Democratization of property ownership: Investors can now choose from REITS to fractional ownership

(Representational image) Fractional ownership gives retail investors the opportunity to pool their resources and collectively own a high-value property at a lower cost.

Affordability and democratization of property ownership has gained a foothold following regulatory mechanisms being put in place for the real estate sector. Prior to demonetization and RERA, the dominance of black money in the real estate market had let to speculative buying and malpractices like pre-launches of projects, resulting in artificially inflated prices.

However, demonetization and Benami Transactions (Prohibition) Amendment Act 2016, followed by RERA, effectively checked the circulation of black money.

According to Anarock, black money in India's housing market is currently down by 75-80% in primary market transactions. This has put an end to artificial price inflation, in turn making properties much more affordable. The investor-led speculative market has now become consumer-centric, with prices remaining stable and range bound for the last few years.

The Central government's policies to liberalize FAR and density norms, together with tax incentives to developers and homebuyers, resulted in homes becoming much more affordable. The government's reformative policies have also seen home loan interest rates touching an all-time low in 2021. With stable home prices, it is a perfect recipe for home accessibility for the common man.

In case of affordable and mid-priced housing, the government has continued with the credit-linked subsidy of up to Rs 2.67 lakh under PMAY for first-time homebuyers to improve home affordability. JLL's Housing Purchase Affordability Index (HPAI) 2021 points to a consistent improvement in home affordability between 2013 and 2021 in key cities. It puts Mumbai, Delhi-NCR, Chennai, Bengaluru, Pune, Hyderabad and Kolkata index at 100, 143, 185, 191, 198, 203 and 2018 respectively, with a score of 100 and above representing affordability.

Small investments were the flavour in 2021

Today, there are new avenues for retail investors, involving small investments with high return on investment. With an investment of just Rs 15-20 lakh, a buyer can purchase a ready-to-move-in furnished studio apartment with a monthly lease guarantee. One also has the option of buying a ready-for-possession lockable office space of over 400 sq ft. After two waves of Covid-19, the increasing trend of high street retail and retail SCOs also offer good opportunity.  With an investment of  Rs 25-30 lakh, there is an equally good opportunity for retail investors in convenience retail outlets (350-450 sq ft) in gated residential complexes, offering significant capital appreciation.

But it is the reforms related to real estate investment trusts (REITS) which opened the doors for making real estate investments inclusive. It opened an opportunity for safe and profitable investment into rent-yielding A-grade commercial office assets with a small sum. Earlier, the threshold limit for investment into REITs was Rs 50,000 but it was lowered in 2021. Like in the case of mutual funds, one can make an investment of as low as Rs 15,000-20,000 to buy REITs.

REITs ensure risk-adjusted returns to investors because they are well regulated and professionally managed. It is mandatory to put 80% of the total investments into rent-yielding high quality commercial real estate assets.

Moreover, the regulation governing REITs stipulates that 90% of the profits earned are to be distributed among investors/unit holders. Further, as they are exempted from Dividend Distribution Tax with a relaxation provided for capital gains tax, their yield is higher. RBI's amendment to allow FPIs to invest in REITs further improved liquidity and returns of unit holders.

According to a report by ICICI Securities, the three REITs in India are expected to offer distribution yields of 6-9% starting from FY 2022 along with 12-18% capital appreciation.

Along with REITS, the new trend of fractional ownership has further democratized real estate ownership.

Fractional ownership gives retail investors the opportunity to pool their resources and collectively own a high-value property at a low cost. With an investment of Rs 20-25 lakh, retail investors stand to receive fairly good returns.

According to Ajay Rakheja, independent commercial real estate consultant, occupiers and developers with pre-leased office assets give returns varying from 6-7% to 8-9%. For built to suit assets, the returns are an additional 5%. Moreover, there is a %% capital appreciation over a year, with life time returns amounting to 12-15%. This investment model has already gained a foothold in commercial office assets. Several start-up investment platforms have come up to promote fractional investment.

After two waves of the pandemic, the trend of Homestays has fuelled investment into holiday homes. Holiday Homes can give returns of around 12-15%. Developers and fractional investment platforms are also opening up to luxury holiday homes and fractional ownership options.

Going forward, fractional ownership in residential real estate is here to stay in 2022. We will also see fractional ownership making inroads into retail real estate, (especially with the emerging trend of neighbourhood malls) and alternate asset classes like warehousing and solar assets, thereby giving a boost to the process of democratization of property ownership.

Also read: India REIT performances: Surviving the pandemic