How fractional ownership affects the commercial real estate industry

The experts have predicted that fractional ownership in India will reach $5 billion in a few years. As a society, we have placed a great deal of faith and loyalty in real estate investments. One of the most important class symbols that guarantees your place in the community’s upper strata is land ownership. Despite the fact that previous generations were able to invest their life savings in gold and real estate relatively quickly, modern urbanites are only allowed to invest in residential apartments or small plots of land. Meanwhile, we as a population of humans also experience a number of constraints that make it challenging to make successful investments.

Since there is a shortage of land in our country, especially in a country where the population is growing, real estate has ultimately proven to be a profitable investment. However, it is also out of reach for those looking to jump on the landowner bandwagon. People prefer to invest in commercial real estate (CRE), which guarantees better rental cash flow, rather than depreciating assets. But CRE demands more money, better connections, and thorough understanding of the real estate industry. Because of this, only High Net Worth Individuals (HNIs) or Ultra HNIs are permitted to participate in this elite sector of the investment industry. 

After the pandemic took everyone on a financial run, fractional ownership of CRE has emerged as a promising idea for safe investments that would offer long-term capital appreciation and daily returns as well. Fractional ownership real estate ownership is a boon for regular people looking to make profitable investments due to its low risk and high return characteristics. Learn more about fractional property ownership and how it can help regular people by reading on.

Fractional Ownership 

Ownership is our sole right to any property. However, as the name implies, fractional ownership is the concept of owning only a portion of any property rather than being the sole proprietor with all rights. Currently, investing in commercial real estate in India can be profitable, but there are certain financial obstacles that prevent the average person from entering the market. 

For instance, if there’s a luxury office worth Rs 100 crore in prime location in Delhi. Only High Networth Individual can afford to invest in it. A typical citizen offering only Rs 10 Lakh cannot claim it, despite the fact that it offers numerous benefits and is a secure investment option. But what if several people band together, combine their resources, and make a bid on the commercial property in question? That would imply that everyone would receive a portion of the office and split the benefits equally. Everybody who invested in the office space could receive rental returns and long-term capital benefits as time passes and real estate’s market value rises.  

That is exactly what the idea of fractional ownership of real estate intends to achieve. It enables those with little capital to participate in the ownership of commercial real estate.

As the commercial real estate (CRE) market is predicted to grow by 13% to 16% over the next five years, fractional ownership of CRE is steadily increasing in India. The fact that the country expects an increase in the demand for office space in the upcoming years, an increase in the number of large institutional investors, and a sizeable inflow of foreign capital related to numerous commercial projects are some of the elements that could contribute to this anticipated boom. Significant capital growth is more likely as a result of each of these factors.

Grade A properties are typically involved in commercial real estate, and they are frequently leased by large businesses like multinational corporations, banks, warehouses, factories, or information technology companies. In contrast to residential tenants, such organizations don’t typically leave the property abruptly and put the owner in a bind. On the other hand, a rental lease for allotting commercial spaces is extended by three years or more. As a result, renting property to businesses has a number of advantages, including on-time rent payment and complete control over setting up the space to suit their needs. Additionally, because they use the property as an office, they make every effort to keep it organized and are more likely to renew their lease than to look for another location to establish their business. 

Many interested parties are looking to invest in fractional shares of Commercial Real Estate because they see a monthly deposit in their bank account and the constant increase in the market value of a property. 

Possible Fractional Ownership Approaches / Models

While understanding the structure and process of co-ownership agreements is an important first step in purchasing a property, it is also important to understand the various models that offer various benefits. The first model is known as the “Pay-to-use” model, in which the co-owners pay a pre-agreed “usage fee” for a daily or weekly usage. The costs of ownership are covered by this usage fee as well as any additional income from the property’s rent. If all of the revenue—including usage fees and rental income—exceeds all of the costs, the surplus is divided among the property owners. Additionally, the purchase price and ownership of the property are divided according to what each co-owner can afford, their respective investment objectives, and any other factors that the owners’ group collectively finds useful. 

The “Usage Assignment” model is the second one used to distribute usage rights. Under this model, each owner is granted the right to use a piece of property exclusively for a set number of days, weeks, or even months over the course of a year. The time frames for such use may be flexible, fixed, or even a combination of the two. The property may also be used by the co-owner to be rented out, traded, or even left vacant during each co-owner’s designated period of use.

The different ways of splitting the benefits of using the asset, the rights associated with each member, ensuring priority access, and providing those at lower market rates are basically what the different types of usage as part of the fractional ownership model entails. The only difference between timeshare and fractional ownership is that the former allows the investor to own a portion of the real estate rather than time-based units. This means that if the asset’s value rises, so will the benefits and surplus shared by the co-owners.

Does Investing in Fractional Real Estate Support Liquidity?

