REITs v/s Fractional Ownership | What should you pick & why?19 Apr, 2022
The Indian commercial real estate market is expected to witness a surge in demand for more reasons than one. Indian Prime Minister Shri. Narendra Modi has set up a vision for the country to become a five trillion-dollar economy by 2024-25. To achieve this, the government has been implementing various programs such as ‘Make in India’ and offering Production Linked Incentives (PLI) across ten key sectors such as Textile, Pharmaceuticals, Electronic Products, etc. This has led to an increase in job creation and demand for commercial real estate. Globally reputed brands are setting up their offices in India.
The accelerated Digitization push: The accelerated digitization push across sectors has led to IT companies hiring at an unprecedented pace and creating jobs faster than ever. They have also begun to set up more development centers across Tier-2 and Tier-3 cities to enable employees to work and stay closer to their homes rather than migrating to far away metros. This has led to a further push in commercial real estate. Large international brands have also set up their offshore development centers and captive centers in India which further accelerates the demand for commercial real estate.
The hybrid model of work:The hybrid model of work has also led to a surge in demand for office spaces as many companies are now opting for co-working spaces so that they can enable their employees to enjoy a flexible model of working.
A JLL Report predicts that India’s co-working market is likely to cross 50 million square feet by 2023. The adaptable office space is expected to grow at around 15-20 percent per annum consistently for the subsequent three to four years. This factor, coupled with the rapid rise in Datacenters and cloud adoption is also going to create a tremendous increase in demand for commercial real estate. It is no surprise then that various avenues for investments in commercial real estate are being offered to investors. These include – REITs and Fractional Ownership among others.
How do REITs work?
Let’s first understand what a Real Estate Investment Trust (REIT) is. REIT is a company that owns, operates, or finances income-generating real estate. The REIT enables individual investors to invest in very expensive commercial real estate and earn dividends to the extent of their investment. REITs pay as much as 90% of their earnings back to investors by way of dividends. The advantage for investors is that they may not have to buy the property in its entirety. They also do not have the onus of finding tenants, taking care of lock-in agreements, and maintaining the property while they can still enjoy a large part of the earnings generated by commercial real estate.
Is Fractional Ownership a better option?
Fractional Ownership democratizes access to Grade A commercial real estate. It is no more an exclusive playground of the ultra-rich. Investors can buy ‘fractions’ of high-quality commercial real estate occupied by highly reputed companies. hBits has currently enabled investors to invest in such premium real estate by enabling you to buy ‘fractions’ for as less as INR 25 Lakhs. Well, that’s way lesser than what you would pay for a 1 BHK flat in Mumbai. Not to mention that you needn’t scout for tenants, maintain the property, collect rent, or work on agreements. You can enjoy a consistent rental yield and sell the fraction at any time through a seamless digital interface. This is because such real estate offers not only a consistent rental yield but also appreciation in the capital due to the ever-increasing demand for premium commercial real estate.
Does Fractional Ownership score over REITs?
India’s first REITs which came in the first half of 2019 raised ₹4,750 crores (US$ 679.64 million). It saw interest from both domestic and international investors. This clearly indicates that commercial real estate in India is an attractive proposition that can make one safely assume that rental yield and capital appreciation are going to rise. However, while REITs investors may get dividends that come from the monthly rental income earned by commercial real estate, they may not enjoy much in terms of benefits due to capital appreciation.
With fractional ownership, the investor can select the property into which he or she invests. Investors can take an informed decision on investing in the property through fractional ownership. The decision can consider various factors such as the location, type of tenants, proximity to airport and business districts, etc. This can enable them to enjoy a rental yield and capital appreciation over time.
hBits – A transparent platform for fractional ownership
hBits has been working at the intersection of finance, real estate, and technology to create a seamless digital interface (web portal) that can enable investors to have real-time access to the value of the fractions they purchase. With hBits, an investor can buy the fraction in just a few clicks. What’s more, he can monitor the value of the fraction, the rental yield, and the income that his fraction has generated over time. The sale of the fraction can also be initiated with just a few clicks. The greatest fear of a real estate investor – the illiquid nature of the asset – is thus taken care of. With hBits, buying a fraction of commercial real estate is as simple as buying a stock. The fraction ensures not only a share of the steady monthly rental income but also capital appreciation over time.
Fractional Ownership – The future of Commercial Real Estate
While the Fractional Ownership v/s REITs debate can rage on, the Commercial Real Estate market is massive, and such investment avenues can co-exist. Over time, investors will clearly realize the difference in terms of their returns and the ease of managing such investments and make their own ‘prudent’ choice to settle this debate.
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