REAL ESTATE INVESTMENT – DIRECT OR PART OWNERSHIP
Investing in a real estate can be an expensive affair for many. With newer models of investments enabled by technology now available, the high end properties seem to be within reach of most Indians.
With a direct real estate investment, you buy a specific property residential or commercial and make money through rental income, appreciation, and profits generated from any business activities in that real estate.
The benefit of investing in physical properties is the potential to generate substantial cash flow as well as the ability to take advantage of tax breaks. Moreover, the property prices generally increase over time, enabling a sale later at a higher price. The investor has a complete control over decision making of selecting the property, financing, rental prices, tenants, and when to sell.
The biggest disadvantages of direct investing in a property is the large amount of investment required, comprehensive due diligence and dealing with tenant issues, maintenance and your liabilities. Additionally, most investors take a loan to buy a property and in case of rental incomes going own, it may create financial problems and loan default. Also, real estate is not a liquid asset and may take time in selling if you need cash in an emergency.
This where the part ownership model either through REIT or Fractional Realty comes in picture offering alternatives to direct investing in real estate.
Both REIT and Fractional real estate make the attractive returns of commercial real estate available to the average citizen. While, offering a combination of high returns and low risk.
REIT is very similar to that of mutual funds. It gathers money from several investors and then invests those funds in income-generating properties. The returns are paid out from monthly rent from the properties invested in.
REITs are traded through the stock market and investors own shares of the corporation which reflects their overall assets, performance and earnings. Public REIT equity shares do not represent ownership in a particular physical property. Owning REIT shares have the same due diligence requirements of identifying the best companies and determining the right share prices for purchase similar to investment in any equity share. Individual investors can access profits from real estate without the need to own, operate, or directly finance properties. They offer a low-cost way to invest in the real estate market and one can buy and sell REIT shares on an exchange.
There are currently only 3 REITs available for investment in India – Embassy Office Parks REIT, Mindspace Business Parks REIT, and Brookfield India Real Estate Trust. Going forward, other leading names in the Real Estate Sector like DLF and Godrej are also expected to introduce REITs.
Fractional property refers to a group of investors pooling their funds together to jointly purchase real estate. This reduces the cost burden on the investors, who also share the rental income in proportion to the size of their investment.
Fractional ownership allows customers to own a fraction of a real estate asset and benefit from a share of the income that the asset generates, and any appreciation in the value of the asset. Once the platforms get into an agreement to sell or get a letter of intent from the owners, they list the properties. Generally there is a minimum investment limit. Once they get the required number of investors, they buy the property through a special purpose vehicle (SPV). The SPV owns the property and investors own the shares or compulsory convertible debentures (CCDs) of the SPV. Each property is owned by a separate SPV. In case, the platform is not able to get the required number of investors, the token money deposited by existing investors is paid back with interest. Investors can exit the property by selling it directly to anyone or by listing it on the platform.
Fracsn, Propertyshare, Strata, Myre Capital, hBits, Assetmonk, Grip and RealX are some of the companies operating in fractional ownership space. BRIKitt offers fractional ownership within the premium residential and vacation homes segments.
FRACTIONAL PROPERTY VS REIT
In the case of REIT, an investor does not have direct exposure to a particular property but instead invests in a fund that has fund managers who decide how the capital is deployed and managed. Whereas a fractional platform connects you directly with investment opportunities, allowing you to invest and own fractions in properties of your choice.
The entry cost in the case of REIT is quite low and once listed, the units can be traded on the exchanges, which helps you avoid the liquidity issue. On the other hand, the fractional model is little on the higher end in terms of the average ticket size.
As per SEBI guidelines, of the real estate portfolio held by a REIT, at least 80% of the assets should be completed and must be revenue-generating properties. Assets can be upcoming or under construction but, by virtue of self-regulation, in a fractional platform assets can be upcoming or under construction.
REIT holds the Special Purpose Vehicle (SPV) and manages the property unlike in fractional where individual investors are co-owners of the SPV.
