Fractional Ownership or REIT – What is right for you?
Despite the fact that both instruments are relatively new to consumers, they are rapidly gaining traction as they provide institutional investors with access to commercial real estate.
One thing is certain: commercial property will dominate the Indian investment market in a few years. Fractional property and REITs (Real Estate Investment Trusts) are two modern-age investment formats that are ushering in this new era in India’s financial landscape.
Here’s a refresher on these words for those who aren’t familiar with them. A consortium of buyers pooling their funds to collectively buy real estate is referred to as fractional land. This lowers the acquisition costs for the developers, who also divide the rental profits in proportion to their investment size.
The idea of a REIT, on the other hand, is somewhat similar to that of mutual funds: it collects money from a number of investors and then invests it in income-producing assets. The annual income from the assets invested is used to pay dividends.
Although both tools are relatively new to investors, they are rapidly gaining traction because they have finally allowed institutional investors access to the most exciting asset class — commercial real estate (CRE), an asset with extremely favourable returns but historically high entry costs. Both types of investing have lowered the barrier to entry into the CRE market, almost acting as a form of real estate crowdfunding.
In India, fractional ownership of real estate (FA) is expected to reach $5 billion in three years, while the country’s first three REIT offerings raised a total of Rs 8,925 crore ($1.2 billion) during their IPOs in 2020 and 2021.
Investors who are financially smart should try and keep ahead of the curve to get a piece of the CRE pie now. But how do you know which investment is best for you? Before making a decision, all potential investors should ask themselves the following questions:
Do you wish you had more power over your money?
REIT owners, including mutual fund investors, have no say about how their money is spent; the fund manager makes the call. When it comes to REITs, the fund manager can want to invest in under-construction projects, residential real estate, or other underperforming properties.
Investors who make a fractional deposit, on the other hand, will choose from a variety of Grade A office spaces. This is the part of CRE that is outperforming the rest and earning the most money (8 per cent to 10 per cent). Also, after the pandemic and the subsequent recession in 2020, there was a net absorption of 25 million square feet of Grade A office space. This year, the figure is estimated to surpass 30 million square feet.
Do you get anxious as the financial market fluctuates?
It’s quick to think of REITs as mutual funds and fractional ownership as a direct stock investment, based on the aforementioned explanation. REITs, on the other hand, are exposed to stock price risks because they are publicly traded, and their value is affected by market volatility. Fractional ownership is similar to conventional land investing in that it has little to no association with public markets. This makes fractional property a real diversification away from the capital market (in terms of flexibility, it’s more appropriate to equate fractional to debt instruments).
Is it important for you to be able to monitor your investment on a regular basis?
Savvy owners like to be more hands-on with their portfolios, checking up with them on a regular basis to see how they’re doing. Both information is available on the web dashboard, and fractional services maintain full transparency and real-time monitoring of the asset and its value. REITs, on the other hand, release a complete valuation once a year, with semi-annual adjustments.
Do you get annoyed by secret fees?
Did you know that REITs are required by law to allocate at least 90% of their net distributable cash flows to their shareholders? So what about the other ten per cent? There is a total distribution of net distributable cash flows with fractional property (post taxes, etc.). This is due to the fact that the fractional business has no secret fees. It does, however, charge a small fee for its land management services.
If you want to make a short- or long-term investment?
Two of the most significant benefits of REITs are their low entrance cost and ease of withdrawal since the units can be traded on the stock exchange. It’s possible to make fast money with REITs, just as it is with bonds, but there’s still a risk that returns and even resale value will suffer if market conditions aren’t favourable. The fractional house, on the other hand, has a higher entry rate, ranging from Rs 10 lakh to Rs 25 lakh per investor. However, it has become more robust over time.
It makes more sense to see fractional as a medium- to long-term investment, with the aim of growing wealth before the investment horizon, which is usually 5-8 years, when the asset is sold. Investors who want to cash out by the end of the contract will do so by selling their shares on the same website that they purchased them.
Of course, the bottom line is to do your homework on the asset class before investing. Both fractional property and REITs function in very different ways and can have different advantages to investors. In the end, it all comes down to the investment objectives.