Sudarshan Lodha, CEO -; Co-founder, Strata

20 May 2022 , 10:35 AM

In an interaction with Mamta Maity, indiainfoline.com, Mr Sudarshan Lodha, CEO & Co-founder, Strata said “Speaking about lease or rental durations, CREs are owned by large businesses, brands and generally locked for a long period of time saving the investor from the hassle of frequent tenant change, risk of outstanding rent, damage of property, etc.“

What is Fractional Ownership Investment in CRE investing and how does it function?

Fractional ownership is a type of asset class which facilitates resource pooling of likeminded investors to invest into a common property typically a commercial real estate. Basis the investment capacity and risk appetite, investors can own one or more fractions of an asset. The minimum ticket size of investment through this route generally starts from upwards of 15 lakhs, however there are some lower ticket properties as well. Post the investment, the investor receives the ownership of that particular share and is entitled to earn regular rental income which is pre decided at the time of investment, beside capital appreciation over the period of investment.

While fractional ownership can be often confused with REITs the two are quite different investment models. Unlike REITs, fractional ownership puts 100% of one’s investment into an asset chosen by the investor after which the investment is completely utilised and rental income is generated on the entire investment. Also since tenants are already on-boarded, investors are able to enjoy rental yields from the very first month itself. Additionally in fractional ownership the investor has complete control over his investment and has absolute visibility of where the investments are parked unlike REIT where the investor is not apprised on where his investments are parked and the spread.

Investing in commercial real estate v/s residential real estate — things that investors should be mindful of

Residential and Commercial Real Estate (CRE) are two very different set of investment avenues and come along with respective set of pros and cons and an investor should be very clear in terms of their preference, goal, investing capacity, risk bearing ability etc. before investing.
Residential real estate is any property built, owned or rented with the sole purpose of living while commercial real estate includes properties meant for industrial/business purposes.

Before taking the plunge investors should factor in the following:

Residential Real Estate

– Residential real estate is generally purchased in full and the owner has to bear all the costs
– The nature of tenants can be very uncertain and acquiring timely rentals from them can be challenging. Also, the tenure of tenants can be short and the property can remain idle for some period.
– Structural, visual damage to the property is likely to happen due to reckless behaviour of the tenants.
– The rental income rate for RREs is very less, usually between 3-4%
– If an investor is sceptical about the investment or the market, they may lease the property for few years so that easy exit can be availed in case of any unfavourable situations. However, this option is very unusual in case of residential assets.
– The RRE market in tier I cities is saturated and the growth in this domain is expected to be slow

Commercial Real Estate

– The initial investment is pretty large for a retail investor in most cases and one needs to have a good understanding of the market’s demand and supply in order to properly assess the benefits of this investment
– It is advisable to approach some property management firm who would take care of all the legalities and technical difficulties and provide you with promising and premium properties
– Higher rental income of anywhere between 8-12%
– Higher capital appreciation as compared to residential real estate

Why it is the good time to invest in commercial realty in the current scenario

CRE has been one of the most promising investment avenues and has proven to give consistent returns over the last decade. The current inflation rate has out beaten many traditional asset classes like bank FDs/RDs, PPF, etc. However, the returns provided by CRE have continuously surpassed the inflation rates by decent margins.

Also, last few years have seen the rise of ecommerce industry in India. The onset of the pandemic in early 2020 further boosted the growth of ecommerce which has created increasing demand for warehousing. Additionally with global conglomerates moving their bases from China to India, there has been a sharp surge in the demand for manufacturing hubs too.

The momentum in the sector however is currently being steered by office spaces. With the receding wave of pandemic and the country is returning back to normalcy, there is a resurgence in demand for office spaces across the country. With most offices reopening, coupled with pent-up demand, occupancy and leasing of commercial office spaces are witnessing fresh highs. Moreover as Start-ups continue to witness a rapid growth trajectory, the industry is witnessing a big boost in demand for co-working spaces across both metros and tier 1 & 2 cities. Whereas demand for data centres is expected to increase by 15-18 million sq. ft. by the year 2025.