Liquidity is the ability to convert an asset into cash without depreciating its market value. Liquidity is a key concept to consider when investing that is advantageous to both businesses and investors. Cash is the most liquid asset in a technical sense because it can be used for transactions in any form. Rare metals are typically seen as having higher liquidity, while commercial properties are seen as having lower liquidity.

Fractional ownership has made it simple for the part-owner to sell commercial real estate. For instance, a person who has a fractional property investment can quickly transfer their share of the property to another willing investor if they wish to sell their share. Also keep in mind that sole ownership of a property does not give the owner the same level of flexibility to switch between investments.

Fractional Ownership Vs. Real Estate Investment Trust (REIT)

Risk and investment are mutually exclusive. There is no way to guarantee that your investment will have no risks over time while also ensuring that it will generate large profits for you. However, you can always research the market, consider the most recent trends, and seek professional guidance on how the real estate industry might develop in the upcoming years. Commercial real estate is currently in great demand due to its rising market value. However, there are drawbacks to CRE, such as the enormous capital requirement that small-scale investors cannot afford. The only people who could benefit from CREs were High Net Worth Individuals (HNI). 

However, with the development of ideas like REITs and fractional ownership, a regular person can now purchase a piece of CRE and benefit financially from monthly rental income or interest accrued on the security deposit amount. But how do REITs and fractional ownership compare?

Real Estate Investment Trust (REIT)

REITs (Real Estate Investment Trusts) are similar to mutual funds in many ways. REITs pool money to invest in profitable real estate on your behalf, much like mutual funds do when they invest in things like government bonds, direct equity, stocks, etc. Such properties are leased to commercial entities, which allows the part-owner to receive their capital share. However, REITs do not give you the freedom to choose the property you want to invest in. 

However, you have a choice regarding fractional real estate investing. First, CRE property is listed on fractional ownership platforms for investors to check out. Following that, the minimum ticket size or fractional real estate investment is chosen based on the market value of each property. Finally, you can decide how many portions you want to own based on the ticket price. If there are a total of 10 tickets available and you choose to buy two of them, you now own 20% of the property and receive your share of the revenue it generates, this is one of the more ideal fractional ownership examples. 

Vacation Ownership vs Fractional Ownership 

If a fractional owner wants to use the home for personal purposes, they must make arrangements with the property management companies. Each property or management company may have restrictions on how much time its customers may spend at the vacation home. Owners of fractional shares are not required to use all of their allotted time themselves. They could give some of their time to close friends, family members, coworkers, and even employees. By informing the property managers in advance, fractional owners may lease their unused time to other owners or make it available to third parties who are not owners.

Differences Fractional Ownership and Between REIT 

• With fractional ownership you can diversify your investments and buy a number of properties in various locations thanks to fractional ownership. REITs present a fixed portfolio with a fixed number of assets. 
• You can sell your share whenever you want with fractional ownership. REITs, on the other hand, cannot be transferred or sold at the investor’s choice. 
• There is no set minimum value for investing in commercial real estate through fractional ownership. REITs have a minimum value of Rs 500 crore, which limits property options.
• Property that is under construction or not currently in use can be acquired through fractional ownership. According to SEBI guidelines, REITs must invest at least 80% of their capital in income-generating properties. 

Things to Consider Before Investing in Fractional Ownership

Investing in CREs is regarded as a wise decision due to the numerous benefits, complete transparency, and safety. When it comes to investing in fractional ownership real estate, however, there is no substitute for experience. You can choose more wisely when it comes to CRE investments by considering the factors listed below. 

• Extensive market research reveals that fractional ownership is a relatively new idea in India, and that few start-ups offer the chance to invest in commercial real estate. These start-ups are typically managed by wealthy financiers. The best course of action is to do your research and identify the business with strong executives and a wide investor base. 
• Get the best Deal by Comparing other factors, such as assessing the current market price of that particular property, finding a property with the highest return on minimum investment is a fairly simple task. In order to avoid overpaying for a property, experienced investors know to search for deals. 
• Look for businesses or prop-tech companies that offer simple exit options and guarantee the highest possible capital gains with a high yield over the long term. Check for solutions that are focused on the needs of the customer.

The saying “the rich get richer and the poor get poorer” is probably one you’ve heard. This statement may be considered true in terms of investment opportunities in our nation, where high net worth individuals (HNIs) are the only ones who can afford promising opportunities like commercial real estate (CRE). The only options available to retail investors at the time were low-return provident funds or high-risk stock markets. Fractional ownership, however, has democratized the CRE market and made it accessible to the average person. Fractional ownership is a recent concept in India. However, it is already well-established in the majority of western nations, Singapore, Hong Kong, etc. This enables multiple investors to band together, pool their funds, and purchase a CRE property,

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