By K Raveendran
Fractional ownership of real estate is catching up fast in India, particularly among the tech-savvy investors. As a concept, fractional ownership has democratized real estate investment in that it has given small investors access to commercial properties which otherwise remained the exclusive domain of high and ultra highnetworth individuals and institutions.
The fractional ownership market in India is estimated to have the potential to grow up to 16 percent in the coming years as specialist companies float new offerings. Last year saw tremendous growth with 70-80 per cent growth, which was of course on a small base. As the market matures and the trend catches on, the growth numbers are expected to fall into more sustainable levels.
According to real estate consultancy JLL, the fractional investment ownership system has provided investors with a new set of opportunities. Despite the Covid-19 pandemic, fractional investment deals worth Rs 350 crore were transacted in one year.
The agency estimated that the last five years, fractional ownership companies have done transactions worth around Rs 750 crores across the country. Investors are looking at Mumbai, Pune, Bengaluru, and Hyderabad markets favourably, JLL said in a report.
Tech-enable firm hBits has launched a commercial property worth Rs 42 crore. It said the Grade A+ asset boasts a high-entry yield of 10 per cent gross per annum and an expected internal rate of return (IRR) of 16.40 per cent. The company has acquired over 27,000 square feet in the Boomerang Building in Powai, which is the fastest-growing commercial real estate micro market in Mumbai, the company said.
The company says it already has a total asset under management (AUM) of Rs 150 crore in its kitty, registering over 50,000 customers on its platform. The new asset launch is an option for more investors who are looking at fractional ownership as an investment option. The building’s anchor tenant is a large US multinational corporation, which has contracted occupancy for a minimum of four years and the company says this means a steady and secure returns in the medium term.
Fractional ownership has been found to have high appeal for millennials who are looking for new methods to make money using technology. Fractional ownership not only opens up new channels for investors, but it also lowers the cost of investment. Young investors aged between 30-50 years in Tier I and Tier II cities are looking at opportunities to invest in Grade A assets from office space to warehouse and industrial parks as demand for these kinds of assets is on a steady increase in view of the expanding e-commerce industry and the focus on last-mile delivery.
According to hBits, commercial real estate provides 8-9 percent annual returns through rental yield and an opportunity to participate in the appreciation of the underlying property, giving it characteristics of both debt and equity. Most commercial leases escalate by 5 percent every year or 15 percent every 3 years providing a strong cushion against inflation. The real rate of return is therefore always8-9 percent with the capital appreciation providing the additional equity kicker.
Fractional property ownership has been greatly boosted by concepts such as tokenization and the use of technologies such as blockchain. Real estate tokenisation is the creation of tokens on the blockchain which are then assigned to properties that are either under construction or already exist. The tokens can represent different things, from a portion of the deed to equity interest in a legal entity or even ownership of collateralised debt. Since physical assets back these tokens, the value of the tokens fluctuates based on the performance of the asset. This is similar to traditional real estate investing, but with the additional advantage the holders can easily transfer their security with the help of blockchain technology.
Tokenisation has been a game changer in the field as real estate is considered one of the most illiquid asset classes that require significant capital commitments and long, expensive transaction processes. Through tokenisation, transactions are made simple and easier, allowing ownership to be transferred directly from investor to investor, essentially cutting out the middleman and saving money for both sides. (IPA Service)