All these factors have resulted in a boom in CRE in India and the trend is expected to continue in the coming years. The CRE industry is expected to grow in India at a CAGR of approximately 13% during the forecast period (2022- 2027).

Fractional ownership in CRE v/s ReIts v/s InvIts

Commercial real estate (CRE) investment is gaining wide popularity as a premium rewarding asset class that has consistently proven to offer returns in the range of 9-10% annually for the last 10 years.

Also, the rising demand for CRE spaces has further led to a boost of this asset class in India.

The best and easy way to invest in CRE for retail investors is through Fractional ownership or REITs. Let us take a closer look at these three options —

• Fractional Ownership — Fractional ownership as a concept, simply refers to a set of the like-minded individuals who pool their resources and invest in a common property for a certain period. This investment which typically ranges from a few lakhs to crores is totally dependent upon the type of property, location and size of property and number of investors. Popular in the US and UK, fractional investment in real-estate is emerging as a lucrative option for retail investors as it enables one to incorporate a potential asset class such as CRE into one’s portfolio without having to invest large sums of money.

In simpler words, owning commercial real estate can be very expensive and fractional ownership can significantly reduce the risk and investment for any individual investor by enabling them to invest in premium commercial properties at affordable prices.

• REITs — REITs, a Real Estate Investment Trust, is nothing but an entity that is used to channelize the funds that can be invested into ownership of any real estate property. It works similar to a mutual fund and can be an easy and trustworthy way to invest in real estate as these are listed on the stock exchange. Also, this year Security and Exchange Board of India (SEBI) has lowered the application value for REITs to INR 10000-15000 from 50,000 to make it accessible to the larger set of investors.

However unlike fractional ownership where the investor has complete control over his investment and has absolute visibility of where the investments are parked, REIT does not apprise the investor on where his investments are parked and the spread. Therefore REIT investments can after a point be beyond your control and much to your dislike a part of your investment can also remain dormant due to many factors.

• InvITs — InvITs or Infrastructure Investment Trusts can be considered as one of the newest investment avenues in India. InvITs are similar to mutual funds wherein an individual invests a certain amount in an infrastructure project either directly or through a special purpose vehicle (SPV) in lieu of a stipulated return.

To ensure cash flow stability, there is a mandatory distribution of 90% of net distributable cash flows to the unit investors. Also, in 2019, to attract more investor community, SEBI, had raised the leverage limit to 70% from 49%.

Having said that, all of the three options have pros and cons and if invested carefully and for a longer term, investors can enjoy a healthy capital appreciation and regular returns.

Why investing in CRE is better than owning a second home?

The average price of a residential property in India is anywhere around 70 lakh which investors generally buy by availing housing loans. Even after investing money, the rental income earned is not more than 3-4% or in many cases can be as low as 1-2%. On the other hand, in CRE through the route of fractional ownership, one can use the down payment amount, to own a share in a premium Grade-A commercial property. The capital appreciation of commercial real estate are expected to outrun their residential counterparts. Also, the interest rate investors can enjoy in CRE is 3X more than residential properties (between 8-12%).

Also with the recent repo rate hike by RBI in the latest monetary policy announcement, the interest rates on loans are expected to rise further making home loans an even more expensive affair. Therefore in the current scenario Investors who are planning to park their hard-earned funds in residential space, for a second home or purely from the investment perspective should ideally reconsider and explore alternative investment avenues in the commercial real estate segment. In case of fractional ownership model, one can avail an investment with a ticket size of approx. 15-25 lakh which is at par with the down payment made for a residential property while at the same time averting a home loan encompassing costly EMIs.

Speaking about lease or rental durations, CREs are owned by large businesses, brands and generally locked for a long period of time saving the investor the hassle of frequent tenant change, risk of outstanding rent, damage of property, etc.