Did you know that in a few years, analysts expect that India’s fractional ownership market would reach $5 billion?
We have placed a great deal of confidence and commitment in real estate holdings as a society.
Land ownership is seen as one of the most important class symbols, indicating your place in the community’s top echelon.
However, while previous generations were likely to invest their life earnings in gold and real estate relatively fast, today’s urbanites are constrained to purchasing residential units or tiny pieces of land.
At the same time, we as a human population confront several scarcities that make it difficult to make effective investments.
Especially in a country like ours, where the population is growing, and land is scarce, that means that real estate has shown to be a good investment.
At the same time, it is out of reach for those looking to become landowners.
People desire to invest in Commercial Real Estate (CRE) instead of depreciating assets since it provides greater rental income flow.
CRE, on the other hand, needs greater contacts, a thorough understanding of the real estate sector, and a substantial sum of money.
As a result, only High Networth Individuals (HNIs) or Ultra HNIs have access to this elite segment of the financial industry.
Following the financial panic caused by the pandemic, fractional ownership of commercial real estate has developed as a potential concept for safe investments that give both long-term capital appreciation plus daily earnings.
Fractional ownership real estate ownership is a godsend for normal folks wishing to make lucrative investments due to its low risk and high return features.
Is Fractional Ownership Safe?
If you’re seeking a safe investment with good returns, consider fractional ownership of commercial property in the new year.
It allows individual investors to participate in pre-leased commercial buildings with ticket sizes as low as Rs 25 lakh, making commercial real estate investments more accessible.
It is one of the safest investment alternatives, delivering greater returns than many of its competitors, with an annual rental yield of 8-10%, capital gain of 5-10%, and rent escalation of 15% every three years.
One of the main reasons fractional ownership is deemed safe is that renters are required to sign a five- to the seven-year fixed lease agreement.
This insulates it from market volatility and economic cycles, ensuring consistent rental income and capital growth for investors.
Leading fractional property investing platforms, such as hits, solely deal in pre-leased commercial property, assuring investors a profit from the start.
Before listing, each property is checked against several criteria, including the tenant’s creditworthiness, the builder’s repute, the lease agreement, the IRR, the location, the asset worthiness, and so on.
Other aspects that make fractional ownership a secure long-term investment include due diligence by qualified specialists and examination of the property on numerous dimensions.
Fractional investing platforms may acquire access to the greatest Grade A assets thanks to solid sourcing across key cities through links with developers and local brokers.
Some of the Most Common FAQs on Fractional Ownership
1. What is the Definition of Commercial Real Estate?
A property utilized for business reasons is known as commercial real estate. It is used as a workplace rather than a living space.
The term “living space” refers to the area where people live. Tenants frequently leased commercial real estate to engage in income-generating activities.
A single storefront in a big retail mall can be considered commercial real estate. Commercial real estate includes office space, hotels and resorts, shopping malls, and healthcare facilities.
2. What is Fractional Ownership and How Does It Work?
Our only entitlement to any property is dictated by our ownership.
However, fractional ownership, as the name implies, is the notion of owning only a portion of a property rather than being the only owner with all of the rights.
Commercial real estate in India is now a viable business, but it comes with certain financial restrictions that prevent ordinary residents from participating.
For example, in one of Delhi’s top sites, there is a luxurious office facility worth Rs 100 crore. No one but an Expensive Net-worth Individual (HNI) can afford to buy it because of the extremely high initial investment.
Even though it offers several benefits and is a secure investment choice, it is not available to the typical individual who offers only Rs 10 lakh.
But what if a group of people band together, pool their resources, and make a bid on the commercial property in question?
This would imply that each individual owns a portion of the workplace and that the advantages are shared equally.
As time passes as well as the market value of real estate rises, all those who invested in office space will be able to collect rental returns and profit from long-term capital gains.
A fractional property is one in which members agree to share both costs (such as upkeep, maintenance, and realty management fees) and the advantages (such as personal usage, equity, and earnings from any future selling) of property ownership.
The specifics of these agreements vary, but most owners hire a management firm to oversee regular upkeep and schedule when each owner will have access to the property.
While fractional ownership in a single property can be purchased as a way to own a second home, certain fractional ownership configurations, known as private residence clubs, give members access to a network of communally held properties such as vacation clubs and condo hotels.
