In this fast-growing world, Investors want to build a Diversified Portfolio. So, they are looking for New Investment Avenues apart from Traditional Investment Avenues like Equity, Debt Funds, Gold & Real Estate. A tech-savvy investor would like to handle the investment with the click of a mouse.
Earlier, Real Estate was available only for High-net-worth individuals. Especially, Commercial Real Estate (CRE) was solely available for Very High-Net-worth individuals.
Digital Technology transformation is inevitable in all Industries, Real estate sector is not exempt from the rule. This has taken a new route in the real estate industry called Fractional Property/Fractional Ownership/Fractional Investing in Real Estate.
Table of Contents:
- Fully Digitised
- Minimum Ticket Size in Fractional Investing in Real Estate
- Returns in Fractional Investing in Real Estate
- Expenses in Fractional Property
- Fees in Fractional Ownership in Real Estate
- Tax deducted at Source
4.)What is REIT & How it is different from Fractional Investing in Real Estate?
5.)Fractional Real estate vs. Real Estate Investment Trust (REIT)
6.)Do not overlook the risks in Fractional Investing in Real Estate
What is Fractional Investing in Real Estate?
Buying a Big Project/Property involves a huge sum of money & complex paperwork. Also, it requires proper maintenance to upkeep the property.
In Fractional Investing in Real Estate, the Investment Management Company invites retail investors to invest an amount & take a portion of ownership.
A large commercial property is jointly owned by a group of individuals. There would be capital appreciation & regular income as well.
How Fractional Investing in Real Estate Works?
The fin-tech platforms create a Special Purpose Vehicle (SPV). The SPV pool the required funds from retail investors. Once the required fund is subscribed, the property is registered in the name of SPV & the SPV manages it.
All the investors hold a share or Compulsory Convertible Debentures (CCDs) of the SPV. All the expenses & income arising from the property are shared in the proportion of their ownership.
Various platforms are providing Fractional investments – Property Share, Bhive, Hbits, Myre capital, Strata prop, and Property Share.
Features of Fractional Investing in Real Estate
Fractional Investing in Real Estate provides you with complete online transactions and no hassle of handling physical paperwork. You can invest & track your Investment Portfolio through online portals which is an added advantage over investing in Real Estate the traditional way.
2.Minimum Ticket Size in Fractional Investing in Real Estate
There is a Minimum Ticket Size to start investing in Fractional Investing. Generally, it ranges between ₹ 25 Lakhs to Crores & within the same Investment Company, and the minimum ticket size varies from one property to another.
3.Returns in Fractional Investing in Real Estate
The returns in Fractional Investing in Real Estate are provided in the form of rental yield & also there would be capital appreciation for the investors. In general, all platforms list a potential return of 8% – 12%.
4.Expenses in Fractional Property
The expenses related to the property such as Property Tax, Insurance, and Day-to-Day Management are deducted from the Gross Rental Yields & not collected separately.
5.Fees in Fractional Ownership
The Investment Company (SPV) charges two types of fees for handling all the procedures. One is Management Fees which is a standard rate ranging from 1% to 2% per annum.
The other is based on performance, they charge extra if they make any surplus gain. If the yield is above the hurdle rate (Target yield), they charge this fee. All these fees are deducted from your Gross rental yield.
6.Tax deducted at Source
The returns (rental yield) are treated as Gross Interest income. After the deduction of the management fee, property tax & all other stuff you arrive at Net Interest Income. Net Interest Income is subject to a TDS of 10%.
What is REIT & How it is different from Fractional Investing?
Real Estate Investment Trust (REIT) is similar to Mutual Funds where they pool funds from Investors & utilize this money to buy Income generating Real Estate Properties.
They are Listed & traded in the Stock exchange similar to Exchange Traded Funds (ETF). A professional team viz. The Promoter (sponsor), Fund Management Company & Trustee will manage the Investment.
Fractional Real estate vs. Real Estate Investment Trust (REIT)
The below table shows you the difference between Fractional Real Estate and REITS briefly;
|Parameter||Fractional Real Estate||REITS|
|Choice of property||An investor can choose a property of his choice, it could be a Commercial, Ware House, Factories, Office space, etc.||Similar to Mutual funds, the managing company does not allow the investor to pick a property to invest in.|
|Regulatory Body||There is no proper regulatory body. The SVP is registered under the Companies Act.||Regulated by the Securities Exchange Board of India (SEBI)|
|Minimum Ticket Size||Usually in Lakhs||Starting from Thousands|
|Charges||Maintenance Charges, Property Tax Etc||No such charges|
|Fees||Management Fees||Fund Management Fees & Property Management Fees|
|Underlying property||No regulation||A minimum of 80% of the portfolio value should be invested in completed & income-generating properties.|
|Sale of the underlying property||Need approval from at least 75% of shareholders||If you are buying/selling 10% of the total portfolio value – you need unit holders’ approval|
|Liquidity||There is no secondary market. Must find a willing buyer||Can exit by selling in the secondary market (Minimum Lot size – 100 units)|
Do not overlook the risks in Fractional Investing
Owning a part of a huge commercial property might be a dream come true for many individuals. But Fractional Real Estate Investing has some limitations as well which are discussed below.
Under Fractional Investing, the Asset Managing Company waits for 40 – 45 days until the required number of investors have subscribed for the proposed value of the property. Till then, your funds get locked.
Fractional Investing in Real Estate is a growing trend in India. There is no statutory body to regulate this whole investment process. There is no grievance redressal for any dispute.
There is no secondary market to exit your holdings. It is difficult to find a buyer & transfer it privately. This affects the liquidity of your investments in Fractional Investing in Real Estate.
As an Investor, you should be a little cautious about certain things before Investing in a new Investment Avenue like Fractional Real Estate. Since all the transactions are remotely done online, it is important to check the legal aspects of your investment. Due diligence should be done from your side regarding the legal documents about your property & SPV.
The main disadvantage of real estate investment is liquidity. This applies to Fractional Investing in Real Estate as well. There is no secondary market, so your funds get locked until the holding period which is generally for the long term or until you privately transfer it to another person.
Though there is a growth-oriented outlook, Fractional Investing in Real Estate does not have a proven Track Record. So, restricting yourself from this investment is advisable if you have a long list of Financial Goals to meet.
No matter how fancy an Investment Product looks, at the end of the day, the returns it can generate for you are what becomes a crucial factor in choosing to invest.
You can consult with your Financial Advisor if you need professional guidance on choosing the RIGHT Investments for your Investment Portfolio.