Is investing in Fractional Ownership of Commercial Office Space Profitable?

People begin to consider investing when they have extra money. Typical queries include where to put money, how profitable it will be, and how safe it is to put money in a certain place. Although fractional investment has been more common in the West, it is becoming more and more well-liked in India. It makes it possible for investors to purchase commercial office space, even in small amounts. You might not be able to accomplish this alone. Investing in commercial office space also enables portfolio diversification.

Fractional ownership opens up opportunities for the purchase of prime commercial office space that would not have been feasible otherwise. This asset type is accessible to members of the average middle class. Prior to now, residential real estate was more popular among Indian investors than commercial office space. After a period of stagnation in residential real estate sales, investors began to search for more profitable ventures. 

Investing in real estate is a more stable option. This presents a less hazardous choice for investors. In real estate, the projected five-year IRR is 16–20% while the rental yield is 8–10%. A significant portion of those looking to use commercial office space as a source of alternative income are young Indians and non-resident Indians.

What is Commercial Office Space?

A piece of property used for business is known as commercial office space. Rather than being a living area, it serves as a workspace. Residential real estate is the segment that includes living spaces. Tenants of commercial office space frequently lease it to them so they can carry out revenue-generating operations. From a single storefront to a sizable retail centre, commercial real estate can be found. Commercial office space includes things like office space, retail establishments, hotels and resorts, and medical institutions. 

What is Fractional Ownership?

A percentage of an asset is called fractional ownership. Individual shareholders purchase fractional ownership shares of the asset. They split the asset's advantages, including usage rights, revenue sharing, first dibs, and discounted pricing.  

What is Risk like in Real Estate?

  • It is an illiquid asset due to its immovable nature

  • Which renders it relatively immune to market risk

  • Its lack of occupancy

  • Tenants quitting early


Fractal Ownership in Commercial Office Space

  • Enables more investors to contribute to a larger investment in the asset by paying their share.

  • Their % contribution to the overall sum is tied to their return.

  • Depending on the amount they invested, each investor is the asset's owner.

Risk Assessment 

Because real estate is immovable, it is a largely risk-free investment.

The asset needs to be thoroughly studied, and financial modelling needs to be done. For example, you ought to be aware of the builders' track record and past experience.

Commercial Office Space vs Residential Real Estate 

  • Strict lease terms, longer lease periods, and a lock-in period allow investors to count on returns from a CRE investment.

  • Residential property market requires significantly more time and effort to maintain the returns from the asset.

  • Commercial office space typically proves to be a better deal than residential real estate.

  • CRE offers more income (2x gain over residential)

  • CRE has a higher annual rental appreciation mark.

  • CRE is highly sellable.

  • CRE has much better returns once sold.

Investing Individually

  • Property, claims, rent value in the market and the history of the price of the asset all become the responsibility of the individual.

  • Investment companies or firms charge to take care of all of the above.

REIT vs CRE

  • One could invest in CRE and join a Real Estate Investment Trust (REIT) to avoid all of the aforementioned annoyances.

  • This would prevent you from selecting which REIT assets receive which portion of your investment.

  • Fractional ownership would provide you this option.

Companies that own or finance income-producing real estate in a variety of property industries are known as REITs. To be eligible as a REIT, these businesses must fulfil a number of requirements. The majority of REITs are very beneficial to investors and trade on large stock markets.  


Fractional Ownership

  • To handle investments in an asset, an SPV (Special Purpose Vehicle) is typically used.

  • The SPV oversees both the asset and the rental return distribution.

  • Since the investment amount is divided, investors are free to choose the amount and degree of risk they wish to take.


Source Link : https://addindiagroup.com/is-investing-in-fractional-ownership-of-commercial-office-space-profitable/

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