Renivesh: Real Estate Fractional Ownership Investment Platform for Luxury Residential & Commercial Real Estate Investments in India (Delhi-NCR)

Fractional property ownership is the paradigm changing investment method in the real estate market. In fractional ownership, a high-value property is jointly invested by a group of people through a special purpose vehicle (SPV) company. It’s the millennial way of making high-value investment affordable and within reach.

Investing in real estate properties requires huge capitals. Traditional investment in real estate does not allow everyone to benefit from high-value properties. Only the ultra-HNIs and wealthy are able to invest in the most prime properties — residential, commercial and investment projects. Prime properties yield high returns and offer greater wealth appreciation. However, it’s beyond the reach of most because of the huge values of these commercial properties. Fractional property investments allow people with much lower investment capacity to enjoy the same benefits that ultra-wealthy and big real estate investors enjoy. It is also much safer than traditional real estate investing as your money can be diversified across different properties and reduce the risks associated with any property ownership.

Think of fractional ownership as turning a property into a company and then selling the shares. It allows investors to own as much as they can afford. With fractional property investments or property shares, people can invest in properties worth crores even if they can only invest a few lakh.

When a real estate asset (generally, commercial property) is acquired through funds pooled by multiple investors, each of the investors owns the property in proportion to their fund contribution. All investors get fractional ownership of the property and benefit from the share of rental income of the property. When the property is finally sold, the money generated from the sale is distributed and everyone gets to benefit from the capital appreciation of the property.

Fractional ownership of commercial real estate unlocks the door for small investors into the world of high-yielding Grade-A commercial properties which would have required a huge capital investment. With fractional property shares, retail investors can benefit from the prospects of high returns.

Fractional property ownership also provides relatively stable rental yield for investors as the tenants are top corporate houses and MNCs. When the economy is turbulent, small businesses are the first to feel the heat. When you own a small shop or office, your tenant might vacate the premises in a difficult economic situation. With deep-pocket companies, the rental lease agreements are for the long term (15 years or even longer) and they are less likely to shut shop.

When a property is purchased through pooling of funds, the money is first collected into a special entity created for the purpose of owning and managing the property. This special purpose vehicle (SPV) company then buys the property, and investors own the property through it. The property is not registered in any investor’s name. The property is registered in the name of the SPV. The investors have a shareholding in the SPV based on the proportion of their investment and own equity shares and debentures in the SPV company.

Rental income for Grade-A commercial offices and retail spaces generally ranges between 6-10% (annual). The rental returns are high for Grade-A commercial properties such as office spaces, retail spaces, and commercial warehouses. Before selecting any property for investment, due diligence is conducted by the asset management company, both in terms of its legal standing and as an investment opportunity.

The return on Grade-A commercial property investments is in the form of:

• Stable rental income of 6% – 10% per year from the pre-leased property.
• Capital appreciation (increase in property price) of >5% per year.
• Net return on investment is around 12-20% at the time of property sale.

CRE investments yield a capital return of more than 5% annually if the investor stays invested for a long tenure, say a minimum of 5 years. The targeted IRR is around 15-20% annualized, and a sale is executed only when the investment objectives are met.

Every investment comes with risks. Investments generally considered safe, such as Fixed Deposits, come with risks too. Even your money kept in a bank is subject to risks. Like any asset class, the returns from investing in CRE through fractional ownership are also subject to the risks associated with the asset class.

Some risks associated with CRE are tenancy, liquidity, and market risk. The asset managers select properties with the least risks and conduct due diligence to minimize the risks associated with the investment. The rental income is subject to occupancy, and this risk is limited by investing in pre-leased properties with Grade-A tenants with long-term lease and lock-in tenures.

As long as the property generates rental income, you will be charged a management fee (~1% of the investment value) every year by the asset management company that undertakes the asset maintenance, manages tenancy, and other asset management activities. Generally, the management fee is charged only for the duration you receive the rent.

The asset management company may also charge a performance fee when the capital appreciation exceeds a certain minimum threshold. You pay a fraction of the returns only when the asset brings high yields.

Fractional property ownership can be sold and exited like other properties.

Generally, there is a small lock-in period of ~6 months, depending upon the property. Investors can sell their property share to any other investor at any point in time. It’s a sale of ownership along with the income benefits. When you find a buyer, the asset management company will assist you with the transfer of your equity and rights to the buyer.

Once a property achieves its destined investment objective, a sale of the property is executed after a collective decision from the investors.

Fractional property investment exits take place in the following manners:

• Collective exit when 75% (or pre-decided vote) of the investors decide to exit the property and ask the asset management company to find a prospective buyer for the property sale. Generally, the asset management company recommends selling the property in 4-5 years.
• Individual investors can exit by selling their fraction to any investor and the asset management company facilitates the share transfer.
• Individuals can approach the asset management company to facilitate the sale of their holding.

Non-resident Indians (NRIs) can invest in commercial real estate through fractional ownership like any other residential and commercial property. NRIs need to invest through an NRO account or a domestic savings bank account in India. Taxes on the income generated from their property holding will be taxed according to the existing income tax slabs beyond the exempted income limits updated by the government of India. Apart from this, NRI investors enjoy the same benefits as other investors.