Complete ownership, fractional ownership, and REITs: Is real estate now within reach of every Indian?

For Indian investors, real estate, fixed deposits, and gold have been the traditional favourites for ages. However, in the last decade, mutual funds - specifically, equity mutual funds - have increasingly found a place in the portfolios of Indian investors. And recently, alternative investments have been trying to make inroads.

While financial asset classes (equity mutual funds and alternate investments) are trying to grab the attention of investors, traditional favourites such as real estate, gold, and fixed deposits are fighting back to regain the lost wallet share. In this article, we will explore why real estate has been a favourite investment for most Indians, how real estate has performed as an asset class, and the various ways of investing in real estate.

Asset allocation: The core of investing

There are various asset classes to choose from. However, as investors, we don't know which asset class will give the best returns this year and in the coming years. Hence, asset allocation requires investors to spread their investments across various asset classes.

Every asset class has a specific role in an investor’s portfolio. Some of these include:

a) Equity: Has the potential to give inflation-beating high returns and create wealth. However, it is volatile and prone to sharp falls. Suitable for investors with an aggressive risk profile.

b) Fixed income: Generates regular income in the form of interest. When equity markets fall sharply, it cushions the impact on the overall investment portfolio. Suitable for investors with a low to moderate risk profile.

c) Gold and silver: Precious metals act as a hedge against inflation. They are also a safe haven during times of uncertainty such as war, pandemic, political uncertainty, etc.

d) Real estate: It can generate monthly rental income and capital gain in the long run and has a low correlation with equity markets. It can shield your investment portfolio against stock market volatility. In India, residential real estate provides one of the best income tax benefits compared to other asset classes.

e) Alternate assets: Alternative asset investments such as lease financing, P2P lending (peer-to-peer lending), invoice discounting, angel investing, etc., provide diversification for the overall investment portfolio. They can provide regular income along with stability when stock markets are volatile.

Types of asset classes in India

(Source: https://www.holisticinvestment.in/introduction-to-asset-classes-and-practical-asset-allocation/)

Investment in real estate

Real estate as an asset class can involve owning it in various forms - residential property, commercial property, plots, agricultural land, etc. It can generate income in two ways:

a) Rent: An investor can buy a property and rent it out. The rent agreement can be for a short term, such as 11 months, or long-term, spanning many years. Depending on market trends, the rent can be revised annually in consultation with the tenant. The rental yields from real estate are steady and usually appreciate over time.

b) Capital appreciation: As per the age-old belief, in view of the finite land supply and the ever-increasing real estate demand, its price will go up in the long run. Many people buy real estate as an investment in the hope that the property prices will appreciate over time and they will make a good profit at the time of sale. In the past, real estate prices have done well, though there are periods when prices appreciate sharply and periods when prices are stagnant or even trend downward.

Also Read: Best Real Estate Stocks In India In 2022

Performance of the real estate sector
During the decade FY 2010-11 to FY 2020-21, the All-India Housing Price Index (HPI) grew by an average of 10.1% per year.

Chart: All-India Housing Price Index (HPI) -10-year growth

(Source: https://www.99acres.com/articles/indian-property-market-sees-10-percent-y-o-y-growth-rbi.html)

Note: The Housing Price Index (HPI) data is released by the Reserve Bank of India (RBI) every quarter. It captures the house registration transaction data of ten major cities. It also measures how house prices are moving in India.

While the average prices across the ten major cities increased by an average of 10% p.a., some of the individual cities did better. For example, in Lucknow, house prices increased by an average of 15% p.a. during the same time, and in Kolkata, house prices increased by an average of 12.5%.

Chart: Individual cities - Housing Price Index (HPI) -10-year growth

(Source: https://www.99acres.com/articles/indian-property-market-sees-10-percent-y-o-y-growth-rbi.html)

Whether we consider the cross-city average or individual cities, these are good returns. They are comparable with equities and other asset classes. In fact, they are better than returns from asset classes such as fixed income and gold.

Indian residential real estate - current consumer sentiment

Anarock’s ‘Consumer Sentiment Survey - H1-2022 Indian Residential Real Estate’ highlighted some interesting facts about customer sentiment towards the Indian property market. Some of these include:

a) Real estate is the best asset class for investment
According to the study, 59% of respondents said they prefer to invest in real estate as they found it the best asset class for them. The number stood at 54% last year. Apart from real estate, 28% of the respondents found stock markets the second-best asset class for investment. Only 7% of respondents voted for gold, and 6% for fixed deposits.

Survey finding - Real estate is the best asset class for investment

(Source: https://api.anarock.com/uploads/research/CONSUMER%20SENTIMENT%20SURVEY%20%E2%80%93%20H1-2022.pdf)

b) Profits from other asset classes to be used for buying a house

We saw how 59% of respondents considered real estate the best asset class for investment. The remaining 41% of respondents said they currently invest in other asset classes, such as stock markets, gold, and fixed deposits, for wealth creation. But most of the 41% said they would like to use the profits from their other investments to buy real estate (a house) in the future.

c) Purpose of buying real estate
While most people want to buy real estate, a majority (69%) plan to buy it for their own use (to stay in). The remaining 31% want to buy real estate for investment purposes.

