Will Real Estate Fractional Ownership Affect the Commercial Real Estate Market?

A new idea in real estate is fractional ownership, which is similar to REITs but different in a few ways. On the other hand, real estate investment trusts (REITs) are publicly traded companies that own income-producing real estate. Investors pool their money and purchase real estate together in fractional ownership commercial real estate. Even though the idea is to rent it out and make money from the rent, many investors are also getting into fractional ownership to have offices for short-term needs.

Many different transaction structures fall along fractional property investment since this is a developing asset class. In the current market for commercial real estate, two primary models can be used for fractional property ownership. Investors are purchasing commercial properties that return rent on an organised level in tier-1 cities to rent them out. However, investors also purchase fractional ownership for limited self-use in tier-2 cities and peripheral places. This is done to maximise their return on investment. For instance, a person looking for a small office can buy a portion of the ownership of a posh office building with an investment of as little as five lakhs of rupees, approximately. If it were acquired outright, the identical office space might be expected to cost fifty thousand rupees (Rs.).

The Benefits of Fractional Property Ownership

Would ownership of commercial properties on a fractional basis affect how they are traded on the market? Why is there such a positive outlook on fractional ownership, to the point that it even threatens to outshine real estate investment trusts (REITs) in India? The explanation can be found in the perspective people in India have toward investments in general and real estate investments in particular.

To begin, while considering an investment, Indians always prioritise the usability of the asset, often placing this priority higher than the return on investment (ROI). One of the many reasons gold investment is valued more than purchasing a wide variety of other financial products is because of this.

Second, you have more control over the investment when you have a fractional ownership stake. One can conduct an analysis of the investment and come to a conclusion while holding the tangible product in their hands. Conversely, REITs amount to nothing more than a piece of paper in your possession.

Thirdly, most Indians are risk cautious regarding the financial sector. The fact that many people continue to choose bank fixed deposits, which provide rates lower than the rate of inflation over stocks or mutual funds, is evidence that this is the case. Having a physical property can give much-needed protection from the ups and downs of the market.

Advantages and Disadvantages of Fractional Ownership in Commercial Realty

The Sandbox Regulation of the SEBI applies to fractional ownership because it is more like a private portfolio than a regulated portfolio. Since it started to become popular in India, fractional ownership has been used to make transactions worth Rs. 750 crores in the first five years.

If you don’t count capital gains tax and only look at net yields, fractional ownership has done better than REITs, with returns of 8%-8.5% compared to 7%-7.5% for REITs. Therefore, it is more for risk-taking investors and not for risk-averse investors. The main benefit of fractional ownership is that it allows you to invest in a known asset that can make money and be physically inspected. So, there is always some kind of capital protection in sight, which isn’t the case with tradable asset classes like REITs, where the retail investor has no control.

Since there are several benefits of real estate investing, you can put your investment in the right place and avail of the benefits in the long run.

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