In India, commercial real estate rental yields are better than residential yields. This is the reason why many people want to invest in commercial real estate. But problem is that it’s not affordable for most. A good commercial property requires crores worth of investments – something which isn’t possible for regular people.
But this problem is now being solved – via Fractional Ownership of Commercial Real Estate (CRE). Many online investment platforms allow small investors to get fractional ownership in ‘Grade-A’ commercial real estates, in prime locations like tech parks, etc. located in large cities and industrial hubs across India. That too with a smaller investment amount ranging from Rs 10 to 25 lakh.
These technology platforms are lowering the entry barrier for investing in commercial realty. While you don’t own the property in full, you still, in a way become, what I call a Laptop Landlord!
This is one way to get your feet into the lucrative commercial real estate without a huge upfront investment. I call it lucrative because a high-quality commercial real estate property, in a good area, can easily generate 8-15% annualized return via rentals with minimal volatility. This is in addition to any future rise in price which you get at the time of sale.
How does Fractional Ownership Work?
In the fractional ownership model, multiple investors come together to hold the combined ownership of a single asset. Each person gets to own a percentage or a small fraction of the property.
Suppose there is a pre-leased office space worth Rs 50 crore in a prime location in Bengaluru, Mumbai or New Delhi. This property generates close to Rs 4 crore in rental every year. That is, it has a rental yield of 8% in addition to any long-term capital appreciation potential.
Now as a small investor, you cannot put up the entire Rs 50 Cr to purchase this.
But via Fractional Ownership platforms, you and many others like you can get together to pool the money required. Let’s say, 200 small investors together put in Rs 25 lakh each. This totals Rs 50 crore which is the cost of the property.
Now the platform (fractional ownership platform) will create a private limited company or Special Purpose Vehicle (SPV) for each property being funded. This SPV pools in the money required and once done, it buys the property on behalf of all the investors who pooled the money. Property registration happens between the seller and the SPV, while each individual investor becomes a shareholder in the SPV.
Since the property we took as an example is generating Rs 4 Cr in annual rentals (or let’s say Rs 33 lakh monthly, this gets split across all 200 investors who bought in a fraction of 0.5% each in the property via the SPV. That is, each person will start getting about Rs 2 lakh yearly in rentals. This is 8% on an investment of Rs 25 lakh.
The actual yield (in the example) might be a bit lower as I have ignored the platform’s own management fee, etc. But given the high rental yields of CRE commercial properties, it can still be a lucrative investment. The fractional ownership model gives small investors access to premium commercial properties, at affordable and smaller ticket sizes. And since commercial properties have long leases and more reliable cashflows, these can be quite stable investments from a rental yield perspective.
Risks in Fractional Ownership
Mind you, this model is more like a privately curated portfolio than a regulated one which is crowdfunded. It is also not regulated by SEBI, RERA or any other regulator. There are no clear regulations in place like those we have for mutual funds or ETFs.
So it is not exactly risk-free though practically speaking, risks might be lower for really good pre-leased properties.
Still, it may seem like a rent-generating instrument and a kind of pseudo-debt asset. But it’s more for those who are willing to take risks and not for risk-averse investors. So the investors who want to get into this should understand the risks and only then invest.
Returns on Fractional Real Estate
Commercial real estate in India has much higher yields than residential ones. So while on residential spaces you get a 2-4% rental yield, the same is 8-15% for commercial properties.
For most fractional ownership SPVs, then yield in the range of 8-12% per annum is generally pre-determined. It is generally paid on a monthly or quarterly basis. But nothing is guaranteed here by the platform or the SPV or the trustees of the SPV. Though it may not seem probable if the tenant is unable to pay rent or the property is vacated without new tenants, then neither the SPV will get any rental income nor the investors like you will get anything till the time new tenants start paying rent. This is the same risk that you face when you put your own property on rent. Nothing odd about this.
That was about regular passive rental income. But what about exiting investments?
It is possible. One option is to sell it via the platform itself – like a secondary sale (resale). Other is when a majority of the investors vote in favour, then the property itself can be sold off and the sale money is paid back to investors in accordance with their fractional stakes.
Taxation of Fractional Real Estate
The rental income paid periodically is added to your total income and taxed at the tax slab rates.
If the property (via SPV) is sold off then profits made on the sale are treated as capital gains and taxed at slab rates if sold in short term or at 20% with indexation of the period held qualifies as long term.
REIT vs Fractional Ownership
How different is Fractional Ownership from REIT (Real Estate Investment Trust)? REITs in India are much more secure as they are regulated by SEBI.
But as of now, the REIT yields are lower than what fractional ownership portals offer as indicative yields.
Should you Invest in Fractional Real Estate?
First of all, understand that it is lucrative but it’s not risk-free. Every financial product has its inherent risks. So just like physical real estate, even fractional real estate investments have similar risks. If the property remains vacant, investors would not get any rent or rental yield. Plain and simple.
Second, this is an unregulated space so that in itself is something to keep in mind. In good times, the regulator doesn’t seem important. But when things go bad and your money is stuck on the line, then you will be desperate to approach a regulator. Just like the people who had money in banks which failed recently had RBI to take care of them. There is no recourse in this case as there is no regulator.
Third, this is for the long term. Be willing to remain invested for up to 5 years if not more. Don’t consider this for short-term buying and selling. Treat real estate like real estate (that is for holding) even if it is just fractional ownership.
Fourth, be cautious of all the platforms out there. Since this is an unregulated space, many players might enter and do their business. But you need to ensure the profile and quality of the investable real estate. And it can vary hugely from one platform to another. Also, real estate investments like these depend a lot on the team managing them as it’s about getting tenants, keeping them, etc. So do check that aspect also.
So that was about fractional ownership investing in commercial real estate in India (2022).