REIT Vs Real Estate Crowd Funding | Should you consider ‘Fractional Real Estate Investments’?

Buying a property (real-estate) is one of the most important decisions that you will ever make. Buying a property involves a lot of money and it is a serious money decision.

But, real estate as an investment option is mostly unaffordable for most Indian retail investors. Real estate investment is also highly illiquid and is difficult to administer and manage.

How about a scenario where a group of individuals can get together to buy a property, enjoy the rentals it generates and finally be able to sell their share when they want.. So, each individual owns a fractional percentage or share of the invested property. Is this a good value proposition?

The prominent ways to own a fractional ownership share (directly/indirectly) in a real estate investment are REITs (Real Estate Investment Trusts) and through ‘Crowd funding’.

In this post, let us understand – What is a REIT? What is Real estate Crowd funding (crowd sourcing)? REIT Vs Real estate Crowd funding platforms. Should you opt for Real estate portfolio management services offered by online platforms like SmartOwner or PropShare?….

What is a REIT?

Real Estate Investment Trust, is a type of real estate company which operates like a mutual fund. Mutual funds pool money from different investors and use it to purchase financial securities like stocks, government bonds etc.,

Whereas, REITs raise money from different investors to invest in income producing real estate properties. REITs provide an opportunity for small investors to participate in real estate market without directly investing in large scale properties.

The basic idea behind the creation of REIT is simple – allow small investors to participate and gain from income producing real estate investment.

How does a REIT work?

• REIT collects the money from the investors. These monies are invested mostly in rent generating properties.
• Properties can generate rental income every month (periodic).
• REIT will distribute the rental income monies among the investors
• The capital values of the properties may also raise over a period of time.
• The Net Asset Value of the REIT units may raise depending on the capital appreciation.
• The investors can sell the units for gain/loss in secondary market (stock exchanges).

What is Real Estate Crowd Funding or Sourcing?

As discussed, a REIT works like your mutual fund. The REIT fund managers decide how the capital is deployed. Whereas, a crowd funded real estate investment works like your investment in direct Equity or Stocks. This can also be compared to an Equity Portfolio Management Service.

A real estate crowdfunding platforms in India, like SmartOwner (or) PropShare give their investors direct access to real estate investments (specific real estate projects). Whereas, a REIT gives its investors a broader exposure to real estate without directly owning the property.

A possible business model offered by these platforms could be as follows:

• A particular property is listed, say for, Rs. 10 crore on a portal.
• 100 buyers are required, each paying Rs. 10 lakh.
• Once 100 such buyers indicate their willingness to invest on the portal, they together form an LLP/ Company with each buyer holding equal stake/partnership interest in the Entity.
• This Entity acquires the property and hands over the management of property to the portal/platform.
• The portal manages the rentals flows and are distributed among its stakeholders as per their fractional ownership share.

But, note that Real Estate Crowdfunding and REITs are similar in a lot of ways. Both investment options permit investors to pool their capital with other investors. This offers a less capital intensive way to invest in a wider range of real estate.

However, REITs are generally suited towards large scale investments in commercial real estate whereas ‘shared property investment’ model like crowd funding can be best suited for small scale real estate investments.

REIT Vs Real Estate Crowd Funding | Which one gives better Investment Returns?

In developed markets like USA, REITs are very popular. But, in India, both REITs and Crowd funded real estate investments are now slowly gaining the popularity among the property investors.

• Minimum Investment :
  • Investors can bid for a minimum of 200 units and in multiples of 200 units in a REIT IPO. (We currently have two listed REITs in india – Embassy Office Parks REIT and Mindspace Business Parks REIT.)
  • The minimum investment in a crowd funded real estate investment can be around Rs 10 to 25 lakh.
• Direct Access Vs Indirect Access :
  • REITs give indirect access to real-estate.
  • Online Platforms like SmartOwner and PropShare give direct access to specific real estate Project.
• Diversification :
  • REITs can provide an opportunity to invest in different kind of real estate projects which spread across different geographies or locations. 
  • If a retail investor opts to invest say Rs 25 lakh in a specific real estate project then risk diversification is not possible.
• Listed on Stock Exchanges :
  • REITs are listed on Stock Exchanges (NSE/BSE), thus providing an relatively easier EXIT option for investors.
  • The entities formed through Online Property Share Portals may not get listed on stock exchanges.
• Under-Construction Properties :
  • REITs are allowed to invest 80% of the pooled amount in Constructed properties and only 20% amount can be invested in under-construction projects.
• Regulation : Both models are regulated by the SEBI.

