Commercial real estate is a playground for the rich. Well, it used to be. With new real estate opportunities bursting at the seams, small investors can now invest and play alongside the rich in the commercial real estate market. So, what are these trends that are making commercial real estate more accessible to retail investors?
Table of Contents
Physical in nature, consistent returns and collateral value, commercial real estate is a popular asset class for HNIs and institutional investors. On the other hand, expensive capital expenditure and extreme illiquidity made it only a dream for ordinary investors. For example, if you buy a premium commercial property, you have to invest millions of crowns, maintain it, pay property taxes and find a tenant.
These properties produce high rental yields and are incredibly promising in terms of capital appreciation. However, given the average ticket size, the required investments remain unaffordable for the retail investor.
However, thanks to modern technology and investment platforms, investors can now add commercial real estate assets to their portfolios. They can invest in real estate without owning, operating and managing it. Partially investing in commercial real estate and buying a REIT allows you to put money into these top commercial buildings and earn monthly rental income. Thus, it helps in the accumulation of long-term wealth.
What exactly are REITs?
REIT is short for real estate investment trust. Most people wouldn’t have invested in REITs ten years ago. However, REITs have grown in popularity among institutional and retail investors due to bright prospects for future office construction. REITs are tax-advantaged investments in income-producing real estate. A REIT was formed when a sponsor transfers ownership of assets to a trust in exchange for units of the trust. Think of it like a mutual fund that collects money from investors. In return, they will receive unit certificates of mutual funds. REITs, rather than stocks, represent ownership of real estate. Dividend payments and capital appreciation are REIT income.
SEBI has three REITs and two InvITs listed in India (Infrastructure Investment Trusts). In theory, invitations and REITs are the same thing. REITs own and operate office buildings. InvITs also own and operate infrastructure such as highways, bridges, dams and power grids to name a few. The history of REITs and InvITs in India is not very far, which shows that REITs are a new trend that has caught up with the Indian real estate investment market in a massive way.
What is the process of investing in a REIT?
REIT units, like shares, can be acquired on the main markets, BSE and NSE, through regular trading accounts. REITs debuted in India in 2019. Embassy Business Park REIT is the first REIT listed in India. In India, public REITs are registered with SEBI and are currently operational. REITs are also traded on stock exchanges.
REIT stock prices fluctuate on stock exchanges. These are dependent on units on demand and the performance of the REIT. SEBI has introduced two critical revisions to the laws governing REIT investments in India to attract investors. The earlier required minimum of Rs 50 thousand for investors to invest in REIT units has been removed. The minimum amount to invest in an IPO is now between Rs 10,000 and Rs 15,000. Another regulatory change is the increase in REIT lot size, currently 100 units. As a result of the same SEBI rule, the average lot size has been reduced from one hundred units to one unit.
What is fractional ownership?
Real estate purchases are sometimes accompanied by large down payments and lengthy repayment periods that can last for decades. While investing in residential real estate is well-known and tax-advantaged, investing in commercial real estate is time-consuming.
Individuals who are not necessarily familiar can now become co-owners of a property by investing a small amount of money and sharing the ownership and revenue proportionally.
What exactly is fractional ownership? Fractional ownership means that a group of people can own parts of a commercial real estate asset rather than the entire unit. For example, a 1,000 sq ft office building in Hyderabad may be owned by ten unique unrelated persons, each contributing Rs 5 crore.
So each unit owner owns 100 square feet of the same unit, receives one-tenth of the total rental income, and can keep the investment at the property’s current market value whenever it appreciates. But how or where can we start with fractional ownership? For example, Assetmonk is one of the best fractional ownership real estate companies that can help you. Assetmonk provides fractional ownership opportunities in high-quality commercial real estate to any investor with a minimum investment of Rs. 10000000.
Wondering where to invest your money?
With so many differences between these two real estate investment options, it’s reasonable to ask which option is best. In fact, neither is objectively better than the other. Both can generate significant income. Every commercial real estate investor has their own preferences, risk tolerance and time horizon. One of the two options may better suit a particular person’s needs. So each investor must do their own research and choose the solution that best suits their circumstances. Both fractional real estate and REITs work in completely different ways and can provide different benefits to investors.
So if you are thinking of investing in any of them, keep the following points in mind.
Transparency and Diversity:
Because REITs have no connection to the S&P 500, their inclusion in a diversified investment portfolio increases returns while reducing risk. This provides a portfolio with a fixed number of assets over which the investor has no influence. It works similar to a mutual fund in that you can choose a basket of goods but not candy. This makes REITs less dependent, as underperformance or inefficiency of any asset will reduce cumulative returns. On the positive side, the impact on individual holdings will be reduced because it will be dispersed among a wide variety of REIT investors rather than a few highly active investors. Fractional ownership provides complete democracy of assets based on investor preferences. It allows the investor to choose from different assets according to the region and investment needs.
Asset and Ownership Requirements:
The asset is selected after extensive thorough research and return calculation in the fractional ownership model. So there is no minimum value that must be met. In addition, there is no lock-in period. It means that an investor is free to sell their ownership of an asset share to interested parties after the minimum asset holding is over. The REIT has a minimum asset requirement of Rs 500 crore. It limits the number of properties it can operate. In addition, the REIT does not allow the transfer of ownership or the opportunity to sell the relevant interest.
As per Sebi standards, a REIT’s real estate portfolio must contain 80% of developed income generating assets. Up to 20 percent of the asset value can be invested in properties under construction, completed but non-rentable buildings and public or unlisted real estate company loans. On the other hand, as a highly regulated trust, it prevents the spread of creative growth models. Because fractional is self-regulating, it allows investment structures to grow across a range of income-producing assets, resulting in higher long-term returns. In addition, a consistent supply of quality properties provides investors with investment opportunities.
Asset Acquisition and Cash Flow Distribution:
One thing that really works in REIT’s favor is the cheap entry fee, and once the units are listed, they can be traded on exchanges, helping you avoid a liquidity problem. However, REITs distribute 90 percent of their net distributable cash to their investors. Fractional ownership allows cash flows to be distributed after deducting statutory fees, taxes and asset management costs, which are just 1% for Assetmonk.
Both investments are profitable; however, real estate investing is about making well-informed strategic choices. It’s all about investment goals, terms, cash flow, risk tolerance and the prospects it brings.
READ RELATED :