the property. A fractional investment in commercial real estate and purchasing REITs allows one to put money in these high-end commercial buildings and earn a monthly rental income. So, it assists in the accumulation of long-term wealth.
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What exactly are REITs?
REIT stands for a real estate investment trust. Most people would not have invested in REITs a decade ago. However, REITs have risen in popularity among institutional and retail investors, owing to the bright outlook for future office space construction. REITs are tax-advantaged investments in income-producing real estate. A REIT got founded when a sponsor transfers asset ownership to the trust in exchange for the trust’s units. Consider it analogous to a mutual fund, which collects money from investors. They receive mutual fund units in return. REIT units, rather than stock shares, represent real estate ownership. Dividend payments and capital appreciation are the REIT returns.
The first REIT in India got launched in 2019. SEBI has three REITs and two InvITs listed in India (Infrastructure Investment Trusts). In theory, invITs and REITs are the same things. REITs own and operate office buildings. InvITs also own and run infrastructures such as motorways, bridges, dams, and power grids, to name a few. The history of REITs and InvITs in India is not too distant, showing that REITs are a new trend that has caught up with the Indian property investment market in a massive way. The Embassy REIT, Mindspace REIT, and Brookfield India REIT are the three listed REITs in India.
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What’s the process of investing in REITs?
REIT units, like stocks, can be acquired on the major markets, the BSE and NSE, using ordinary trading accounts. REITs made their debut in India in 2019. Embassy Business Park REIT is India’s first listed REIT entity. In India, public REITs get registered with SEBI and are presently in operation. REITs also are being traded on the stock exchanges.
REIT share prices fluctuate on stock exchanges. These are dependent on on-demand units and the REIT’s performance. SEBI has introduced two critical revisions to the legislation governing REIT investment in India to entice investors. The previously required minimum of Rs 50k for investors for investing in REIT units has gotten removed. The minimum amount for investing in IPOs is now between Rs.10k and Rs.15k. Another regulation change is the increase in the lot size of REITs, currently 100 units. As a consequence of the same SEBI rule, the average lot size has lowered from hundred units to one unit.
What is fractional ownership?
Real estate purchases sometimes accompany the baggage of large down payments and protracted repayment periods that might last decades. While investing in residential real estate is well-known and gives tax benefits, commercial real estate investments are time-consuming.
Individuals who are not necessarily acquainted can now become co-owners of a property by investing small quantities of money and sharing ownership and returns proportionally. Welcome to the world of fractional ownership.
What exactly is fractional ownership? Fractional ownership means that a group of people can own parts of a commercial real estate asset rather than the entire unit. For instance, a 1,000 sq ft office building in Hyderabad can get owned by ten unique, unconnected persons who contribute Rs 5 lakh each.
So, each fractional owner owns 100 square feet of the same unit, receives one-tenth of the total rent return, and can leave the investment at the property’s current market value whenever it appreciates. But, how or where can we start fractional ownership? Assetmonk, for example, is one of the best fractional ownership real estate companies that can help you. Assetmonk provides fractional ownership options in high-quality commercial real estate to any investor with a minimum investment of Rs. 10 lakhs.
Wondering where to invest your money?
With so many differences between the two real estate investment options, it’s reasonable to ask which is the best option. In actuality, neither one is objectively better than the other. They can both generate substantial revenues. Each commercial real estate investor has their preference, risk tolerance, and time horizon. One of the two options may be a better fit for a specific person’s needs. So, each investor needs to undertake their own research and choose the solution that is most suited to their circumstances. Both fractional property and REITs operate in quite different ways and can give investors varied benefits. In the end, it all comes down to your investment objectives.
So, if you’re thinking of investing in either, keep the following points in mind.
- Transparency and diversity: Because REITs have no connection with the S&P 500, including them in a diversified investment portfolio boosts returns while lowering risk. The latter provides a portfolio with a fixed number of assets over which the investor has no influence. It operates similarly to a mutual fund in that you may select the basket of goods but not the sweets. It makes REITs less dependent, as underperformance or inefficiency in any asset will reduce cumulative yields. On the plus side, the impact on individual holdings will get reduced since it will get dispersed among a wide range of REIT investors rather than a few highly active investors. Fractional ownership provides total asset democracy based on the investor’s preference. It allows the investor to select from varied assets based on region and investment needs.
- Asset and ownership requirements: An asset gets chosen after extensive due research and calculation of return in the fractional ownership model. Therefore there is no minimum value that must get met. Furthermore, there is no lock-in period. It implies that an investor can freely sell his ownership of the asset share to interested parties after the minimum asset-holding tenure is completed. REIT has a minimum asset requirement of Rs 500 crore. It limits the number of properties that it may undertake. Furthermore, REIT does not enable transfer ownership or the opportunity to sell the stake involved.
- Investment restrictions: According to Sebi standards, a REIT’s real estate portfolio must contain 80% developed and income-generating assets. Under-construction properties, completed but non-rent-generating buildings, and public or unlisted loans of real estate corporations can all get invested in for up to 20 percent of the value of assets. On the other hand, as a highly regulated trust fund, it hinders the proliferation of creative growth models. Because fractional is self-regulated, it allows for the growth of investment structures across a range of income-generating assets, resulting in greater long-term returns. Furthermore, a consistent pipeline of quality properties provides investors with investment opportunities.
- Asset acquisition and cashflow distribution: One thing that truly works in REIT’s favor is the cheap entry fee, and once listed, the units may get exchanged on exchanges, which helps you avoid the liquidity issue. However, REITs distribute 90 percent of their net distributable cash to their investors. Fractional ownership enables cash flows distributed after subtracting statutory fees, taxes, and asset management costs, which is just 1% at Assetmonk.
Both investments are profitable; nevertheless, real estate investing is about making a well-informed strategic selection. It is all about investment goals, terms, cash flow, risk tolerance, and the prospects it will bring to the table.