Commercial real estate (CRE) investment through fractional ownership is proven to have differential benefits over other commonly preferred alternate investments. It is one of the very few investment products that provide monthly cash flow and enables investors to earn 8-10 percent stable rental income, which is secured by long-term registered leases by MNC tenants.
A diversified portfolio is the need of the hour and hence, carefully curated CRE assets offer a favourable risk-return profile for investors. Such assets present a compelling proposition to access high-yielding and collateralised fixed-income investments. Further, CRE has seen an annual appreciation of 11.6 percent for the past few years in India. This enables investors to realize additional gains at the time of exit due to capital appreciation. Thus, the fixed rental income and collateral make this asset class comparable to debt with respect to its risk profile and yet the return profile tend to be at par with equities (17- 25 percent IRR) after factoring in capital appreciation.
The returns and appreciation from fractional ownership of CRE is directly linked to the quality and thorough vetting of the asset. It is essential to have a comprehensive asset selection process to account for subjective and quantifiable parameters – such processes are becoming increasingly nuanced with the integration of new technologies such as artificial intelligence, machine learning, and big data sets. Due to information asymmetry, presently, it is difficult for a retail investor to access this information and conduct the required level of scrutiny and evaluation. Identifying a good asset is just as difficult in the real estate sector as it is in the stock market.
For new investors who wish to explore the world of fractional ownership of CRE, here are some of the winning points that one must keep in mind before investing:
Choose location by growth potential
Selecting the city and location wisely are instrumental to gaining value in the long run. According to a report by the Global Knowledge Partnership on Migration and Development (KNOMAD) on ‘Internal Migration and Urbanisation’, the rate of temporary and seasonal migration is seven times larger when permanent and semi-permanent migration is considered. Such demographic trends of the micro-market will impact the demand rate of the properties.
For example, ageing demographic trends in the micro market will negatively impact CRE demand. On the other hand, a growing population would increase demand for more homes and at the same time, more offices.
Infrastructure and urban development are necessary as companies seeking top talent may need to consider their proximity to “live-work-play” environments to stay competitive. The maturity of the micro-market may lead to vacancies and decreased demand. So choosing a location that is stable and has sustained high demand and limited supply is essential. The net absorption is also a very important metric to look at supply and demand dynamics in a commercial market.
Reputation matters while choosing a tenant profile
In residential properties, the tenants tend to vacate in a short span of time, resulting in unstable rental income. However, in the case of commercial properties, large profit-yielding MNCs and listed tenants tend to be the most stable because they come with long-term leases backed by security deposits and company guarantees.
$1 rentals in India are amongst the most favourable for MNC tenants in view of the rupee depreciating against the dollar as a general trend and rental expense becoming cheaper for them in dollar terms. India has become an IT and ITES outsourcing hub of the world, and MNCs now have access to affordable and high-quality talent in the country. Therefore, choosing tenants with a strong reputation and successful business is vital to earning a stable income.
Longer lease term indicates a stable business
The longer the lease term, the stable the rental income. Tenants with successful businesses are very likely to possess a large workforce by virtue of which they would look for a fixed office location with extended lease tenures. Lock-in period is also important as it ensures revenue visibility until that duration. The tenants furnish their own premises, which leads to a significant capex, and hence they do not want to leave as shifting would involve a second round of capital expenditure.
Find the right partner
In fractional ownership, try to find a property partner or agent who invests his/her own money in the property with a strong asset quality. Your partner should have a wide range of investment in ‘A’ grade assets that are lucrative, and this can be achieved only through deep industry knowledge, predictive analysis and expertise. Further, emphasis should be allocated to evaluating the partners real estate expertise and ensuring they have the capabilities of identifying, managing, and exiting the properties presented on the platform. Thus, associating with the right partner can change your investment game manifold.
And finally, any amount of strategy and planning will reap benefits with time. Commercial real estate is a hard asset, and hence, it is also a scarce resource. Its value appreciates over time and can benefit investors with a stable source of income, long-term appreciation and diversification of the investment portfolio. About 75-90 percent of the total office space in India is leased due to rise in preferences for rented office spaces.
So if you are looking for a safe and long-term investment, then you should invest in CRE through the fractional ownership model. It offers stable and higher returns compared to conventional investment choices that are volatile and provide lower returns. Investors can co-benefit by being fractional owners of various asset portfolios.
The author, Aryaman Vir, is Founder and CEO at MYRE Capital. The views expressed are personal