Fractional ownership and how it is boosting liquidity in commercial real estate

However, the advent of fractional ownership is transforming this landscape, making commercial real estate accessible to a broader spectrum of investors.

Fractional ownership provides real estate owners and developers with a source of stable finance while offering potential investors and stakeholders end-to-end investment management and execution. This enables them to redevelop trust in this asset class and reposition the Indian real estate market on a global platform.

Democratizing commercial real estate

For the emerging class of HNIs, and retail and affluent investors, fractional ownership is a paradigm shift. This model democratizes commercial real estate, allowing investors to own a fraction of high-value properties.

It democratizes commercial real estate (CRE) by empowering retail investors to participate in institutional-grade investment opportunities that were previously dominated majorly by HNIs and institutional investors due to the large investment minimums.

Notably, investors can achieve returns nearly threefold compared to residential properties, with the internal rate of return (IRR) ranging from 11% to 19%. Additionally, real estate is not a market-linked asset, meaning it can provide more stable and potentially higher returns compared to more volatile investments like stocks.

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Rise of fractional ownership platforms

The post-covid era witnessed a proliferation of fractional ownership platforms. These platforms have been instrumental in bridging the gap between investors seeking lucrative real estate opportunities and A-grade developers in need of capital. By institutionalizing the framework, they manage properties, handle maintenance and tenant relations, and ensure seamless distribution of rental income.

This model has opened doors for smaller investors to participate in high-quality real estate ventures, facilitating a mutually beneficial ecosystem for both investors and developers.

Investing in real estate via fractional ownership

Investing in real estate through fractional ownership offers a plethora of benefits to investors:

● Affordability: Lower entry barriers make high-value investments feasible for more investors.

● Institutional grade investments: A-grade assets are assessed and listed for retail investors.

● Diversification: Investors can mitigate risk by diversifying their portfolios across multiple properties.

● Higher returns: Commercial real estate typically yields higher returns compared to residential investments.

● Easy exit: Fractional shares can be traded more fluidly, enhancing liquidity.

● Property management: Professional management ensures a hassle-free investment experience.

Choosing the right platform

Despite its advantages, fractional ownership necessitates careful consideration. Investors must align their investment objectives and conduct meticulous due diligence.

Selecting the right platform is crucial for success in fractional ownership investments. Investors should look for platforms that offer transparency, robust property management and a strong track record. Evaluating the platform's reputation, fees and the quality of properties it offers is essential.

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Role of technology and regulations

Technology has been instrumental in the ascent of fractional ownership. Digital platforms provide convenience, enabling investors to monitor their investments in real time, access comprehensive property data and manage their portfolios with ease.

Additionally, regulatory bodies like the Securities and Exchange Board of India (Sebi) have introduced guidelines to ensure a level playing field, thereby adding layers of liquidity and transparency to the market.

Following Sebi’s introduction of regulations for small and medium real estate investment trusts (SM Reits), we are poised for a transformative shift.

The Indian fractional ownership market, set to evolve into SM Reits, is projected to grow from $500 million to over $5 billion in assets under management (AUM) by 2030, indicating a significant expansion and bright prospects for SM Reits.

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Recent growth trends and outlook

● Overall real estate market outlook: With India’s per capita income surpassing $2,000, rising purchasing power is transforming the country into a consumption-driven economy, encouraging investments in luxury real estate. According to an India Brand Equity Foundation (IBEF) report, the overall Indian real estate market, valued at $265 billion in 2023, is projected to reach $1 trillion by 2030 and $5.8 trillion by 2047. This positive outlook underscores the potential for substantial growth and opportunities within the sector.

● Commercial real estate demand: The demand for commercial real estate is on the rise, driven by the expansion of industries and the need for modern office spaces. This sector is experiencing robust growth as businesses look for high-quality spaces to operate.

● Economic growth and rising disposable income: India’s stable economic growth and rising middle class are significantly driving real estate demand. As disposable incomes increase, more individuals are seeking property investments, further fuelling the market’s growth.

● Growing affluent demographic: The affluent demographic is expanding, with a 69% increase in millionaires expected by 2027. This growing wealth is driving demand for high-value investments.

Aryaman Vir is chief executive offier at WiseX.

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