Typically, Indian households allocate 77% of their assets in real estate as this asset class offers high growth potential, high returns and protected sources of income. Moreover, with SEBI’s recent directives on fractional ownership and compact REITs, the sector is poised for further significant growth in 2024.
However, navigating the real estate market and selecting appropriate outlets in accordance with applicable regulations and government rates can be complex, especially for novices.
Read also: Income Tax Strategies for Real Estate Investors: Maximizing Deductions and Minimizing Liabilities
This article discusses a variety of real estate investment options suitable for different investor profiles and risk appetites.
1. Properties for rent
The established approach is to acquire residential properties to generate rental income. This method, although uncomplicated, requires significant initial capital and ongoing maintenance costs. Before investing, make sure the property is free from legal problems. Acquisition options include leasing, outright purchase or financing through loans.
It is worth noting that there is a growing trend towards investing in luxury rental properties, especially in major Indian urban centers such as Mumbai, Delhi and Bangalore. Industry data shows that luxury residential properties in these cities consistently outperform other established assets, boasting annual price growth of 4% to 7%.
2. Holiday homes and flipping
Wealthy buyers are expanding their property portfolios beyond primary residences to include lucrative second homes. In India, demand for secondary residences has skyrocketed post-pandemic, reaching a staggering USD 1.394 billion by the end of 2021, an impressive enhance of 88.63% over pre-pandemic levels.
Coupled with strategies such as house flipping, where properties are renovated to enhance their resale value, Indians are profiting from their second homes by turning them into holiday getaways, attracting a lot of interest from tourists.
Also Read: 5 Imperative Strategies to Maximize Your REIT Investment in 24-25
3. REITs and ETFs
Exchange Traded Funds (ETFs) and mutual funds provide indirect exposure to real estate by investing in related assets. Options include ETFs that focus on shares of real estate companies, such as publicly traded construction companies, or funds invested in REITs (real estate investment trusts).
REITs operate similarly to mutual funds, pooling investor capital to purchase income-producing assets. These assets generate rental income, which is then paid to investors in the form of dividends. Investing in REITs offers various benefits such as immediate liquidity, affordability, regulatory protection, tax benefits, among others. Because dividends make up a significant portion of profits (90%), REITs provide a steady stream of income, often tax-free.
4. Partial ownership of commercial real estate
This pioneering approach involves many investors combining funds to jointly purchase a commercial property. This reduces individual investment costs and risk exposure, while allowing rental income to be shared. Industry experts are forecasting significant growth in this segment, with fractional ownership real estate in India expected to reach $8.9 billion by 2025, representing an annual growth of 10.5%.
Commercial properties typically offer higher rental yields compared to residential options. It could potentially generate an investment of Rs 25 lakh in fractional ownership ₹2 lakh annual rental income (calculated at 8-12 per cent rental yield) coupled with at least ₹1.25 Lakh capital appreciation per annum contributing to wealth creation and improved monthly cash flow.
Also read: Answers to your questions: I want to invest in Nifty Realty Index. Please discuss this and how it is taxed?
Choosing the right option
The optimal investment option depends on various factors, including available capital, desired liquidity preferences, preferred regularity of cash flow, and risk tolerance. Owning, renting and flipping properties typically require significant capital and real estate experience.
ETFs provide high liquidity and lower costs, but may not offer monthly dividends and may require you to sell shares to obtain a return.
REITs and fractional ownership, while relatively recent, are gaining popularity because they provide retail investors with access to the lucrative commercial real estate (CRE) sector. While CRE offers good returns, it traditionally requires high capital investment.
Fractional ownership represents a lucrative opportunity with a potential annual rental return of 8 to 12 percent and an internal rate of return (IRR) of 13 to 17 percent. Prime properties and commercial complexes in business centers such as Gurugram, which have recently emerged as one of the most promising real estate markets, offer both steady rental income and capital growth prospects.
All of this suggests that fractional ownership of commercial real estate can deliver higher and more stable returns over other options over the long term and deserves solemn consideration by those looking to diversify their investment portfolios and build long-term wealth.
Aankush Ahuja, Founder and CEO of FOIP
Posted: Apr 25, 2024 3:18 pm EST
