Investment in Real Estate is considered to be one of the important allocations in the overall asset allocation of an individual. But whether one should invest in real estate in physical form or not is a matter of concern. Hence, in this article, we will be discussing some of the other options than the physical real estate option to invest in real estate. So, let’s start.
Ways to Invest in Real Estate:
There are two ways to invest in real estate that is REITs and Crowdfunding platforms.
- REITs- Real estate investment trusts take the real estate in large amounts and then it is distributed to the investors in small parts. There is the sponsor who manages everything. REITs are listed on the stock exchange under the regulatory authority of SEBI; one can trade in it also.
- Crowdfunding Platforms: There are many crowdfunding platforms like Property Share, Strata, Asset monk, etc. which identify different properties for example if you are in Bangalore, they identified a property that has good rental then they open it to people. Crowdfunding mostly focused on commercial property based on the interest of various investors. These platforms manage this property on investors’ behalf. They keep on buying a new property and managing it, this is how the whole platform works.
Structure of REITs:
- When the REIT, which is floated by a sponsor, makes an Initial Public Offering (IPO) of units (akin to shares) to investors.
- Investors buy these units based on an offer document and the REIT is then listed on the stock exchange. If the investor wants to exit a REIT, they have to sell their units (like shares) on the stock exchange.
- In REIT, the trust puts money in commercial properties.
- The investment can be made through a trust directly or via Special Purpose Vehicle (SPV). An SPV is a company or a Limited Liability Partnership (LLP) in which a REIT holds or proposes to hold an equity stake or interest of at least 50%.
- Usually, all REITs have 2 layered structures:
- SPVs are owned by a holding company
- The holding company is owned by the trust.
Structure of Crowdfunding:
- The crowdfunding platforms act as asset managers on behalf of the investors and each property has a separate SPV created which helps to smoothen the process of collection and distribution.
- The asset manager incurs expenses like collection and distribution expenses and other administrative expenses. Along with that, the annual management charges are levied by the platform on a monthly/quarterly basis for acting as the asset manager.
- The TDS of 10% is to be deducted from the net rentals generated by the property. The interest income received by the investors falls under the head of Income from Other Sources and is taxable at the normal slab rates of the investor.
REITs Vs Crowdfunding
- REITs are regulated by SEBI and traded on the stock exchange, investors can buy and sell to have capital gains and dividends whereas crowdfunding is not regulated nor traded on the stock exchange. REITs are on a much bigger scale has a much bigger asset under management compared to crowdfunding platforms.
- The minimum amount required to invest in REITs is Rs. 1000 whereas in crowdfunding platforms the minimum investment is Rs. 25 lakhs.
- Rental yield in REITs is around 6% to 7% on a semi-annual or annual basis whereas in crowdfunding the rental yield is different on a different platform, inform investors before the investment which is given on monthly basis.
- In REITs, there is a tax benefit whereas crowdfunding is taxable up to 30%.
- Net Asset Value of REITs is declared semi-annually and the same in the crowdfunding platform also.
- REITs can be held by the investors till the time they want or the REITs get delisted but in crowdfunding platforms holding period is pre-defined.
- The management fees in REITs are between 1% to 3% of consolidated revenue earned whereas in crowdfunding it differs from platform to platform but normally it ranges between 1 % to 2.5% of the value of the assets and an additional 20% performance fee in case of capital gain beyond the mentioned internal rate of return.
- There is no lock-in period in REITs as investors can trade intraday also, but in crowdfunding, there is a minimum of 6-month lock-in period once the property is registered with SPV, post which the investor has multiple exits options.
Key Risks:
i) Liquidity
- Unlike REIT where the liquidity is present on a real-time basis, Fractional CRE faces the challenges of liquidity as it cannot be traded on an exchange rather it is an OTC product with no obligation of the crowdfunding platform to find a counterparty for the sale.
- Though the NAV is declared semi-annually, there is no guarantee of receiving a value equivalent to the Market price/NAV. Additionally, the exit and entry of the scheme are restricted in between the tenure which adds to the woes of the investors.
- As the investors have fractional ownership, the sale of the property to exit the investment is difficult as a minimum 75% vote is required to initiate the sale offer.
ii) Default Risk
- In case of default of rent by the lessee, the crowdfunding platform which acts as the asset manager is not responsible for the default.
- The property is registered with the SPV and the title is transferred to the SPV. In case the asset manager decides to quit, the ownership might be protected but the operational end will be very difficult to manage as the fractional owners may not have the expertise to manage.
What should investors do?
REITs are for small retail investors as it is highly liquid, and regulated by SEBI and one can also start with Rs. 1000 also have tax benefit along with good rental yield but in the case of crowdfunding it is not regulated and differ from platform to platform, there is a lot of risks associated with it. An investor can take decisions according to their risk-taking appetite and expectation from the investment.
Originally Published On:https://blog.investyadnya.in/which-is-a-better-option-for-retail-investors-reits-or-real-estate-crowd-funding-difference-between-reits-crowdfunding%ef%bf%bc/
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