By Varun Mohan – Founder and CEO at Definite
While there are endless ways to invest money, ownership of property is known to be considered a long-term investment option. Being an appreciating asset, land scarcity and high demand, it provides good returns to investors while generating wealth. This stays staunch with many other physical assets as well. For instance, purchasing shares or stock units makes the investor own a portion of a business or a company.
Ownership of assets helps in generating income and wealth. However, in the last couple of years, the mode of ownership of assets has evolved dramatically with the constant change in the business models. One of the biggest examples could be that timeshares are not the only thing the investor gets partial ownership of. The art of investing and owning an asset has completely been transformed by fractional ownership.
Understanding the concept
Until a few years ago, many Indians did not find it practical to invest in a commercial property because of its high-ticket price. A majority of them focused more on putting their money into the residential realty sector. However, with the introduction of fractional ownership, access to Commercial Real Estate (CRE) becomes easier for investors.
Imagine, having a stake in a premium commercial building worth Rs 50 crore generating good cash flow and is a leased asset to a verified institutional-grade tenant. That’s possible only due to the concept of fractional ownership. It enables to divide the Rs 50 crore worth asset into fractions or shares that represent equity and debt in the underlying asset. It means that this asset can now be accessed by a wider pool of institutional investors, individual investors, and fractional investors
Fractional ownership is prevalent in western countries for more than a decade and now picking up the pace in India. Investing in commercial property has always been a playground for institutional investors, however, fractional ownership is emerging in India as a new investment avenue for new-age investors to participate in new opportunities at a fraction of the cost previously required.
What is fractional investment in real estate and how is it different from REIT investments?
It is quite similar to the concept of owning a fraction of stock shares. When it comes to fractional ownership in stock, it enables more people to buy equity without any capital limitations. A recent example of this is cryptocurrency in which one does not need to pay a whole amount to buy a bitcoin by paying just a portion of it.
Practices to keep in mind for investing in fractional ownership
Investing in a commercial property is like an opportunity that provides a balance of different investment product portfolios. Unlike the volatile stock market or fixed deposits with low returns, CRE has a physical underlying asset, the ability to preserve capital and generate income as well. Investment in fractional ownership requires extensive experience that cannot be expected from every new-age investor. A few practices can help them in making up the gap of lack of experience and knowledge.
Market Research: Fractional ownership is fairly new in India and currently only a few companies offer the opportunity to invest in fractional properties. Most of them are startups with experienced investors spearheading the business. The right trick is to conduct intensive market research and find out the company having experienced founders and a strong network of investors to offer the best possible investment opportunity.
Fetch the best deal: While anybody can search for a high-yielding property online, it is not a cakewalk for everyone to evaluate the property’s correct price. This is one of the biggest steps in which experience plays a vital role. Finding the property to precisely gauging its price is a whole different game that only an experienced investor can play. Ensuring to get the best price of the deal is necessary so that an investor does not end up overpaying.
Look for customer-oriented solutions: Fractional ownership in the CRE segment or any asset needs to have clear planning of exit points. Many experienced investment or prop-tech firms are based on the long-term perspective of generating capital gains, not just the high yield. If an investor makes a smart decision in purchasing a fractional property, the investor gets to maximise capital gains on resale along with a high rental yield.
Fractional ownership of assets can be a rewarding opportunity in generating wealth, portfolio and passive income. Since many Indians are new and inexperienced to this concept, partnering with new age and tech-enabled platforms makes the whole process hassle-free.