How can fractional ownership in commercial properties help you build wealth?

By Christian Nordqvist

We have placed a great deal of confidence and commitment in real estate investments as a society. Land ownership is seen as one of the most important class emblems, ensuring your place in the community’s higher echelons. However, while previous generations were able to spend their life savings in gold and real estate relatively fast, today’s urbanites are constrained to investing in residential units or tiny pieces of land.

Because of our country’s growing population, land is scarce, which means that real estate has proven to be a profitable investment. At the same time, it is out of reach for those wishing to become landowners. Instead of investing in deteriorating assets, consumers choose to invest in Commercial Real Estate (CRE), which provides a higher rental income flow. CRE, on the other hand, needs greater contacts, in-depth knowledge of the real estate sector, and a substantial investment. As a result, only High Net-worth Individuals (HNIs) or Ultra HNIs can participate in this elite segment of the financial market.

After the pandemic sent everyone into a financial tailspin, fractional ownership of commercial real estate has arisen as a promising notion for dependable investments that would deliver both long-term capital appreciation and daily profits. Because of its low risk and high return characteristics, fractional ownership real estate ownership is a blessing to ordinary folks wishing to make lucrative investments. Read on to learn more about fractional property ownership and how it may benefit the average person.

What is fractional ownership?

Our exclusive right to any property is dictated by ownership. However, as the name implies, fractional ownership is the notion of owning only a portion of any property rather than being the only proprietor with all rights. Commercial real estate in India is a good business right now, but it has special financial restrictions that prevent common residents from entering the market. 

For example, in one of Delhi’s top sites, there is a luxurious office facility worth Rs 100 crore. Because of the extremely large capital expenditure required, only a High Net-worth Individual (HNI) can afford to buy it. Even though it promises several benefits and is a secure investment choice, an average person with only Rs 10 Lakh cannot claim it. But what if a group of individuals band together, pool their resources, and make a bid on the Commercial Real Estate in question? That is, each individual gets to own a portion of the workplace and divide the profits equally. As time passes and the market value of real estate rises, all those who invested in office space will be able to collect rental returns while also reaping long-term capital gains. That is exactly what the notion of fractional ownership of real estate intends to accomplish. It enables persons with low resources to participate in the ownership of the commercial real estate.

Fractional ownership investments in commercial real estate opportunities can be carried out with online platforms. If you are looking for an ideal investment platform to start your investment in the commercial real estate sector with fractional ownership, then Assetmonk may be your best choice. They offer some of India’s top-notch investment opportunities with an IRR of 14-21%. 

Why is Fractional ownership in commercial investments growing?

In India, fractional ownership of commercial real estate is progressively increasing, with the CRE market predicted to rise by 13% to 16% over the next five years. Some of the causes for this anticipated boom might be connected to the country’s increased need for office space in the future years, growth in the number of significant institutional investors, and a substantial infusion of foreign money associated with several commercial projects. All of these elements add to the possibility of significant wealth appreciation.

Commercial Real Estate often consists of Grade A properties that are frequently leased by Multinational Corporations, Banks, Warehouses, Factories, or Information Technology firms with large budgets. Unlike residential renters, such organizations do not often depart the premises on short notice, putting the property owner in a dilemma. A rental contract for assigning commercial space, on the other hand, is for three years or more. As a result, one big advantage of renting land to commercial organizations is that they pay the rent on time and design the entire space to their specifications. Furthermore, because they utilize the property as an office, they devote all of their efforts to keeping the space organized and are more inclined to extend their lease rather than seeking a new location.

Many interested parties are eager to invest in fractional 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.

Fractional ownership and liquidity in commercial real estate

Liquidity refers to 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 technically the most liquid asset because currency in any form may be utilized in transactions. Rare metals are often regarded as more liquid, whereas commercial properties are considered illiquid assets.

Commercial Real Estate may now be readily liquidated by the part-owner thanks to the advent of fractional ownership. For example, if a person with a fractional property investment wishes to sell their piece of the property, they may rapidly transfer their portion of the property to another interested investor. Also, keep in mind that sole ownership of property does not provide the proprietor with the same level of flexibility in switching between assets.

Fractional Ownership or REITS- The better choice for commercial investments

Investment and risk are inextricably linked. There is no way to guarantee that your investment will be risk-free for a long time and will fill your pockets with large sums of money. You may, however, constantly research the market, look at current trends, and get a professional opinion on how the real estate sector might appear in the next few years. Commercial Real Estate is currently in great demand due to its ever-increasing market value. CRE, on the other hand, has limits, 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, a regular person may acquire a portion of CRE and profit financially from monthly rental revenue or interest on the security deposit amount.

The concept of REITs (Real Estate Investment Trusts) are similar to that of mutual funds. Similar to how mutual funds pool money to make investments such as government bonds, direct equity, stocks, and so on, REITs pool money to invest in successful real estate on your behalf. Such assets are leased to businesses, and the part-owner receives their share of the capital as a result. However, REITs do not provide you the option of selecting the property in which to invest.

Fractional real estate investing, on the other hand, occurs at your discretion. To begin, fractional ownership platforms display CRE properties that investors are allowed to see. The minimum ticket size is then determined depending on the market price of each property. Finally, you may select how many servings you wish to own based on the ticket price. For example, if there are a total of ten tickets available and you decide to buy two of them, you now own 20% of the property and receive a portion of the proceeds.

What are the distinctions between REITs and fractional ownership?

  • You may diversify and invest in many homes in different areas with fractional ownership. REITs provide a predefined portfolio with a predetermined number of assets.
  • Liquidity is provided via fractional ownership, which allows you to sell your share whenever you desire. REITs cannot be transferred or sold at the discretion of the investor.
  • There is no predetermined minimum value for investing in CRE through fractional ownership. REITs have a minimum valuation of Rs 500 crore, which lowers property selections.
  • Property that is under development or is not already in use can be acquired through fractional ownership. According to SEBI standards, REITs must spend at least 80% of their capital on income-producing assets.

Tips to keep in mind to start investing in commercial options through fractional ownership

Investing in CREs is seen as a sensible decision because of the numerous benefits, total transparency, and safety. When it comes to fractional ownership real estate investing, however, there is no replacement for expertise. The variables listed below might assist you in making a more informed decision about CRE investments.

  • Extensive market research 

Fractional ownership is a relatively new idea in India, with just a few start-ups offering the option to invest in commercial real estate. The majority of these start-ups are led by wealthy investors. It is essential to undertake a study and identify a firm with qualified management and a large investor network.

  • Get the greatest price possible

When compared to other considerations such as examining the current market price of that particular property, searching for a property with the best return on minimum investment is a very simple undertaking. Experienced investors understand that they should hunt for a bargain in which they do not pay more than the market price for a property.

  • Look for solutions that are focused on the client

Look for enterprises or prop-tech organizations that offer simple exit strategies and assure maximum financial gains with a high long-term return.

You’ve probably heard the expression “the rich get richer and the poor become poorer.” This phrase may be deemed accurate for investment possibilities in our nation, where promising prospects such as Commercial Real Estate (CRE) are exclusively available to High Net Worth Individuals (HNIs). At the same time, retail investors were limited to high-risk stock markets or low-return provident funds. However, with the advent of fractional ownership, the CRE market has been democratized and is now accessible to the common person. Fractional ownership is a new yet intriguing 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 nations, Singapore, Hong Kong, and so on.

You may be interested in: What is a Real Estate Investment Trust (REIT)?