It is well known that retail investment in India surged dramatically during the pandemic and continued thereafter. According to SEBI, nearly 26 lakh demat accounts were opened every month in 2022, as against a monthly average of four lakh in 2020.
While this growth was likely, not many would have guessed that it would happen so quickly, and the adoption would cut across various traditional and new age financial instruments, including mutual funds and real estate.
Perhaps, Indians have always had an affinity towards the real estate industry. But complex processes and soaring prices have restricted most investors to the residential market and deterred them from investing in commercial real estate.
Amidst this, fractional ownership is granting retail investors access to high-value commercial properties and rapidly gaining ground with its potential for high returns, ease of tracking, and diversification benefits.
MFying fractional ownership
Two of the top investment trends of the last decade – stocks and mutual funds – grew on the back of their flexibility and liquidity. They empowered investors and created investment convenience by leveraging technology. These two reached a recent high by enhancing awareness to increase the mass appeal and understanding of the products.
In a parallel world, REIT and fractional ownership have emerged as a new asset that are offering access to a broad selection of real estate properties. Yet, REIT comes with its own set of limitations, including limited growth potential. Conversely, fractional ownership has the same or perhaps even more potential than any of these investment vehicles.
Today, there are various digital platforms that allow retail investors to participate in fractional ownership of commercial real estate assets, such as warehouses, industrial plots, data centres, malls, and other buildings without a hefty investment.
The first pillar - safety
Fractional ownership enables investors to gain ownership of a ‘fraction’ of grade A or highest quality commercial real estate. Yet, the bigger question is whether fractional ownership can be MFied? Yes. Data shows that fractional ownership can render a capital appreciation of 5% and a rental yield of 8% per annumover a five-year period. So, it is comparatively safer than riskier assets, yet it yields more capital appreciation than the safer assets.
Consider the case of a residential property where the onus of finding a tenant rests solely with the owner as does a loss of rental yield due to inoccupancy. On the other hand, fractional ownership implies the ease of finding tenants, which in turn translates to higher yields. Considering that companies managing the commercial real estate scout for reputed corporates as tenants and have long-term contracts with lock-in agreements, there is a low potential for loss of rental income.
This safety is also replicated when addressing management, maintenance, and repairs of the property. With fractional ownership, the upkeep of the property is taken care of by the company managing it the properties that investors have purchased fractions in.
Finally, the rental yield and capital appreciation of ‘fractions’ owned by the investors are almost assured as commercial real estate, unlike residential properties, is usually located in popular business centres that are always in demand by corporations.
The second pillar – long term wealth generation like mutual funds
When compared to traditional investment, such as a fixed deposit, fractional ownership in commercial real estate can yield 27.37% more return on investment over a five-year period. Much like mutual funds that have a dividend reinvestment plan, the fractional ownership model can create attractive returns over the long term if investors start investing the rental yield and capital appreciation back to own more fraction.
To simplify, let us take an example. An investor, who usually makes an annual investment of ₹1.5 lakhs in mutual funds, decides to make an initial investment of ₹25 lakhs in a Grade A commercial property. For better parity with mutual funds, let us assume that property prices grow at 7% each year. In six years, the value would therefore be ₹38 lakhs.
Simultaneously, the rental yield for the first three years will be approximately 9% and around 10% from the fourth year as there is an increase in rental yield every 3 years. The total rental income for the period therefore would be ₹14 lakhs. Going by these numbers, the total return on ₹25 lakhs in six years would be ₹52 lakhs. This would then suffice to meet life goals such as higher education or saving for retirement in a shorter time frame as compared to a mutual fund.
Third pillar - Easy to invest and transparent transactions
Fractional investment offers easier entry points into high-value properties and eases risk management as investors can buy a fraction, instead of purchasing the whole property. Further with the fractional ownership platforms entering the arena, investors can gain access to distinctive data insights of every property and personalised services that are remotely accessible at any given point.
As we go forward, more investors will turn to fractional ownership to access high value properties and diversify their portfolios. Fractional ownership’s mutual fund moment is going to be about reducing the impact of market volatility and offering significant liquidity. It will be about the amalgamation of a unique investment vehicle with income stability and high returns.
Shiv Parekh, Founder and Chief Executive Officer, hBits