Fractional ownership providing boost to Commercial Real Estate
Fractional real estate is a unicorn investment because it offers a rare combination of high returns
If this pandemic has accomplished something, it has forced us to reconsider how we make financial decisions, especially how we save and invest. As if wage cuts and layoffs weren't bad enough, many people lost their stock market savings in 2020, and some had to split their fixed deposits or sell property to get their money. The question is how to make a pandemic-proof and reliable investment that offers daily and liquid returns that go straight to our pockets, as well as long-term capital appreciation. In the past year, one form of investment stood out on all three counts: fractional ownership of commercial real estate. Fractional real estate is a unicorn investment because it offers a rare combination of high returns and low risk. It makes the attractive returns of commercial real estate available to the average citizen.
“Investment in Commercial Real Estate is gaining traction because of increased volatility in stock market and reduced returns in bonds and fixed deposits. Fractional ownership in commercial properties have given an opportunity to retail investors to invest smaller sums in India’s booming commercial real estate market thereby helping them open an alternate source of income flow. 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,” says Mohit Goel, CEO, Omaxe Ltd.
Although the market in India is still in its infancy, it is estimated to be worth $5 billion and increasing. Fractional ownership is predicted to be the real estate market's future because it addresses one of the most significant issues with commercial property: the high entry barrier or necessary capital investment. “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" says Akshay Taneja of TDI Infratech.
Unlike the rest of the financial market, commercial real estate only endured a modest recession in the early months of last year's lockdown and rapidly recovered in Q3. As compared to the previous quarter, net absorption of CRE has increased by 63 per cent, while new completions have increased by 59 per cent. “Though real estate in other countries suffered due to Covid-19 outbreak, office leasing in India grew during the same time due to the country's strong outsourcing industry. This should serve as a good reminder to Indian investors, both residents and non-residents, that it's time for them to get a piece of the real estate pie, too. In reality, now is the best time to invest, as CRE prices are expected to skyrocket in the future,” says Achal Raina, COO, Raheja Developers.
Tenants of residential properties tend to vacate the property regularly, resulting in a loss of rental income before a new occupant can be found. The rental lease on commercial property is usually three years long, although it can be longer in some cases. The tenants of Grade A properties are usually multinational corporations, banks, or information technology firms with deep pockets; such tenants do not default on rent but pay on time. They often like to decorate the space themselves, according to their tastes. Furthermore, because of the time, resources, and effort they put into converting the property into their offices, such tenants are more likely to extend their rental lease. For better returns, it's best to invest in a property that has already been rented.
The rental returns will be credited to your bank account every month. Unlike bank deposits or bonds, where you must wait for the investment to mature and the lock-in period to end before you can access your earnings, you can access your earnings immediately. “Fractional ownership guarantees a rising rate of return -- rental yield and capital appreciation. In India, commercial property has grown at a 16 per cent compound annual growth rate (CAGR) over the last five years. Apart from the increase in capital appreciation, you can also expect a rise in rental returns if you invest in a reputable real estate firm. This increase is built into the rental agreement to protect your investment from potential inflation and keep it steady over time,” says Sagar Saxena, Project Head, Spectrum Metro. Investors must perform due diligence on the property in terms of venue, rental yield, capital appreciation potential, and the types of tenants it would attract.