Alternative Investments to REITs

Alternative Investments to REITs

Real estate investments have undergone a major transformation in the last few years. From joint families to millennial real estate investors, real estate trends are seeing a huge shift in people looking to invest in real estate without directly owning properties. 

REITs are companies that own, operate or finance income-producing real estate across various sectors. They allow people to invest in large-scale, diversified portfolios of real estate assets, often providing high dividend yields and liquidity.

But REITs are not the only way to invest in real estate. In this article we’ll see several alternative investments to REITs, such as fractional ownership of commercial real estate. 

Top 4 Alternative Investment Options Compared To REITS 

1. Fractional Ownership of Commercial Real Estate

Fractional ownership allows multiple investors to come together & collectively own shares of high value real estate assets. These could be Grade A commercial properties, resorts, luxury homes, and so on. 

Fractional ownership platforms like Assetmonk provide investment opportunities to investors, by pooling their funds and using them to acquire and manage high end commercial properties. 

In return, the investors get a stake in ownership as per their share of investment, and also share the returns in the form of rental income and appreciation in the value of the property. 

Fractional ownership enables investors to own premium assets without much hassle, while also bringing other investors on board in a way that shares risks and profits equally.

Fractional Ownership Market Size in India 

Fractional ownership is actually backed by SEBI under the SM REIT (Amendment) Regulations 2024, with a minimum investment pool of Rs 50 crore. 

As per a latest report by commercial real estate investment firm JLL India, small and medium real estate investment trusts (SM REITs) are expected to grow significantly in India’s real estate market. 

The report, titled JLL Property Share, reveals that the Indian fractional ownership market is expected to grow more than tenfold and exceed $5 billion by 2030. The fractional ownership sector has enormous potential, with a portfolio of over 328 million square feet of office assets valued at around $48 billion.

Benefits

1. Accessibility: Fractional ownership lowers the entry barrier, allowing smaller investors to participate in commercial real estate markets that would otherwise be out of reach.
2. Professional Management: Properties are typically managed by professional firms, relieving investors of the day-to-day management responsibilities.
3. Income Potential: Investors receive a share of the rental income, which can provide a steady stream of passive income.

Risks

1. Illiquidity: Unlike REITs, fractional ownership shares are not easily traded, which can make it difficult to sell your interest if needed.
2. Market Risk: The value of the property can fluctuate based on market conditions, affecting the returns.
3. Management Fees: Professional management comes at a cost, which can eat into profits.

Assetmonk currently has a fractional ownership real estate product called AM Whitefields in Bangalore, with an expected Internal Rate of Return (IRR) of 16% and a maturity tenure of 60 months. 

2. Real Estate Crowdfunding

Real estate crowdfunding platforms connect individual investors with real estate developers. These developers are looking to raise capital for building projects, and take funds ranging from relatively small amounts to huge lump sums of money. 

Investors who contribute to these projects usually receive equity or debt stakes in return. 

Benefits

1. Accessibility: Similar to fractional ownership, crowdfunding lowers the investment threshold.
2. Project Variety: Investors can choose from a wide range of projects, including residential, commercial, and mixed-use developments.
3. Diversification: Investors can spread their money across various projects, reducing exposure to any single asset.

Risks

1. Platform Risk: The success of the investment can depend on the reliability and reputation of the crowdfunding platform.
2. Project Risk: The specific project may fail to meet its financial targets, leading to potential losses.
3. Liquidity Issues: Investments in crowdfunded real estate are typically not liquid, and there may be restrictions on selling shares.

3. Real Estate Mutual Funds 

Real estate mutual funds invest in a diversified portfolio of real estate-related assets, including stocks of real estate companies, REITs, and direct property investments. These funds are managed by professional portfolio managers.

Benefits

1. Diversification: Real estate mutual funds offer broad exposure to various sectors and regions.
2. Liquidity: Shares of mutual funds can be bought and sold easily, providing liquidity to investors.
3. Professional Management: Investors benefit from the expertise of professional fund managers.

Risks

1. Management Fees: These funds charge management fees, which can reduce net returns.
2. Market Risk: The value of the fund can fluctuate based on the performance of the underlying assets.

4. Structured Debt Backed By Real Estate 

Structure debt investments backed by real estate are complex financial instruments that are secured by real estate assets. 

Structured debt backed by real estate is a financing method that combines debt and equity to fund property transactions. The property’s income serves as collateral for the debt, ensuring the lender’s investment is protected. This approach offers flexibility in financing options, risk management through collateral, and diversification for investors. 

These investments include commercial mortgage backed securities (CMBS), collateralized debt obligations, and other such products. 

Benefits

1. Income Generation: Structured debt investments provide regular interest payments, offering a steady income stream.
2. Diversification: Investors can gain exposure to a broad range of real estate loans, spreading risk.
3. Risk Management: The tranching of securities allows investors to choose their preferred level of risk.

Risks

1. Complexity: These investments can be complex and may require significant due diligence and understanding.
2. Credit Risk: The performance of the underlying loans can affect the returns, with the risk of defaults impacting lower tranches more severely.
3. Market Risk: Changes in interest rates and market conditions can affect the value of the securities.

Bottom Line 

Like the name suggests, alternative investments represent a departure from the conventional. Alternative investments may not be for everyone, but are they the right choice for you? This is where we come in. 

Assetmonk is a unique player in the real estate alternative investment space By marrying the stability of conventional real estate investments with alternative financial investments, we have constructed an innovative bridge between traditional property investment and contemporary wealth management strategies. 

Assetmonk provides a web-based dynamic alternative investment platform, it empowers investors to own stakes in high-value commercial properties, opening up opportunities for them in real estate investments with significantly lower entry barriers.

In doing so; we present investors with a unique avenue for growth by putting them in pole position for reaping off of their financial investments.  

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