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- Conventionally, real estate has been considered one of the excellent investment classes because of its potential for steady returns and capital appreciation in the long run. Conventional investment in real estate requires enormous capital and has kept many people away from this asset class.
- This is answered by a relatively new concept in investing actual estate-fractional ownership through Small and Medium Real Estate Investment Trusts, more commonly known as SM REITs.
- Fractional real estate ownership provides a new avenue for property investment whereby investors invest a part of the property and not purchase an entire asset—combined with SM REITs- that opened possibilities for a low-budget investor to enter the lucrative real estate market.
- This article explains what fractional ownership in real estate means, how SM REITs work, and how this combination will finally change the real estate landscape for investors.
“Understanding Fractional Ownership in Real Estate”
The Real Estate Investment Trusts Regulations, 2014, were revised by the Securities and Exchange Board of India (SEBI), opening the door for the creation of small and medium real estate investment trusts, or SM REITs. Through fractional ownership platforms, these real estate investment trusts (REITs) enable individuals to participate in real estate holdings.
Fractional ownership involves the investment of a pool of investors buying fractions or shares in a single high-value asset, such as real estate. In return, each investor gets a share of rights in the property income, costs, and capital appreciation. Unlike the timeshare model, in which the owners can utilize the property for a certain fixed period, fractional ownership entails the ownership with permanent stakes in the property.
What Are SM REITs?
Small- and medium REITs are another breed of REITs that aims to pool funds from more than one investor for developing, managing, and acquiring income-generating real estate. Though REITs have been around since the 1960s, SM REITs focus on smaller- and medium-scale real estate projects, opening more access for individual investors in several alternative directions.
These smaller REITs also fall under the ambit of the SEBI and function mainly along the same lines as their larger cousins. They retain the same advantages of diversification and liquidity, with a continued income flow from real estate, except that they focus on smaller real estate, which can be fractionalized for ownership. It has been one of the significant innovations in real estate markets, especially for investors with smaller capital, with the emergence of SM REIT.
Fractional Ownership through SM REITs
Fractional ownership through SM REITs brings a sea change in the real estate investment landscape.
Pool of Investors :
It works because an SM REIT pools together multiple investors who, in contribution, provide smaller amounts of capital to invest jointly in commercial or residential real estate properties. This does not demand that investors necessarily need to buy an entire property; they can very well invest in fractions of the value of the property.
Diversification :
One of the significant advantages of SM REITs is that they enable investors to diversify their portfolios across different properties. One may invest in fractions of different properties, spreading his or her risk and perhaps enhancing returns
Lower Capital Requirement :
Classic investment in real estate requires a lot of capital. On the contrary, SM REITs grant exposure to high-value real estate assets by using less money from investors, thereby making access more feasible for retail investors.
Professional Management:
Properties are managed professionally in an SM REIT whereby day-to-day management of property, including property maintenance, tenant acquisition, and rent collection, is done. Investors will, therefore, not have to invest their time in the management of operational aspects of the property.
Liquidity and Exit Strategy :
One of the significant drawbacks to direct real estate investment is the illiquidity of the asset. And it may take a few months before the real estate is sold, not to mention the exorbitant transaction fees accompanying it. In that case, the investor in SM REIT enjoys better liquidity in that they may sell off their fractional ownership on either a secondary market or through the REIT platform itself, which would mean a far quicker and more flexible exit strategy.
Income Generation :
The SM REITs, like conventional REITs, generate income from rental receipts and other streams from the property held by it. This, in turn, is distributed pro rata among the fractional owners to render a continuous cash flow to the investors.
Advantages of Fractional Ownership via SM REITs
1. Accessibility :
Fractional ownership opens up the market even to small investors. The investments start as low as INR 1 lakh, and many more players get involved who could not afford high-end real estate earlier.
2. Shared Risk :
The financial risk is spread among the owners. Since many different investors own the ownership in one property, the impact of a single investor in terms of poor performance of that particular property or due to other circumstances that may arise is considerably reduced.
3. No Operational Hassles :
Investors need not manage the property themselves; they will be managed by the management of REIT, and all the aspects will be operationalized by REIT management, which enables fractional ownership in passive investment.
4. Higher Returns :
Fractional ownership through SM REITs is a relatively modern phenomenon, but again, there is enormous scope for high returns if one invests in commercial properties within growing areas. The combined effect of rental income along with property appreciation can result in consistent returns to the investors.
5. Regulated Investment :
REITs, in general, and SM REITs, in particular, are regulated by SEBI. This inherently provides more security to the investors, knowing full well that the product of their investment is bound by strict financial and operational regulations.
The Future of Fractional Ownership and SM REITs in India
Fractional ownership in real estate through SM REITs is bound to increase as more investors start looking for alternative ways of investment apart from traditional investment avenues.
It is expected that the rise in interest in commercial real estate, along with an increase in technology platforms that facilitate such fractional ownership, will drive the growth of this model.
It is expected that with more and more investors seeing the likely benefits associated with fractional real estate investment via SM REITs, this emerging channel for investment will continue upward in momentum. The combination has turned very attractive, with reduced capital requirements, professional management, and liquidity options for portfolio diversification.
Conclusion
Fractional ownership through SM REITs has turned the world of real estate investment upside down. That provides the opportunity for those of much smaller budgets to invest in high-value real estate assets, professional property management, and steady income streams.
Assetmonk is an alternative investment platform that focuses on providing fractional ownership in high-quality commercial properties. It allows investors to participate in fractional real estate investments, enabling them to own a share of premium properties and earn rental income.
