What is the meaning of fractional
ownership in commercial real estate?
If you ever dreamed of owning a posh office space or a part of an upcoming skyscraper, your dream could now be a reality with the growing popularity of fractional ownership in India.
Fractional real estate investment involves the purchase of fractional shares in a property instead of investing in the entire property. The fraction can be as little as one-hundredth of a share. Thus, the buyer becomes an owner but not the actual owner, so they enjoy all benefits of ownership but with fractional costs, making it perfect for investors on a budget.
Commercial Real Estate in India is one of the best ways to invest your money. With increasing opportunities and growth in the commercial sector, many international & local brands are choosing Indian cities as their business hubs.
Until some time back, commercial real estate investment was reserved for high net-worth individuals or those with ample private equity. But not anymore. Today, with the emergence of digital platforms, you can own a slice of Grade-A commercial real estate in prime locations across cities, leased out to marquee tenants, with just Rs 25 lakhs to invest.
What is Fractional Ownership?
Suppose there is a luxury office space worth Rs 200 crore in a prime location in Mumbai. Considering the total capital investment, perhaps nobody except an HNI can afford to purchase it. But, undeniably, the investment offers multiple benefits, including assured rentals. Still, small investors stand no chance to benefit from such an opportunity due to the large entry capital requirement.
But what if a group of people came together and pooled in money to purchase the said office space? In that case, each person would own a piece of the property according to their investment and also benefit from the rental returns equally.
This is precisely how fractional ownership in real estate works. The only difference is that the property is managed by experts and is often already leased out to marquee tenants to give investors an assured rental return on their investment.
What are the benefits of a fractional ownership?
Affordable way to invest in commercial real estate:
Fractional ownership offers a more affordable way to invest in commercial real estate as compared to buying the entire property. This is especially beneficial for small investors who may not have the large capital investment required to purchase a property outright.
Short term investment option:
Fractional ownership generally works on a less risky shorter tenor with investors preferring to exit before the tenure reaches maturity.
No management hassles:
The most important advantage of fractional ownership is that someone else does all your work for you – from finding a suitable property, getting the legal documentation done and then managing the property.
Diversification:
Fractional ownership offers investors an opportunity to spread their investment across multiple properties and geographies, thus mitigating risk.
Guaranteed rental returns:
The biggest benefit of fractional ownership is the assured rental income that investors receive on a monthly or yearly basis. This helps to overcome the risks involved in investing in real estate, such as the lack of guaranteed rental income and concerns about insolvency on part of tenants.
Easy exit:
With fractional ownership, you can sell your share at any time and take out your initial investment plus a pre-decided profit margin depending on market conditions, without waiting for the maturity of the investment tenure.
If you are wondering about the safety of the investment, fractional ownership in commercial real estate is a new concept. You won’t find clear regulations, as you find in the mutual fund or equity space. Yet, you must know that any investment firm offering the service requires a license from RERA to continue operating.
Besides, the asset ownership is arranged through a special purpose vehicle (managed by a trusteeship company) that is bankruptcy remote to protect the interests of the investors. Therefore, the trusteeship company manages all payouts, including rental income and sale proceeds from the property.
What is the future of fractional ownership in India?
Fractional Ownership of Commercial Real Estate is steadily rising in India as solid growth is expected in the commercial real estate market in the next few years.
Some of the reasons for this predicted boom in the commercial real estate market is related to factors like:
- Augmented demand for office space in the coming years
- Increasing foreign investments related to several commercial projects
- An uptick in the number of large institutional investors.
Fractional ownership allows smaller investors to diversify their portfolios by making limited investments in commercial real estate, which they were previously locked out from. The proposition becomes even more lucrative when the asset for sale is already leased out to reputable tenants, ensuring a stable return on investment from day one.
Here are some benefits of managed leasing for both small and big investors:
Stable tenancy
Leasing expertise providing long term stability. For example, the lease tenure provided by the tenant for the Times Square project is 5+5+5, or 15 years.
Vacancy Risk Mitigation
Tenant sourcing, management and vacancy responsibility of managed leasing partner, which means you can rest assured of your rental return without any groundwork on your part.
Secure Rental
Dual protection from managed leasing partner and sub-tenant.
High Stickiness
Managed leasing partner invests high marketing costs, tenancy expenses, building up-gradation and furnishing CAPEX.
Superior Asset Upkeep
Expect value add facilities, workspace digitization and professional building expertise.
Rental assurance
The managed leasing partner is responsible for the rental payment irrespective of subtenant vacancy.
Diversifying your portfolio through fractional ownership
Fractional ownership can be a handy tool to create a diversified portfolio to minimize investor risk. For example, instead of putting INR 50 lakhs in a single unit, you can buy different kinds of assets in a couple of locations with expert professionals managing the asset on your behalf.
Tech platforms have popularised fractional ownership in India while using technology to drive transparency in transactions. So, if you’re looking to invest in commercial real estate affordably, fractional ownership could provide you with an entry.
