Fractional ownership: An Alternative Investment to Direct Property investment

For many people, investing in real estate is a costly proposition. With modern investment models enabled by technology now available, high-end homes appear to be within most Indians’ reach. A direct real estate investment is purchasing a single home or business property.

For many people, investing in real estate is a costly proposition. With modern investment models enabled by technology now available, high-end homes appear to be within most Indians’ reach. A direct real estate investment involves purchasing a specific property, either residential or commercial, and earning money through rental revenue, appreciation, and profits derived from any business activity conducted in that property. The advantage of investing in physical assets is the possibility of significant cash flow as well as the chance to benefit from tax savings. Furthermore, property prices often rise with time, allowing for a subsequent sale at a higher price.

The investor has entire control over the property selection, financing, rental pricing, tenants, and when to sell. The most significant drawbacks of direct property investment are the substantial amount of cash necessary, extensive due diligence, dealing with tenant difficulties, upkeep, and your responsibilities. Furthermore, most investors take out a loan to purchase a property, and if rental income falls short, it can lead to financial difficulties and loan default. Furthermore, real estate is not a liquid asset and may take time to sell if you need cash quickly. This is where the part ownership model, whether via REIT or Fractional Realty, comes into play, providing alternatives to direct real estate investment.

The high returns of commercial real estate are now available to the common citizen through REITs and fractional real estate. While providing a mix of great profits and minimal risk. REIT REITs are extremely similar to mutual funds. It collects money from various investors and then invests it in income-generating assets. The monthly rent from the properties invested in is used to pay the returns. REITs are listed on the stock exchange, and investors hold shares of the firm that represent its entire assets, performance, and earnings. The equity shares of a public REIT do not represent ownership of a specific physical property.

Similar to investing in any stock share, owning REIT shares requires the same due diligence of choosing the finest firms and calculating the optimum share values for acquisition. Individual investors can earn from real estate without owning, operating, or directly financing properties. They provide a low-cost alternative to participating in the real estate industry, and REIT shares can be bought and sold on an exchange. Also Read: 50 Lakhs Investment Options Via Fractional Ownership In The Indian Real Estate Market

FRACTIONAL REAL ESTATE

A fractional property is created when a group of investors combines their resources to purchase real estate. Customers can own a share of a real estate asset and benefit from a portion of the asset’s revenue as well as any increase in its value. After the platforms achieve a sale agreement or obtain a letter of intent from the owners, the properties are posted.

A fractional property is a group of investors that pool their assets to buy real estate together. This lowers the cost burden just on investors, who share the rental revenue in proportion to their investment amount. Customers can own a part of a real estate asset and profit from a portion of the income generated by the asset as well as any growth in its value. The properties are listed after the platforms reach a deal to sell or receive a letter of intent from the owners. In general, there is a minimum purchase amount. They purchase the property thru a special purpose vehicle once they have attracted the requisite number of investors (SPV).

The property is owned by the SPV, and investors hold the SPV’s shares or compulsory convertible debentures (CCDs). Each property is held by its own SPV. If the platform fails to attract the requisite number of investors, current investors’ token money is repaid with interest. Investors can get out of the property by selling it to anyone or advertising it on the site.

Also Read: Fractional Ownership Of Commercial Real Estate vs Cryptocurrency In 2022

REIT VS FRACTIONAL PROPERTY

An investor in a REIT has no direct exposure to a single property, but rather invests in a fund managed by money managers. A fractional platform connects you to investment opportunities directly, allowing you to invest in and now own fractions on properties of your choice.

In the case of a REIT, an investor does not have direct exposure to a specific property but rather invests in a fund managed by fund managers who select how capital is spent and managed. A fractional platform, on the other hand, connects you directly with investment possibilities, allowing you to invest in and own fractions of properties of your choosing. In the case of REITs, the entrance fee is fairly minimal, and once listed, the units may be exchanged on exchanges, which helps you overcome the liquidity issue. In terms of average ticket size, the fractional model, on the other hand, is slightly greater. According to SEBI standards, at least 80% of a REIT’s real estate portfolio should be finished and revenue-generating buildings. Assets can be impending or under development, however, under a fractional platform, assets can be upcoming or under construction due to self-regulation.

Unlike fractional, where individual investors become co-owners of the SPV, the REIT owns the Special Purpose Vehicle (SPV) and administers the property. In the case of fractional platforms, there is no minimum that a property must satisfy, nor is there a lock-in time. The minimum asset requirement for a REIT is Rs 500 crore, which limits the number of buildings that it may handle. REITs do not allow for the transfer of ownership or the right to sell the share involved, but a fractional investment allows the investor to sell his possession of the asset piece to interested parties. The fractional enables regular asset valuation monitoring, whereas the REIT does comprehensive valuation once a year, with half-yearly updates.

A NEW MARKET FOR REAL ESTATE 

Luxury real estate investors have begun to embrace the concept of fractional ownership, which helps investors to own a portion of prime real estate in popular city centers or vacation destinations. They present new opportunities for office builders and a new investment class for smaller investors.

The epidemic has compelled us to rethink our financial investments. While stock markets sank and fixed deposit interest rates fell last year, real estate weathered the storm and remained a viable investment alternative for capital appreciation. In recent years, luxury real estate players have begun to embrace the notion of fractional ownership, which allows investors to purchase a piece of great real estate in high-demand city centers or famous vacation locations. Also, Read Fractional Ownership & REITs: Questions Answered By A Professional Real Estate Lawyer

In terms of rental return, capital appreciation, and, in the case of vacation homes, duration of personal use of the property, all investors enjoy a degree of profit commensurate to their investment. Furthermore, the fractional owner is not liable for the property’s normal maintenance. With the commercial segment expected to rise in the post-pandemic period, developers can extend the market by selling commercial buildings through REITs and fractional ownership. They open new doors for office developers and provide a new investment class to smaller investors that were previously exclusively available to HNIs, Family Offices, and Institutions due to the high cost of holding large office space.

Real estate investments, on the other hand, may help to level out the investment’s peaks and valleys, generating an increasing monthly passive income stream from which you may retire and secure your financial future. Assetmonk, for example, is a well-known real estate investing business that can help you find dependable and high-quality properties. It also ensures that all investors enjoy a smooth and trouble-free property choosing process. Assetmonk makes asset-backed investments available. It suggests that your funds are secure even if anything unexpected occurs.