Individual investors with a minimum investment of Rs. 25 lakh can purchase a piece of Grade-A commercial real estate. Yes, anyone may now purchase a piece of Grade-A commercial real estate in major cities and industrial hubs, including opulent office buildings, enormous warehouses, and glamorous towers. Individual investors in India can gain partial ownership of real assets with a minimum investment of Rs. 25 lakh under the idea of fractional ownership of property.
In India, any resident or NRI (Non-Resident Indian) can own commercial property. To invest in industrial real estate in India, NRIs must hold an NRO (Non-Resident Ordinary) account. NRIs who wish to invest in commercial real estate in India or have any questions about the subject can immediately book a conversation with an NRI investment specialist.
Table of Contents
- What is fractional ownership, and how does it work?
- What is fractional ownership and how does it work?
- Why should non-resident Indians (NRIs) participate in CRE fractional ownership?
- Who is eligible to participate in CRE via fractional ownership?
- Implications for taxes
- Are laws in place to safeguard the interests of investors?
- How to Get Out
- Is fractional ownership the same as investing in the stock market?
- Types of usage of fractional ownership
What is fractional ownership, and how does it work?
A business concept where a real estate asset is divided into pieces and groups of investors pool funds to acquire a property is known as fractional ownership. They all have passive ownership of a high-value asset in common. This structure lowers the cost of owning a piece of ‘Grade-A’ commercial real estate in major cities and industrial centers for an individual investor.
All investors share income and expenditures in accordance with their participation in the asset.
What is fractional ownership and how does it work?
Typically, ‘Grade-A’ commercial buildings with tenants are advertised for investment on web platforms. For a home valued roughly Rs. 50 crore, an investor can start donating as little as Rs. 25 lakh. A Specific Purpose Vehicle is used to implement fractional ownership for each commercial property (SPV).
The funds pooled from each investor are directed through the SPV’s trusteeship business or limited liability partnership (LLP). The SPV buys the property, and each fractional owner receives shares in the SPV that owns the property in accordance with his or her contribution to the property.
The SPV’s sole purpose is to hold the property for the consumers. On behalf of the consumers, the investment platform is in charge of the SPV and the underlying property. An SPV is used to transfer ownership to fractional owners. Investors must execute SPV agreements in order to be registered with the Ministry of Corporate Affairs’ Registrar of Companies (RoC). The investors receive a copy of all paperwork, including the lease/rental agreement, property sale deed, and SPV agreement copy.
You can invest in fractional ownership with the help of online platforms such as Assetmonk. Assetmonk specializes in commercial real estate investments and is India’s fastest-growing wealth-tech platform. Assetmonk, which serves clients from all around the world, uses fractional ownership to offer high-quality investment alternatives at reasonable prices.
NRIs can easily have access to grade-A assets without having to wait for long periods of time. To better understand investor goals such as capital appreciation, passive income and risk reduction, Assetmonk offers investing options based on risk appetites.
Why should non-resident Indians (NRIs) participate in CRE fractional ownership?
In Hyderabad, a high-quality office property for sale costs Rs 300 crore. In the vast majority of cases, such an asset is exclusively available to HNWIs. However, with fractional ownership, one can now become a co-owner of a property for as little as Rs 10 lakh and earn a rental ranging from 6% to 10% each year. An investment like this generates a rental income of Rs 60,000-Rs 1 lac per year.
2. Asset with a Lower Volatility
The real estate business slowed during the global shutdown, but it quickly recovered in Q3. As a consequence, you may count on passive revenue. Year over year, net CRE absorption climbed by 63 percent. Furthermore, the number of new completions rose to 59 percent. Covid-19 caused a decline in the value of real estate across the world.
Commercial renting, on the other hand, has expanded as a result of India’s extensive outsourcing activity. Over 63 percent of office space rented in India is used by international companies. It should signal to Indian and non-resident Indian investors that now is the moment to invest in fractional real estate.
Commercial property values are expected to skyrocket in the coming years. As a result, it is a great moment to buy fractional ownership.
3. Tenants who have stayed for a long time
Tenants in residences tend to leave on a frequent basis, resulting in a loss of rental revenue until a replacement tenant can be found quickly. The lease period for a commercial property is three years. The lease can, however, be extended. It just ensures that you have a consistent income. Fractional ownership offers investor safety in this way.
Large multinational corporations, banks, and information technology companies with large budgets are among the tenants of high-end homes. They are always on time with their rent payments. Furthermore, because of the time, effort, and money spent turning the apartments into offices, such tenants frequently extend their rental agreements.
