Security of capital, steady growth of wealth and regular monthly income are the hallmark of a good retirement investment. For these reasons, fixed deposits (FD), Senior Citizen Saving Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY) were popular investment havens for people above 60. Until now.
Due to the onslaught of the Covid-19 pandemic, central banks across the world scrambled to reduce the interest rates in order to stave off liquidity pressures. While lower interest rates can be a tonic for a struggling economy, they can adversely impact senior citizens relying on a steady income. And if you think that the low-interest regime will blow over any time soon, think again as the US Fed -- whose decision has a global impact -- intends to keep the rates rock-bottom, between 0 percent-0.25 percent, until 2023.
Down in the Doldrums
Unsurprisingly, traditional retirement investments such as fixed deposits and savings accounts are generating measly regular returns during this low-interest era. Even factoring the special deposit schemes for senior citizens, the interest rate hovers between 6 percent-7 percent, barely keeping its head above the current inflationary rate of around 5.1 percent.
Senior Citizen Saving Scheme (SCSS), meanwhile, provides security of capital and offers a healthy 7.4 percent per annum, but the maximum investment you can make is Rs 15 lakh and comes with a 5-year lock-in period.
Often confused with SCSS is the Post Office Monthly Income Scheme (POMIS). But the interest rate is on the lower end at 6.6 percent per annum and the maximum investment amount is just Rs 4.5 lakh.
Another investment option for the retired is the LIC-managed Pradhan Mantri Vaya Vandana Yojana (PMVVY). While it provides assured returns of 7.4 percent per annum, you can’t withdraw your investment without incurring a penalty for the first ten years.
Succinctly put, the current generation of investment options are either faltering due to the prevailing low-interest regime or due to long lock-in periods.
Fractional Ownership in CRE
Fractional ownership is a model that allows a group of investors to jointly own a piece of real estate. Why do people opt for fractional ownership? Reduction in cost burden and sharing the rental income, along with steady capital appreciation. These are the three main reasons why this model has seen a surge in popularity in the markets of US, Europe and China.
However, owning a residential property through the fractional ownership model may not be suitable for senior citizens since its low rental yield of 2 percent-3 percent per annum may not provide sufficient regular income.
High Rental Yield
Commercial real estate (CRE), on the other hand, offers high rental yield, almost three times higher than its residential cousin (at 9 percent per annum on average).
Moreover, it is ideal to invest in Grade-A commercial properties through the fractional ownership model. Here’s why: you can invest in the highest-graded commercial real estate -- which can otherwise cost you hundreds of crores -- for as little as Rs 25 lakh. This means that a Rs 25 lakh investment could fetch you around Rs 2.25 lakh per annum on average.
Additionally, the property you invest in also appreciates over time. Depending on the location, commercial properties usually grow anything between 7 percent to 16 percent each year. In other words, investing in fractional commercial properties can deliver regular monthly income and steady capital appreciation in the long run.
Safety of Capital
Since the fractional ownership model invests in Grade-A commercial properties, you can expect the monthly rent in your bank hassle-free, primarily because these properties are usually leased out to well-known IT firms, BFSI sector and multi-national companies.
Moreover, unlike stocks or debt instruments, its value does not hinge on market conditions.
The demand for commercial real estate has been resilient despite the waves of lockdowns across the country. The industry initially saw a sharp drop in demand. But by the time the economy reopened late last year, India’s office market witnessed a 64 percent increase in net absorption in the third quarter of 2020 as compared to the previous quarter, according to property consultants JLL.
With business activities poised to strongly rebound in the second half of 2021, all indicators point to the start of a new growth cycle for the commercial realty industry. Industry experts believe that this space will grow in double digits over medium- and long term.
Due to its high rental yields, steady capital appreciation and resiliency during the pandemic, fractional property is a savvy investment choice not just for retired citizens but also for the millennials and Gen Z who are looking to secure their future.
The author, Aankush Ahuja, is Director of Business Development and Investments at hBits. The views expressed are personal
First Published: IST