Survey finding - End use of real-estate

(Source: https://api.anarock.com/uploads/research/CONSUMER%20SENTIMENT%20SURVEY%20%E2%80%93%20H1-2022.pdf)

d) Ready-to-move-in or under-construction property?
According to the survey, 30% of the respondents want to buy a ready-to-move-in property. So, that indicates that people are not willing to wait by buying an under-construction property. On the other hand, 25% are ready to buy a newly launched property, 27% are willing to invest in a property that will be ready within a year, and 18% in a property that will be ready within six months.

e) Budget for a house
Respondents were asked what their budget was for buying a house. 28% of people said they prefer properties that cost less than Rs 45 lakh. For 34% of respondents, the budget was Rs 45-90 lakh. The budget for 24% of respondents ranged from Rs 90 lakh to Rs 1.5 crore.

Also Read: Gold Investment Vs Real Estate Investment - Which Is A Good Option For Women In The Long Run?

Ways of buying real estate in India

In the earlier section, we saw how many Indians consider real estate the best asset class for investment. Now, let us look at some ways of buying real estate.

a) Buying the entire physical property
The oldest and most used method of purchasing real estate is to contact the property developer (or owner, in the case of resale property). Whether you want to purchase a residential property, commercial property, or plot, you need to contact the developer or existing owner and negotiate the price, complete all the paperwork, make the payment, and get home ownership.

b) Buying fractional real estate
Due to the high cost of real estate, paying for the entire property (whether from one’s own money or through a loan) is only possible for some people. To solve this challenge, in the last few years, the concept of fractional ownership has emerged and is gaining momentum.

In this system, a group of buyers come together and pool money, which is then used to purchase the property. The property is divided into shares. For example, a property worth Rs 5 crore may be divided into 20 shares of Rs 25 lakh each. The 20 shares may then be sold to individuals. For every share of Rs 25 lakh, an individual will get 5% fractional ownership of the property.

Various platforms provide individuals with an opportunity to get fractional ownership of a property. Some of these include Myre Capital, Strata, PropertyShare, hBits, etc. With fractional ownership, these platforms reduce the cost of property ownership for individuals to between Rs 5 lakh and Rs 25 lakh for one fractional share. 

These are mostly commercial properties. So, fractional owners earn regular monthly rental income. After the specified period, the platform may sell the property and distribute the profits among the fractional owners. If a shareholder wants to sell their share(s) earlier, they can find a buyer on their own, or the platform can facilitate the sale.

c) Buying Real Estate Investment Trust (REIT) units
In the above section, we saw how one can get fractional property ownership with just Rs 5 lakh to Rs 25 lakh. However, for many people, even that amount can be very high. In such a case, an individual may look at Real Estate Investment Trusts (REITs).

A REIT is a trust that purchases commercial properties. These properties are then rented or leased out to various corporate tenants. The REIT operates like a mutual fund. It raises money from investors (unit holders) and issues them units (shares) in proportion to their investment. As per SEBI guidelines, a REIT has to invest at least 80% of its money in income-producing assets, i.e. commercial properties that are ready for occupancy and can be given on rent/lease.

By purchasing REIT units, you become a shareholder in the REIT. A REIT has to distribute at least 90% of its net distributable cash flows (income expenses) to unitholders at least twice a year. Investors can expect to earn an annual distribution yield of 5-8% p.a. depending on the annual Dristibution Per Unit (DPU) and the price per unit. The capital appreciation is over and above the distribution yield.

In India, there are three listed REITs as of November 2022:

1) Embassy Office Parks REIT
2) Mindspace Business Parks REIT
3) Brookfield India Real Estate Trust REIT

All three REITs make quarterly distributions to their unitholders. The share price of a single unit of each of the three REITs is below Rs 500 (as of 15 November 2022). So, you can get a piece of commercial real estate at a very low price that is affordable to most investors.

Let us take the example of Embassy Office Parks REIT to understand the distribution yield. For FY2023, the company has guided a DPU in the range of Rs. 20.62 - 22.79. As of 18th November 2022, the unit price per share is Rs. 334. Based on the DPU guidance and the current share price, the distribution yield range comes to 6.17 - 6.82%. Please note, any capital appreciation is over and above the distribution yield.

Also Read: Real Estate Funds: Why Does It Make Sense To Invest In Them?

Conclusion

We saw how the Anarock survey highlighted that real estate continues to be a favourite investment for many Indians. However, very few Indians are able to buy their own residential or commercial property due to the high prices. The fractional ownership concept brought down the real estate ownership cost to between Rs 5 lakh and Rs 25 lakh, so more people can afford to buy it. REITs have further brought down the real estate ownership cost to below Rs 500. With such a minimum investment requirement, real estate is now within reach of all, and every Indian can fulfil their aspiration of owning a piece of real estate.