The Indian real estate market has become an attractive investment segment thanks to its high-growth potential. However, at the same time, investing in real estate is challenging for most individuals owing to the soaring prices. But the concept of fractional ownership makes this easier.
Fractional ownership of real estate involves multiple individuals owning a portion of a high-value property collectively. This allows investors to invest in real estate by pooling their resources and enjoying ownership, even with a small capital outlay.
Within fraction property ownership, two new investment options have gained popularity – Small and Medium Real Estate Investment Trusts (SM REITs) and Real estate-focused Alternative Investment Funds (RE AIFs).
What are SM REITs?
Real Estate Investment Trusts allow people to invest in real estate ventures without the hassle of direct ownership. Think of REITs as mutual funds for real estate. REITs are companies that invest in income-generating real estate, like offices, malls, and apartment buildings. They rent these properties and distribute most of this interest to investors as dividends.
SM REITs have been established as a separate asset class within fractional ownership to pool investments and acquire commercial real estate projects. SEBI introduced this new category of SM REIT to govern the fractional ownership platforms (FOPs) and safeguard investor interest with enhanced transparency, control, and credibility.
Now, those FOP structures will migrate into SM REITs, which pool investments equal to or more than Rs. 50 crores and issues units to at least 200 investors to acquire and manage real estate assets. Investors can invest in the units of SM REITs with a minimum subscription of Rs. 10 Lakh. Typically, a special purpose vehicle (SPV) is established to purchase and retain title to the property. Rental income generated by the property is distributed periodically by the SPV to the investors.
Pros
1. Accessibility: Fractional ownership through REITs lowers the barrier to entry for investing in real estate, as investors can start with smaller amounts of capital.
2. Transparency: SM REITs aim to create a framework for small REITs and are expected to formalize many unregistered FOPs by encouraging them to register under the SM REIT structure. This will enhance the transparency of investment and protect the investors with fair practices.
3. Passive income: REITs distribute a significant portion of their income as dividends, providing investors with a steady stream of passive income.
Cons
1. High set-up costs: The setting up and operating of SM REITs involves a range of costs such as SEBI registration fee, the cost of appointing independent directors, listing fees, underwriting fees, and more. These costs incurred by the company may impact investor return.
2. Management risks: The performance of an SM REIT depends on the management’s ability to acquire, manage, and dispose of properties effectively.
What are RE AIFs?
Real Estate-focused Alternate Investment Funds are SEBI-regulated investment instruments that invest in Indian real estate. It pools the funds of multiple investors on a scheme-wise basis under a relevant RE AIF scheme to acquire ownership in one or more under-development, under-construction, or finished residential or commercial projects.
RE AIFs have a fixed tenure and fund life, so the underlying assets must be sold, and the proceeds from it are paid to the investor by redeeming the unit held in the scheme.
Similar to REITs, fractional ownership through RE AIFs allows investors to own a portion of a real estate property or properties. Investors contribute capital to the AIF; in return, they receive units or shares representing their ownership stake in the fund.
Pros
1. Access to wider investment opportunities: With RE AIFs, it is possible to have fractional ownership in under-developed commercial and residential projects.
2. Professional management: RE AIFs are managed by experienced real estate professionals who conduct due diligence, select properties, and manage assets on behalf of investors.
3. Diversification: Investing in RE AIFs allows investors to diversify their real estate exposure across multiple commercial and residential projects and geographic regions.
Cons
1. Limited fund life: Since RE AIFs have limited fund life with the requirement to liquidate the underlying asset before the end of fund life, fractional ownership can be challenging in small to medium-scale projects.
2. Minimum ticket size: Certain RE AIF schemes also carry a minimum ticket size of Rs. 1 Cr per investor, which can prevent small investors from entering the real estate market through RE AIFs.
In Conclusion
Fractional ownership of real estate assets through SM REITs and RE AIFs allows individual investors to participate in the real estate market, diversify their investment portfolios, and potentially generate decent returns. However, you must carefully consider the pros and cons of these investments before committing capital.
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30 May 2024
4 mins read
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