In case of Fractional platforms there is no minimum value that a property has to meet nor any lock-in period involved. REIT has a minimum asset requirement of Rs 500 crore which makes REIT’s offerings limited w.r.t the number of properties that it can undertake.
REIT does not offer transference of ownership or the rights to sell the stake involved whereas, an investor on availing fractional investment has the freedom to sell his ownership of the asset portion to the interested parties.
The fractional offers monitoring of asset valuations at regular intervals and REIT carries out full valuation once a year besides half-yearly updates to the same.
THE INDUSTRY VIEW
“There is a grey area as far as the regulations are concerned for fractional platforms.. Investors should check the law for such schemes. Ideally, the fund-raising identity should be registered under Sebi’s alternative investment fund (AIF) regulations and protected under legal framework of pooling of funds,” as per Anuranjan Mohnot, MD & CEO, Lumos Alternate Investment Advisors Pvt. Ltd.
REITs are a better option as they provide a highly diversified portfolio. Plus, you can move out of REIT at any point of time while liquidity can be a concern here,” sataed Sharad Mittal, CEO, Motilal Oswal Real Estate Fund.
“The future of fractional investment looks bright and sustainable and therefore retail investors have jumped on this bandwagon to ride the wave of safe and healthy returns and also as a means to diversify their investment portfolio,” Mohit Goel, CEO, Omaxe Ltd shared his opinion.
“Consider a luxury office space worth Rs 90 crore. Normally, such a large investment will only be accessible to those with a high net worth (HNI). However, with fractional ownership, an individual can now invest as little as Rs 10 lakh to become a part-owner and earn rental returns. TDI is coming with a concept of part ownership for its commercial properties in third quarter of 2021, where buyers will be able to hold a property for a long period of time which is leased to world renowned brand for long term durations,” Akshay Taneja of TDI Infratech informed.
“Fractional ownership is finding its acceptance in India. For small and second home investors, it is one of the best ways to invest and own grade-A premium commercial properties and build a stable long-term income. Fractional investing also enables you to diversify by investing in multiple properties with smaller investments. It is an investment that offers both portfolio diversification and is superior to residential investment in terms of yield,” is the view of Rajesh Binner, Founder and CEO, YieldAsset Real Estate Tech Pvt Ltd.
“REITs in India are, so far, limited to commercial properties and are yet to make inroads into the residential segment. In factional ownership of commercial properties, multiple investors hold combined ownership of a single asset – while in REITs, investors own a portfolio that is invested in several assets. In fractional ownership, investors can cherry-pick the assets; in REITs, individual selection of invested assets is not possible as there are multiple assets in one portfolio. Both REITs and fractional ownership are fairly new in India, but the former is a tried-and-tested risk-free investment option,” opined Prashant Thakur, Director & Head – Research, ANAROCK Property Consultants
A NEW REAL ESTATE MARKET
The pandemic has forced us to think out of the box for our financial investments. While, stock markets crashed and fixed deposits interests rates went down last year, the real estate endured the difficult times and remained an investment option for capital appreciation.
In the last few years, luxury property players have started to warm up to the concept of fractional ownership which enable investors to secure a piece of prime property in high-demand city centres or popular vacation destinations. All investors reap a level of benefit proportional to their investment – in terms of rental yield, capital appreciation and, in the case of vacation homes, duration of personal use of the property. Moreover, the fractional owner is not responsible for the routine upkeep of the property.
With the commercial segment set to grow in the post-pandemic period, REIT and Fractional ownership are the additional options for the developers to expand the market to get liquidity by selling commercial properties. They open new avenues for the office developers and offer an investment class to smaller investors which otherwise was available only to the HNIs, Family Offices and Institutions due to the ticket size of owning large office space.
The Key to investing depends on the goals of investment. Due diligence on the asset class before investing whether a direct buy of property, fractional real estate or REITs is necessary. They all work in v different ways and can give investors different benefits.