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REIT vs Fractional Ownership where investors should invest

We need to know these investments and how they help diversify portfolios towards better and consistent returns.

August 03, 2021 8:49 IST | India Infoline News Service
The real-estate sector has never been so lucrative with so many options. The new investment opportunities provided by Real-estate Investment Trusts (REITs) and Fractional Ownership (FO) in commercial properties have opened a whole lot of opportunities for smaller investors to experience the high returns on the commercial grade A properties which were beyond reach earlier for them.

Before deciding where to invest, we must first have a comprehensive understanding of both the institution and the market. We need to know these investments and how they help diversify portfolios towards better and consistent returns.

A REIT is a company that owns or producesfinance income-producing real estate across a range of property sectors.On the other hand, fractional ownership allows a group of investors to create a "Special purpose vehicle," or "SPV," through which they can invest in a commercial property and generate income through lease for investors on agreed terms. Let’s examine the advantages and disadvantages of REITs and fractional ownership, let’s discuss in detail which is the most beneficial.

Property Selection-Investors in REITs have no role in which properties are chosen. The investment manager makes this choice, but with fractional real estate investing, the members who own the SPV have total control over whatever real estate properties they buy.

Property Type-According to REIT operational rules, income-producing properties should account for at least 80% of a REIT's investment portfolio. This necessitates the acquisition of existing assets.On the other hand the fractional ownership model permits the acquisition of both existing and under construction properties. The investors need to be clear about their investment needs, while investing in under construction properties through FO. 

Potential Earnings-REITs must pay at least 90% of their taxable income to shareholders in the form of dividends. Under FO,revenue generated by the property is also paid to investors at regular periods, generally monthly or quarterly.The SPV holding company of FO charges 1-2% yearly on the investment made by the customers.

Transferability-REIT investors do not physically own a property. As a result, they are unable to transfer ownership of property. They are, however, free to sell their shares at any time. Investors can freely transfer their fractional ownership share in a fractional property investment.

Diversification-The acquisition of REIT shares allow investors to diversify their portfolios. Investors are not actively involved in the portfolio development process since REIT portfolios are diversified by the real estate market and the real estate industry by design. Investors who choose the fractional investment option have complete control over the diversification process. They have complete control over the properties and asset types they invest in.

Minimum Investments-With SEBI’s new ruling an investor can invest as low at 10-15 k in REITs.Fractional ownership on the other hand needs a minimum investment of anywhere between 10-25 lakhs.

Terms-Individuals who invest in publicly listed REITs often have the option to sell their shares at any time. On the other hand,fractional ownership is a longer-term investment with a set holding duration, generally between 5 and 10 years. Some new age start-up platforms are offering the investment without any lock-in period.

With so many variations between the two real estate investing alternatives, it's only natural to wonder which is the best choice. In reality, none is objectively superior than the other. They're both capable of generating healthy profits. Every commercial real estate investor has unique preferences, risk tolerance, and time horizon. As a result, one of the two alternatives may be a better fit for a particular person's requirements. This is why it is critical for each investor to conduct their own due diligence and select the solution that is best suited to their own circumstances. Both fractional property and REITs work in quite different ways and can provide investors various benefits. It all boils down to the investing goals in the end.

The author of this article is Divaker Bhalla, CEO- DNA Ventures Pvt Ltd

The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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