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COMMERCIAL REAL ESTATE INVESTMENT THROUGH FRACTIONAL OWNERSHIP
The Indian economy’s resilience to world upheavals is undoubtedly scaling new heights. Various news and research reports claim a bright future for the country. However, the developmental journey of any country heavily depends on its core sectors. Real estate is one of those prominent sectors that provides enough thrust to grow different sectors and business avenues. At present, India is the 5th largest economy in the world, but as per the IMF prediction, it will soon become the 3rd largest economy by 2029. According to S&P Global, the nominal GDP of India is expected to rise to 7.3 trillion by 2030 from 3.5 trillion in 2022. As per statista.com, the commercial real estate market is anticipated to reach $5.47 trillion by 2024. In addition, the tailwind of robust FDI for the years 2023–24 shows great potential for Indian commercial property investment. India has recorded a breakthrough in FDI influx of USD 70.9 billion for FY 2023–24. It shows a positive development of the sector and a great future ahead for the investors. Let’s see a microscopic view of this sector to know why and how it can benefit investors:
Changing investment patterns:- A startling survey conducted by Neo-Reality shows the changing investment patterns of investors. According to the survey, fractional ownership is gaining importance as a new investment model. The trend has been prevailing for the last couple of years. Commercial real estate (CRE) is considered a great source of passive rental income as well as capital appreciation benefits. In addition to this, a report by Knight Frank also substantiates that the market size of fractional ownership properties experienced a surge of 65% in 2020 and is expected to reach USD 8.9 billion by 2025.
Why Fractional Ownership:- The fractional ownership investment model helps investors invest in high-end projects. Investors may collectively own a proportion of such properties that a single investor may not be able to invest in all alone. Such transactions are often facilitated through a real estate investment trust (REIT) or limited liability company (LLC). This model helps investors receive proportionate shares according to their investment. Furthermore, it makes them eligible to bear a proportional amount of taxes, expenses, rents, and property appreciation benefits. The greater benefits include low entry costs, fewer management responsibilities, and diversifying the investment portfolio. However, various challenges, such as conflict over property management and usage, coordination amongst various other stakeholders, and decision-making, may arise over time.
The reason for the change:- The survey further reveals that the regulatory framework support of SEBI helped boost the confidence of the investors to go for fractional ownership. According to the survey, 60% of those investors chose the fractional ownership model for the first time after the new framework. Among various alternate investment models, 61% of investors preferred equity, whereas REIT and fractional ownership accounted for 45%, mutual funds, and traditional real estate investment for 39% and 35%, respectively. As mentioned earlier, out of the total FDI inflow of USD 70.9 billion, USD 44.4 billion was received through equity. It is worth noting that the first quarter of 2024 equity inflow was USD 12 billion, which reflects 33% year-on-year growth. In addition, as per the survey report, 69% of HNIs are planning to augment their commercial real estate investment. The survey also highlights that over the last decade, there has been a positive development observed in investment as a result of technological advancement and rising income. Individuals with disposable income play an important role.
The paradigm shift:- As the world economy goes digital, India follows the league. The survey also highlights that most of the investors preferred digital platforms to park their investments through fractional ownership. In addition, the majority of investors, around 55%, preferred to invest for 4-6 years, compared to 20% of investors who invested for 1-3 years. Another big reason was the liquidity concerns of the investors. 30% of investors showed this concern since digital platforms offered a great payment track record as a reason investors were inclined to the commercial real estate sector. As per the CEO of WiseX, an investment wing of Neo-realty Survey, Mr. Aryaman Vir, Bengaluru, Pune, Mumbai, and Delhi-NCR are the prominent regions that are leading in the real estate investment sector. However, the investors are also taking an interest in Tier-1 and Tier-2 cities. In the coming days and years, many such cities can show a great prospect for investment. SEBI’s initiative to remove the minimum threshold limit of Rs. 10 lakh and to regularise fractional ownership in real estate will help investors invest more in the real estate sector.
Conclusion:- Commercial real estate investment in India is not a new phenomenon. However, significant changes in investment patterns have been observed. Investors are taking more interest in this sector and augmenting their investment. Undoubtedly, cities like Delhi, Mumbai, Pune, and Bengaluru are among the highest investment-receiving regions. However, it is worth mentioning that the changing pattern of investment also makes investors look for Tier-1 and Tier-2 cities. Past 3- to 4-year investment patterns show a positive development in this direction. In addition, the prominent reason for changing investors' preferences can also be viewed as the change in the investment policy of SEBI, which allows even small investors to invest their money. Digital investment platforms help investors keep track of their investments. Furthermore, unlike traditional investment patterns, new-age investors go for fractional ownership. Such investment models not only ensure a greater rental yield but also the benefit of property appreciation over time.
