In real estate investments, co-owning a property has emerged as a compelling option for asset diversification and returns. Investors can have co-ownership in two kinds of properties—commercial and residential—through Fractional Ownership Platforms and REITs.
Investing in commercial real estate (CRE) has traditionally been a domain reserved for institutional investors and high-net-worth individuals due to its substantial capital requirements and complexities. However, fractional ownership platforms like Strata, HBits, and Propshare have helped retail investors invest in these assets.
These companies vet commercial properties, assess investment worthiness, and then list them on their platforms for potential investors. Investors join together to create a Special Purpose Vehicle (SPV) to acquire the property. Each investor holds a proportionate stake in the property, entitling them to a corresponding portion of the rental income.
Says Sudarshan Lodha, co-founder and CEO of Strata, a commercial real estate investment platform, "Investors can find information, like type of property, area, price, location, expected IRR (Internal rate of return), gross entry yield, and lock-in period on these platforms. Typically, investments in CRE via fractional ownership start from Rs 15-25 lakhs. CRE gives rental returns in the 8 to 12 per cent range. The IRR can range from 13 to 17 per cent, encompassing superior rental yields and substantial capital appreciation."
Nevertheless, Lodha adds that potential risks, like tenant defaults, market collapse, and economic crises, necessitate a careful assessment of the property and location aligned with risk tolerance and financial objectives.
Another avenue for CRE investment is through Real Estate Investment Trusts (REITs). These publicly listed entities, regulated by the Securities and Exchange Board of India (Sebi), manage income-generating real estate assets like mutual funds. By acquiring REIT shares, investors can receive dividends corresponding to earnings generated by the REIT entity's real estate holdings.
REITs are securities that can be traded on the stock exchange once listed. The structure of REITs is similar to that of a mutual fund, which has sponsors, trustees, fund managers, and unit holders. Besides regular income from rents and leases, unit holders also receive gains from capital appreciation of real estate.
REIT investors should be mindful of market fluctuations, economic cycles, and interest rate changes, which can impact property values and profitability. Thoroughly assess each REIT's
characteristics and features based on risk tolerance, liquidity needs, and investment objectives before making decisions.
This investment model allows retail investors to become co-owners of luxury residential properties, offering flexibility for personal use or generating rental income. They include flats, villas, bungalows, penthouses, etc.
In contrast to CRE, fractional ownership of holiday homes typically involves shorter lock-in periods, often spanning just one year. The minimum investment generally is Rs 5 lakh. Lodha says residential properties usually offer rental returns ranging from 3 to 4 per cent.
Sudeep Chandran, co-Founder & COO of fractional ownership venture YOURS, also highlighted the advantages of fractional ownership, including diversification across multiple locations, increased liquidity, and higher potential returns. He said that property value in fractional ownership often appreciates in the 10-15 per cent range, surpassing traditional real estate because properties are usually in high appreciation areas.
Tenant defaults or users vacating during the lease can impact investors' rental yields. Further, it can be tough to exit by selling your holdings in the secondary market during an economic downturn for real estate investments.