Fractional Ownership in CRE and Managing the Fractions
So, you are interested in investing in commercial real estate. That too, via fractional ownership. But how to manage the fractions?
Commercial real estate is a great option for investment due to three main reasons - stability of the sector, independence from most other market factors, comparative better returns than most other stable investment options. Partnered with fractional ownership, this becomes an even more ideal long-term investment choice. Fractional ownership splits up any real estate asset into chunks of ownership that are easier for retail investors to consider. But as an investor, how do you go about managing the fractions you own?
Understanding Investment Goals and Asset Relatability
Investments are always in line with certain goals that need to be achieved. Without a specific goal in mind, most investors often look at very long tenures of investment with little to no risk involved. Investment assets falling under this category will mostly be government bonds, fixed deposits, recurring deposits, and precious metals. Commercial real estate also falls in the same category, however, based upon the tenant, the investment period can vary. Typically, in India, most tenants opt for lease periods of 5 years or more. That falls under the ambit of long-term investments.
So, if you are focussing your investments to be solely on commercial real estate, how do you time and space your investments out? What fractions should you consider for a comparatively short period of time and which are the ones that you’d look at for a longer holding period?
Sub-classes in commercial real estate are a great way to understand and space out your investments. The most popular “longer” investment options include specialized labs, manufacturing, and assembly lines. Since these asset types are more often customized for the tenant’s business and operations from the ground up, there’s very less likelihood of the tenant just switching places on a whim. Production facilities of medicines, chemicals, automobiles, and parts thereof, cold storage units combined with research and development spaces are the commercial properties to look at if you are investing for periods of10-15 years or more. There are also instances where businesses opt for a sale and leaseback of their own property to free up capital. Such properties are great picks for a laidback investment option.
Looking at investment periods of 7-10 years, warehouses and common transport and storage spaces are great options. Tenants who lease such spaces are mostly manufacturers who either have a production unit somewhere else and want a storage space closer to commercial or transport hubs or are e-commerce players who operate on a spoke-and-hub model of supply chain management. Based on the growth of the surrounding area and the people or businesses thriving there, the capital appreciation of such spaces can be quite decent.
Coming down to the most basic and commonly found lease option, you get tenants who opt for 3-8 years of a lease on office spaces. Based on the vacancy rate of the market and the availability of premium office space, these assets can be a literal gold mine for comparatively “shorter” investment periods. It’s not that after the lease period is over, you have to always hunt for a new tenant. Most times, existing tenants can renew their lease if the location seems preferable for them. A good way to know if your next office asset investment is going to be profitable is to find out if the tenant occupying the space has its employees staying within the radius and if its operations include businesses within the immediate area.
Managing the Fractions in a Fractional Ownership
Now that you know which kind of assets are preferable over what period of time, it’s a good practice to space out your fractions as per your investment goals. For example, a specialized asset might not have a lot of demand, but it will certainly be the most secure one among all other assets, albeit with a comparatively lower rate of return. Money that you would rather have safe and secure is to be invested in the fractions of such assets. Likewise, office spaces are great for getting major returns and also benefiting from the capital appreciation if you decide to hold them even after lease renewals.
Most investment firms will provide you with summaries of your investment in every asset. It is also preferable if you can view at a glance what kind of returns your investments are generating over a period of time. Strata, through its investor dashboard, gives you a comprehensive report about all the investments you have made across all assets and their individual performance. That way, you are in control of where your next investment will be. If an asset doesn’t match up to your expectations, you can even sell or transfer your ownership via the portal itself. For more information about how Strata works out the best investment options for you, visit us at https://www.strataprop.com.