Investing in Commercial Real Estate Without Buying Property

Investing in real estate no longer requires buying an entire flat, as alternative investment vehicles allow individuals to earn returns from commercial property without tying up large amounts of capital.

REITs and Fractional Ownership

Buying physical property directly often locks up savings and lacks liquidity. To solve this, investors can choose routes like Real Estate Investment Trusts, known as REITs, and fractional real estate platforms. A REIT collects money from investors to purchase rent-earning commercial properties such as office parks, shopping malls, and warehouses, while professional managers handle the tenants, maintenance, and leases. Investors buy units of these trusts on stock exchanges just like shares. In India, REITs must be set up as trusts and hold properties through separate special purpose vehicles to keep legal ownership and debt separate.

Rules and Returns

Because residential homes give very thin rental yields, Indian REITs focus mostly on commercial real estate. Rules require at least 80 percent of a REIT's assets to be completed and earning rent, while the Securities and Exchange Board of India mandates that trusts distribute at least 90 percent of net distributable cash flow to investors. Payouts consist of a mix of interest, dividend, rent, and loan repayments, each taxed differently. Apart from regular payouts, investors can also gain if unit prices rise, though these prices move with the stock market and interest rates.

SM REITs and Trade-offs

For investors wanting a concentrated bet on a specific property, fractional real estate or Small and Medium REITs offer alternatives. Introduced by SEBI in 2024, SM REITs cover properties valued between 50 crore and 500 crore rupees, require a minimum investment of 10 lakh rupees, and need at least 95 percent of assets to be rent-earning. However, single-property investments carry higher risks if a tenant defaults or leaves, and unlisted setups can be difficult to exit quickly.

Context

Real estate investments generally do not move in step with other asset classes, making them a way to diversify a portfolio. Rental income is not guaranteed, however, as leases end and tenants vacate spaces, meaning payouts can fluctuate over time.