4. Rental Profit
Rental money is deposited directly into the account each month. Unlike savings accounts, you must wait for the investment to mature before reaping the benefits. Fractional ownership of commercial properties offers a high return on investment due to ongoing rental income and appreciation.
Commercial property investment in India had expanded at a CAGR of 16 percent over the previous five years. Aside from the value increase, you may expect a 15% increase in rent returns over the following three years if you buy with a respectable fractional ownership company. It’s included into the lease for future inflation protection, ensuring that your investments stay consistent over time.
5. High Liquidity
Commercial properties are a scarce resource because it is a hard asset. Its value rises over time, giving investors a steady stream of income, long-term growth, and portfolio diversification. Around 75-90 percent of the total office space in India is leased as a result of the rising demand for rental office space.
Commercial real estate is a stable and predictable investment since its returns do not fluctuate with the market. Furthermore, according to experts, fractional ownership investments are not locked in, and investors can exit at any time.
6. Diversification of a portfolio
Fractional ownership allows investors to pick and choose whatever properties they want to invest in. You may increase your safety by diversifying your portfolio by acquiring properties in a variety of locations and industries.
Who is eligible to participate in CRE via fractional ownership?
Any Indian citizen, even non-resident Indians, can invest in commercial real estate in India if they produce acceptable KYC paperwork. NRIs can use their NRO accounts to invest. Return on investment (ROI) from commercial real estate.
Commercial real estate offers relatively better returns than other stable investment options. Commercial property rental yields vary from 8% to 10%, i.e. Rs. 2 lakh to Rs. 2.5 lakh per year for a Rs. 25 lakh investment, with an IRR (internal rate of return) of 16 to 20% after five years.
The CRE is not a way to make rapid money. Investors should commit funds with a long-term horizon of at least 3-5 years in mind.
Implications for taxes
This asset class is not subject to any special rules. Rent collected from a CRE property is taxed like income from other sources under the corresponding tax slab under the present income tax system. Sections 24 and 80C of the Income Tax Act allow for tax deductions on home loans used to purchase real estate. NRI investors may profit from the Double Taxation Avoidance Agreement (DTAA) that they have signed with their current residency nation.
Are laws in place to safeguard the interests of investors?
Fractional ownership as a business strategy in commercial real estate is a relatively recent notion. The trusteeship company/LLP through which the SPV works, on the other hand, is governed by the Ministry of Corporate Affairs’ Registrar of Companies (RoC). The Real Estate Regulatory Authority must provide a license to the investment site where these services are offered (RERA).
How to Get Out
The policy on lock-in and departure differs for every investing site. Some portals have a six-month lock-in period, while others don’t have any limits at all. Resale through the investor’s dashboard, private sale (where investors may sell their fractional ownership to anybody on their own subject to KYC and other regulatory standards), and total asset sale (where the entire property is sold) are the three main methods to depart.
Is fractional ownership the same as investing in the stock market?
Fractional ownership of a commercial property is analogous to investing in the stock market since investors have the opportunity to choose whatever asset they wish to acquire shares of. However, the setup does not correspond to the stock market in practice.
Types of usage of fractional ownership
Each member may have different ideas about how to use the item. As a result, fractional owners must come to an agreement on how to utilise the property after acquiring it. Investors’ usage rights are unaffected by the investment component.
There are two primary methods for distributing usage rights, as follows:
A. Using a pay-to-use model
- Co-owners must pay a daily or weekly use charge to utilize the property.
- The rental money and the use charge are utilized to offset the costs.
- In the event of a surplus, the profits are shared among the co-owners.
- In the event of a cash deficit, all co-owners chip in to cover the costs.
B. Methodology for assigning use
- For a given amount of time, each owner will have exclusive usage of the asset.
- This time frame might be fixed, flexible, or a combination of the two.
- During this time, the co-owner is free to utilize the property as he or she pleases.
- Each co-purchase owner’s price and usage rights shall be proportional.
Commercial real estate is a popular investment option because it is a reliable source of income that is unaffected by market fluctuations and offers higher returns than other solid investments. While fractional ownership of CRE properties is still in its infancy, it is gaining traction. Investors see fractional investments as a cost-effective strategy to diversify their portfolio.
The government has yet to enact legislation governing this business model. So, have you begun to consider making changes to your portfolio by investing in commercial real estate in India? Do you have any commercial real estate in your portfolio?