Part owners can typically lend their different permissions to friends or family members, or even rent it out to other co-owners, depending on the arrangement.
The level of a co-fractional owner’s stake typically determines factors like how much time they may spend at the property and how much voice they have in group decisions.
3. Why is Fractional Ownership of Commercial Real Estate Growing?
Commercial real estate fractional ownership is progressively increasing in India, with the CRE market predicted to rise by 13 percent to 16 percent over the next five years.
Some of the causes for this expected boom might be connected to the country’s increased need for office space in the coming years, growth in the number of significant institutional investors, and a large foreign investment in various commercial projects.
All of these elements lead to a strong capital appreciation potential.
Commercial Real Estate often consists of Grade A premises leased by Multinational Corporations, Banks, Storage facilities, factories, or Information Technology companies with a large budget.
Unlike residential renters, such organizations do not frequently depart the premises on short notice, putting the property owner in a difficult situation.
A business space rental lease, on the other hand, is usually three years or longer.
As a result, one of the major advantages of renting property to businesses is that they pay their rent on time and can customize the space to suit their demands.
Furthermore, because they utilize the property as just an office, they devote all of their efforts to keeping the space tidy and are more inclined to extend their lease rather than seeking a new location.
Many interested parties are eager to invest in additional shares of Commercial Real Estate after seeing a monthly deposit in their bank account and the continual growth in the market worth of a property.
Commercial real estate is less risky, has more predictable returns, and is a tangible asset. Commercial real estate is indeed the better investment in almost every case, however, it’s never a bad idea to have both in your portfolio.
Assetmonk is a real estate investing platform that helps investors diversify their portfolios by curating investment possibilities in Bangalore, Hyderabad, and Chennai.
You may invest in luxury Grade-A properties at a low cost through fractional ownership, and you won’t have to worry about legal issues.
4. Is Liquidity Supported by Fractional Property Investment?
Liquidity is the process of transforming an asset into cash without affecting its market price.
When it comes to investing, liquidity is a crucial notion that benefits both corporations and investors.
Cash is the most liquid asset in terms of technical terms, as any form of money may be utilized in transactions.
Rare metals are often seen to be more liquid, whereas commercial properties are thought to be illiquid.
Commercial Real Estate may now be readily liquidated by part-owner’s thanks to the advent of fractional ownership.
For example, if a fractional property investor wishes to sell half of the property, they may immediately transfer it to another interested investor.
It’s also worth noting that exclusive property ownership doesn’t give the owner the same level of flexibility when it comes to switching assets.
5. Real Estate Investment Trust (REIT) Vs. Fractional Ownership – Which is the Better Option?
Investment and risk are inextricably linked. There’s no way to guarantee that your investment will be risk-free throughout time and that it will pay off handsomely.
However, you may always research the industry, observe current trends, and get a professional opinion on how the real estate market will evolve in the following years.
Commercial real estate is currently in great demand due to its ever-increasing market value.
CRE, on the other hand, has drawbacks, such as the large initial outlay that regular investors cannot pay.
As a result, CREs were exclusively available to High Net Worth Individuals (HNI).
However, with the emergence of concepts such as REITs and fractional ownership, the regular person may now acquire a portion of CRE and profit financially from monthly rental revenue or interest earned on the security deposit amount.
But how do REITs and fractional ownership stack up against one other?
REITs (Real Estate Investment Trusts) are similar to mutual funds in that they invest in real estate.
REITs aggregate money to invest in lucrative real estate on your behalf, similar to how mutual funds pool money to invest in government bonds, direct equity, stocks, and other assets.
These properties are leased to businesses, and the part-owners receive a portion of the profits.
REITs, on the other hand, do not provide you the option of picking the property you want to invest in.
Fractional investing in real estate, on either hand, is something you may do at your leisure. First, fractional ownership platforms make the CRE property available for investors to see.
The minimum ticket size or proportionate real estate investment is then determined based on the market value of each property.
Finally, you may pick how many servings you wish to own based on the ticket price.
Consider this: if there are a total of 10 tickets available and you opt to buy two of them, you now own 20% of the property and are entitled to a part of the proceeds.
