Authored by Shiv Parekh
If there is one thing this pandemic has done, it has compelled us to re-evaluate how we make financial decisions; particularly how we save and invest. 2020 was a year of hardship and uncertainty; as if the pay cuts and lay-offs weren’t bad enough, thousands of people lost their hard-earned investments in stock markets and mutual funds, while some had to resort to breaking their fixed deposits or selling off property to access their funds.
The questions lie on how to make an investment that is pandemic-proof and stable, provides regular and liquid returns, straight to our pockets, and provides long-term capital appreciation. Interestingly, one investment form stood out on all three counts in the past year — fractional ownership of commercial real estate (CRE). In India, it is still at a nascent stage, but the market is already estimated to be worth $5 billion and growing. Fractional ownership is tipped to be the future of the real estate market because it solves one of the biggest problems with the commercial property — the high entry barrier or capital investment required.
Making real estate affordable
Imagine a premium office space on sale for Rs 100 crore. Normally, such a big investment would only be within the reach of High Net Worth Individuals (HNWI). But with fractional ownership, one can now invest as little as Rs 10 lakh and be part-owner of the property and enjoy rental returns as high as 6 percent-10 percent per annum. Such an investment could fetch an investor Rs 60,000 to Rs 1 lakh per year in rental yield. Compare this to residential property, where an investment of the same amount would have yielded just 1.5 percent-3 percent (or Rs 15,000 to Rs 30,000 per year). Not to mention, residential realty was hit badly by the pandemic, with property values falling by 2 percent-7 percent in the past year.
Stable asset, growing market
Unlike the rest of the financial market, the commercial property only witnessed a slight slowdown during the early months of the lockdown last year and quickly bounced back in Q3. Since then, net absorption of CRE increased by 63 percent, while new completions grew by 59 percent when compared to the preceding quarter.
Elsewhere in the world, in major cities like London, Dubai, Stockholm, etc., real estate took a hit following the Covid-19 outbreak, but industry experts have reported that office leasing continued to grow in India during the same period due to its strong outsourcing sector. In fact, international companies (mostly based in the US and EMEA) account for more than 63 percent of office space leased in our country. This should serve as a healthy indicator to Indian investors — both resident and NRIs — that it’s time they grab a slice of the real estate pie as well. In fact, this is the right time to invest, with CRE prices set to boom in the future.
In residential property, tenants tend to vacate the house frequently, and the owner loses out on rental income until they find another tenant. In commercial property, the rental lease generally lasts three years, and sometimes longer. With Grade A properties, the tenants are usually MNCs, banks, or IT companies with deep pockets; such tenants do not default on rent but make timely payments. They also prefer to decorate the premises on their own, as per their preferences. Further, such tenants also tend to extend the rental lease due to the time, money and effort they put in to convert the property into their offices. It is advisable to buy into a property that is pre-leased for better returns.
Straight to your pocket
Every month, the rental returns will be credited straight to your bank account. This is unlike bank deposits or bonds, where you have to wait for the investment to mature and the lock-in period to expire before you can access your earnings.
The increasing rate of returns
Fractional ownership of commercial property ensures an increasing rate of returns both in terms of the regular rental yield and capital appreciation as well. Commercial property has provided 16 percent CAGR over the past five years in India. Apart from the growth of capital value, if you invest with a reputable real estate company, you can also be assured of a hike of 15 percent in the rental returns every three years. This increase is built into the rental agreement, to hedge against inflation in the future, keeping your investment stable over the long haul.
Fractional real estate is what you could call a unicorn investment — that rare combination of high returns but low risk. It brings the hefty returns of commercial property within reach of the common man. The investors have to do due diligence on the property, vis a vis location, the local zoning laws, rental yield, potential for capital appreciation and the kind of tenants it will attract.
Shiv Parekh is a real estate tech entrepreneur and founder of hBits, a fractional real estate platform