Retirement Corpus Growth: Fractional Ownership vs NPS

By the year 2050, 25% of the population in countries of OECD and nearly 20% of the global population would be over 65 years. However, there is enough empirical evidence to show that barely a quarter of the population globally invests with retirement as a goal. India, which is expected to have 315 million people by the year 2050, is no exception to this rule.

Is NPS the best choice?

As reported by the Financial Express in the recent past, a survey done by PGIM India Mutual Fund and Neilsen in late 2020 shows that 51% of the survey participants had no retirement plan at all. Among the others, who had some retirement plan, the National Pension System (NPS) was a popular choice as it is a low-cost tool, is reasonably tax efficient, and has various debt and equity options that an investor can choose from based on his risk appetite. At all times, however, 25% of the corpus remains invested in debt to ensure capital security.

Despite its obvious advantages, NPS has some limitations that do not make it best suited for retirement planning. One of the most glaring limitations is the long lock-in period of 25 years. Only partial withdrawal up to merely 25% is allowed, that too on specific grounds such as higher education or a wedding of children, treatment of COVID, and serious health grounds.

Further, an investor must make contributions up to a minimum of 10 years to qualify for a partial withdrawal and cannot consider another withdrawal before 5 years.

Another drawback of the NPS is the lack of flexibility in reinvestment options post-maturity. At the age of 60, it is mandatory for an NPS investor to put 40% of his corpus into a low-yield option (3-7% pre-tax). If he chooses to exit before retirement age, he must use 80% of the corpus to buy an annuity. The income from the annuity too is taxable in the hands of the investor at the time of receipt.

While NPS may be popular owing to its affordability, for middle-income investors looking at a tax-efficient and flexible means to build a retirement corpus the NPS may not be the best option to consider. Investment avenues such as fractional ownership are better suited to retirement planning as it provides better returns and flexibility.

Why fractional ownership?

Fractional ownership is a relatively new concept in India that has of late been making waves in investment circles. In India, there is a high degree of emotional value attached to real estate and owning one’s own property is considered an important milestone. However, it is a little-known fact that commercial real estate is a viable and lucrative investment option for retail investors.

But how do retail investors for whom, commercial real estate has been inaccessible so far owing to ambiguity get access to this largely unexplored investment avenue. Enter proptech start-ups such as hBits. As covered in YourStory, hBits combines real estate, technology, and finance to create a platform that is ideal for middle-income investors to invest with a low ticket size of Rs 25 lakhs in numerous Grade A commercial properties with a pre-stipulated exit strategy.

As explained in Financial Express while fractional ownership in real estate is not regarded as a traditional option retirement planning scores over NPS on both returns and flexibility.

Superior returns as compared to NPS

The NPS has gained popularity for delivering good returns in the 9-12% range. The average rental yields on commercial real estate property are about 9%. Add to that the annual capital appreciation factor of 7-16% annually and it far outweighs NPS returns. It is also notable in this context, that despite a pandemic-related slowdown, and the rise of remote working, grade A commercial real estate office assets have remained a frontrunner in Q1 FY2021, accounting for more than 58% of the real estate investments.

Further reiterating the prospects of commercial real estate, rating agency ICRA notes that the office leasing segment witnessed the least impact on operational cash flows during FY2021. With collections from existing leases largely intact, and the need for larger spaces increasing in post-COVID environments, commercial real estate is on firm grounds.

Liquid and stable

As mentioned earlier, the lock-in period in NPS is 25 years making it a highly illiquid investment avenue. In comparison, fractional ownership in commercial real estate is liquid and more flexible in this regard as there is neither any withdrawal limit nor any lock-in period with regard to fractional ownership. With high-quality property and verified tenants, carefully structured contracts, and long lease periods, fractional ownership paths the way for superior and stable returns over a period of time that aids the construction of a retirement portfolio.

Thus, for middle-income investors looking to build a retirement portfolio, fractional ownership in commercial real estate may prove to be a far more efficient way to ensure that the silver years are comfortable and stress-free with regard to finances.