The new concept of fractional real estate on commercial properties is emerging as a popular investment source these days. Today when people are more open to trying out other high-risk, high-reward, or low-risk low return options, the concept of fractional CRE investment is indeed quite interesting even for a small investor.
Until now commercial real estate was an investment entitled to HNWIs. The invested capital was way out of the capacity of small investors. So how is fractionating commercial property making this traditional investment attractive and open for a wider investment audience, let us find out.
Aggregating top commercial properties in the most sought-after localities, top, commercial builders are adding a new dimension in the direction of CRE investment. Grade A properties are being split into fractions and investors are sharing passive income from a fraction of the investment in the higher-priced property. The financial burden shared between small investors and owners continues to generate steady income returning the investors’ money on a monthly, quarterly, or annual income flow. Fractional investment has now become popular in every Indian city. The properties are pre-leased by large MNCs, which makes the returns quite healthy.
Apprehensive investors may still be reluctant about investment opportunities here, so understanding it with an example will help them get a grip on the concept. For example, a prime property in a prime location in Hyderabad is worth INR 100 cr. It is a pre-leased property by a top MNC ensuring steady returns. An investor with just INR 25 lac cannot invest solely in this property. Protects constituted as Special Purpose Vehicles (SPVs) ensure the cash flow of investors is maintained through an escrow mechanism and help channel the investors’ money on one of such projects. SPVs take care of the project and financial risks and conduct management assessments of the investment.
Project risk includes demand, funding, and implementation concerns. Demand risk encompasses the demand and supply of the property in the micro market, the developer's position, and whether the product on offer and the customer's preference is compatible. Funding risks cover funds tied with advances made by investors, equity and debt, and compensation for advances made by customers (either users or investors). Under implementation risk, the developers’ track record, and project status in terms of approval and construction are all considered.
Financial position and liquidity fall under financial risk as cash flow in real estate starts at the implementation stage when sales and booking begin in contrast to manufacturing where asset utilization starts after completion. SPVs look after these concerns using a buffer cash ratio and fencing cash through an escrow mechanism. RERA's buyer-friendly improved directives on transparency from builders, timely delivery with penalties on delay with liability on structural defects within five years of possessing the property bring greater discipline to the CRE's investment profile adding assurance with support from SPVs.
Fractional investment in commercial real estate was popular in the US and Europe, and Singapore and Hong Kong had also adopted this investment opportunity. India's tech-enabled platforms are democratizing this potentially high-worth sector and young investors with monthly salaries are getting drawn towards it. This disruptive investment opportunity, based on a traditional investment, where real estate investment, involving high ticket, was considered one of the best options for investing funds. With fractionalisation, investors can earn passively without being involved with property management decisions. Thus, this investment is proving to be extremely attractive for tech-savvy investors, trying out new ways of generating wealth by diversifying their investment portfolios.
However, this investment should not just interest the young but investors of all ages. The only hurdle is getting across to investors and helping them understand this innovative investment profile. Fractional investment is opening a new investment path for middle-class investors. Properties are picked from multiple locations and investors do not need any experience in property management, they just need the required capital which can be as low as INR1 lakh, and a trusted platform. Tech-enabled investment platforms are partnering with SPVs, making it possible for investors to generate wealth with steady income at low risk. If you want to expand your investment, you can learn about fractional investment through Grip and get started.