Rise of fractional ownership in commercial real estate in times of covid uncertainty
Covid will be remembered as a watershed moment in the history of humankind, making an indelible impact on our lives. It’s impact on future of real estate will be felt more around the investment demand rather than the end user demand. Covid will accentuate the gradual shift in real estate investment demand, which has been in the works for some time due to inherent dichotomy of the current structure of real estate investing with two key wealth management trends digitization and diversification
Technology is now leading the change in consumer behaviour. The impact is so pervasive that every rupee that a consumer either spends or saves today has a billion-dollar start-up vying for its attention. A young demography, their strong desire for ease and a hyper entrepreneurial ecosystem will keep pushing the boundaries of technology in every sphere. By some counts the pandemic has accelerated this digital adoption by at least five years, forcing businesses to quickly evolve strategies to stay relevant.
Unfortunately, real estate sector has been the slowest to digitize. For an investor, the whole experience of purchasing and post-purchase management remains a stressful experience. Trust in technology infrastructure and a one-touch purchase behaviour may over a period of time make the arduous real estate investing process fall out of favour with many future investors.
Diversification
Real estate has a 77% share of India’s average household wealth but HNIs allocate just about 30% of their wealth in real estate. A lower allocation to RE by those with more disposable incomes indicate that given a choice, investors tend to diversify out of RE.
Portfolio diversification is going more mainstream as it yields better risk adjusted returns and can help fulfil multiple investment goals. Affordability, liquidity and transparency are now key decision factors during investment decisions. Real estate currently scores low on all these counts. As a matter of fact, the huge financial obligation one has to undertake to invest in real estate squeezes out other investment opportunities from the portfolio, which is bound to weigh in negatively going forward as access to varied opportunities open up. Especially the non-tradition opportunities become accessible, easier to participate in and exit. There are global equities, crypto-currencies, P2P lending, funds, art, etc.
Focus on commercial real estate
As uncertainty remains high in public equity and bond markets, investors want to hedge their risks by diversifying their portfolios with Alternative investments.
By definition, CRE is a property used for business purpose, be it an office, warehouse or say a retail store. Besides superior return potential, what attracts smart money to seek Commercial Real Estate is predictable cash flows and capital preservation through an asset-backed investment. CRE has a low correlation with public markets and investors globally invest in this Alternative Investment class to hedge against volatility.
As a matter of fact, commercial real estate comprises over 90% of the real estate portfolio of HNIs.
Innovation driving retail participation in CRE
Not many have the ability to source, acquire and manage a high-quality commercial space with locked-in multi-year lease with a highly credible tenant. Thankfully, recent market innovations have brought this attractive asset class within the reach of retail investors, who now generate a healthy passive income through such high-yielding investment properties.
These are primarily listed REITs and private fractional ownership platforms. Essentially both provide access to retail investors and take away the hassle of acquisition and management.
Understanding fractional ownership better
Fractional ownership, simply put, is a method of ownership where investors collectively put small sums of money to individually own a fraction of a high-value property. The unified purpose is to gain superior returns over time.
While such kind of holding structures in real estate are quite old, the innovation is about how new-age platforms are using technology, to increase depth of its investor base and making the whole process of acquisition and management hassle-free, and leveraging professional expertise to differentiate.
Investors now can look forward to invest in Real Estate with affordability and liquidity, opening up a whole new way of investing.
Future of real estate investing
Fractional ownership will emerge as a $5 billion market opportunity by year 2030 and will find a much wider industry acceptance as investor awareness and process maturity of this nascent ecosystem grows. Developers should look forward to having fractional ownership products in their portfolio to keep pace with the times