6. What is the Nature of Risk in Real Estate?
- It’s an immobile asset that’s mostly immune to market risk.
- As a result, it is an illiquid asset.
- Occupancy Issues
- Tenants Leaving Commercial Real Estate Early Fractal Ownership Allows a larger number of investors to pay their portion of a larger investment in the asset.
- Their reward is proportional to the amount they contributed as a percentage of the total.
- Based on their investment, each investor is the owner of the asset.
7. What Should You Consider Before Investing in Fractional Ownership?
Due to the obvious numerous benefits, total transparency, and safety, investing in CREs is considered a sensible decision.
When it comes to fractional ownership real estate investment, however, there is no replacement for expertise.
The variables listed below might assist you in making a better CRE investment selection.
- Extensive market research: In India, fractional ownership is a relatively new idea, and only a few start-ups provide CRE investments. The majority of these businesses are led by wealthy investors. It’s essential to do your homework and find a firm with qualified executives and a large investor network.
- Get the greatest deal possible: When compared to other considerations such as examining the current market price of that particular property, finding a property with the best return on minimum investment is a rather simple undertaking. Experienced investors understand to seek a deal where they are not paying more for a property than it is worth.
- Look for solutions that are tailored to the needs of the customer:Look for enterprises or prop-tech organizations that offer simple exit strategies and assure maximum capital gains and a strong long-term income.
“The rich become richer, and the poor get poorer,” you’ve probably heard.
This phrase may be true for investment prospects in our nation, where attractive opportunities such as Commercial Real Estate (CRE) are exclusively accessible to High Net Worth Individuals (HNIs).
Retail investors, on the other hand, could only invest in high-risk stock markets or low-return provident funds.
The CRE market has been democratized with the advent of fractional ownership, and it can now be accessed by the common person.
Fractional ownership is a new yet promising idea in India that allows numerous investors to come together, pool their money, and buy a CRE property.
It is already popular in most Western countries, Singapore, Hong Kong, and other Asian cities.
8. What Are the Benefits of Partially Owning a Business?
The main advantage of fractional real estate is that it makes vacation home ownership more affordable—as long as you don’t mind sharing the property with your co-owners, that is.
- Paying just for what you use: If you only intend to use the property for a portion of the year, it may be more cost-effective to share a property rather than purchase one on your own.
- Lower maintenance costs: Another benefit of fractional ownership is that the owners share the property’s upkeep costs. For example, if anything breaks in the house, the cost of repair is less expensive for each owner than it would be if one of the partners owned the entire property. Cleaning and upkeep are also less expensive when done regularly.
9. What Are the Negative Consequences of Fractional Ownership?
Fractional ownership has some drawbacks, such as sluggish purchasing and decision-making progress.
- Finding realtors can be tough: Finding a real estate agent or a bank ready to deal with you to arrange a mortgage on a jointly held asset might be challenging.
- High upfront costs: Buying the property outright may be more expensive in the long run than placing a down payment on a house or condominium that you would own outright.
- Decision-making takes longer: Collaborative ownership may or may not imply collective decision-making, depending on the provisions of the ownership agreement. And everyone has a say, resolving everyday problems may rapidly become a nuisance. When a member wishes to sell their share of the property, the same issues may arise.
- Homeowners associations have several issues: The local homeowners association may impose limits on communally owned houses or properties that are rented out for a significant portion of the year, depending on the region where you acquire the property. For the sake of ownership, you may have to jump through more hoops than you’re willing to.
Over five years, a Rs 25 lakh investment in fractional ownership would provide Rs 10 lakh in rental income (2 lakh x 5 years at 8% rental return), while your equity will increase by Rs 6.9 lakh (at an assumed capital appreciation rate of 5 percent annually).
As a result, your investment will provide total returns of Rs 16.9 lakhs and a maturity amount of Rs 41.9 lakh.
In comparison, a Rs 25 lakh fixed deposit will yield roughly Rs 32 lakh (at 5% interest), while PPF and bonds will also yield moderate returns.
Gold can help you secure your assets, but it lacks the income or capital gains benefits other fractional investments provide.
When all factors are considered, fractional ownership may be a good investment for you in Samvat 2078.
It will not only help you diversify your portfolio, but it will also aid in the growth of your wealth and the protection of your investments from market changes.