Another important aspect that we need to look it as ‘Returns’ on your investment. REITs provide income in the form of Dividends and Capital Appreciation.

REITs distribute surplus income to its unit holders in the form of Dividend payouts. As per SEBI’s mandate, REIT’s in India have to pay out 90% of their Net Profits as dividends to its shareholders. It means, not more than 10% of PAT can be kept as retained earnings by REITs.

We currently have two listed REITs in india – Embassy Office Parks REIT and the recently listed Mindspace Business Parks REIT.

What is the Dividend Yield offered by Embassy REIT for its unitholders in FY 2019-20? – Let’s have a look..

Embassy REIT has made payouts (Dividend + Interest) of around Rs 1,882 Crore (or) Rs 24.39 per unit. That’s a dividend yield of around 8.3%.

Embassy REIT was listed on BSE and NSE on April 1, 2019. The Share price has seen decent appreciation (as can be seen in the above graph) till March 2020.

We can see the sudden fall of its unit price during March-April period. The correction has wiped out most of its gains of the investors since its listing in April 2019.  This is primarily due to the prevailing uncertain environment (Covid-19).

Now, let’s have a look at some examples listed by ‘Propertyshare.in’ on their portal.

If you look at the above listed properties, the indicative rental yields (like the dividend yield of REITs) and Return Targets (like the capital appreciation w.r.t. REITs) vary from Property to Property.

Should you invest in REIT or Real Estate Crowd Funded Project?

Off-late, I have been receiving good number of queries related to ‘fractional ownership in real-estate’. As per my observations, the primary reasons for looking for this ‘alternative investment avenues’ are;

• The interest rates on Small Savings Schemes and Bank deposits are very low (and/or);
• They can not afford to invest in a real-estate property due to the high property prices.

So, should one look to invest in ‘property sharing model’ or REIT? Which one is a better investment option?

Let’s put it this way – ‘Which one is a better investment option? – Mutual Funds, Shares (direct equity) or Portfolio Management Service. There is no right or wrong answer to these questions.

An investor needs to pick an investment tool based on his/her investment objective(s), risk profile and time-horizon.

You may ponder over the below points before investing in REIT or Crowd-funded real estate project(s);

• Who can invest? – If you are looking for periodic income (not guaranteed) and would like to have an exposure to real-estate.
• Expected Returns/Yields – Though the dividend yields from REITs (or) indicative Rental yields from ‘specific real estate projects’ are around 7 to 8%, the past returns may or may not be achieved in the future. Also, note that these returns are not guaranteed ones.
  • With demand for office and commercial spaces likely to reduce, as companies consider permanent work from home, revenues for REITs or Crowd funded investments may take a hit in the next few quarters
  • So, not advisable to expect fantastic or abnormal rental yields from real-estate investments.
  • Always remember that returns are mostly dependent on ‘property location’, type of tenants, type of property, lease agreement/renewals, occupancy ratio etc., So, before investing, kindly do some research on these parameters.
• Options : If you would like to invest in REITs, we now have only two options in Secondary market (Embassy/Mindspace). Whereas, you may have more options w.r.t ‘property sharing’ model.
• Delay in Construction : The REITs can invest up to only 20% of the pooled money in under-construction properties. This may not be the case with ‘crowd funded’ model. This may affect the rental yields and return targets.

• Personal Choice : Based on my risk profile, given a choice, I would prefer REIT to Crowd-sourced model.
• Worth investing Now? : If I have to invest NOW, will definitely wait for few more quarters before picking REITs where underlying assets are mainly Commercial Real Estate Properties.

I hope you find this post informative. Have you invested in REIT? What is your view on ‘fractional ownership’ models?. Do share your views, cheers!

Continue reading :

1. Checklist of Important Property Documents in India | Legal Checklist for Property Purchase
2. Latest BDA (Bengaluru) Plots E-auction 2020 | Details & Online Procedure
3. How to save Tax on Rental Income in India?
4. List of all Popular Investment Options in India – Features & Snapshot

(Kindly note that ReLakhs.com is not associated with any of the above mentioned Real-estate linked Companies. We have not received any monetary benefit for publishing this article. This post is for information purposes only and not to endorse any service provider. We are not biased towards any specific Firm.)

(Post first published on : 18-August-2020)