Alternative Investment

Here’s how retail investors can invest in CRE without overlooking safety concerns

At a total market share of $200 billion, Indian real estate is undoubtedly one of the largest industries in the world. While the industry offers an option for investors to invest in residential and commercial, CRE has proven its might in terms of better and stable returns.

As the world’s fastest-growing economy, there has been an ever-increasing demand for commercial properties across the country. The e-commerce boom has created a massive demand for warehousing needs. MSME industry growth and policy initiatives such as Make in India and Atmanirbhar Bharat have bolstered manufacturing capacity, creating a need for state-of-the-art manufacturing units. In the last few years, India has positioned itself as the world’s IT leader, which has led to tremendous growth in the requirement for sophisticated data centres. Similarly, the need for retail spaces and the hospitality industry has also increased. All these factors have made CRE a lucrative and one of the most promising investment avenues for investors.

Ways of investing in CRE

CRE as an investment avenue has been very technical and complex asset class. The most easiest and direct way of investing into CRE is by purchasing a complete asset. Another emerging option of investing into CRE is Alternative Investment Funds (AIFs). Alternative Investment Funds (AIFs) are privately pooled funds, which are invested into a group of Grade A commercial assets.

However, both these options involve heavy ticket size and is often out of reach for any retail investor. In other words, these options are highly limited to institutional investors or HNI/UHNIs.

Let us briefly discuss some of the ways in which retail investors can invest into this emerging asset class.

Fractional Ownership 

Unlike REITs, fractional ownership pools in funds from investors and invests them into a single asset. Having no fund manager, Fractional Ownership investment platforms often pre-lease a premium commercial property and source a tenant. Post this, they launch the asset for investors and attract investment at a pre-decided rental yield and expected internal rate of return (IRR) assurance. A rental income is then paid to the investors as the ROI. To elaborate this with an example, supposing a premium office asset is launch in Mumbai with an area of 30000 sq.ft. and priced at INR 50 crore and is pre leased by a fractional ownership platform for 10 years. This platform will also source a tenant and set a lock in period. A rental income rate would be decided (typically between 8-12%) which is then distributed, often every quarter between the investors. All these details are provided by the platform to the investors before parking their money.

Investors also earn capital appreciation through fractional ownership during the exit. The pros of this model are complete control of the asset choice, promising returns, and positive capital appreciation. However, this asset class can still be expensive for some investors.

Things to watch out for!

  • It is critical to have a local market knowledge about the asset location and the tenant industry as well as the demand trend for the particular asset type
  • There are various digital platforms offering fractional ownership into CRE, however you should be vigilant against the fraudulent platforms and choose your investment partner wisely after thorough research
  • Fractional ownership as an investment model being at a nascent stage, it falls under regulatory ambiguity. Therefore it is imperative for an investor to conduct a detailed research before parking your money.

REITs 

Real Estate Investment Trusts, popularly known as REITs, are one of CRE’s most popular and trusted investment options. Similar to mutual funds for real estate properties, REITs are where an investor can invest in multiple assets via a single fund. The best advantage of REITs is their low ticket size making them an affordable avenue for majority investors. You can invest into REIT with as low as Rs. 10000-15000. 

REITs, just as Exchange Traded Funds, are traded on stock market. Hence, it is mandatory to have a DEMAT account. Currently, there are three options available for investors, Embassy Office Parks REIT, Mindspace Business Park REIT, and Brookfield India Real Estate Trust. Being a listed option, REITs are regulated by SEBI.

Things to watch out for!

  • Before investing into a particular REIT, you should carefully consider the underlying portfolio quality. In other words, a REIT should have well diversified asset base investment into different income generating assets.
  • You should also look at the past and current Net Operating Income (NOI) of a REIT. This term defines the profitability of the fund. The higher NOI determines the better performance of the fund. 
  • Analysing the occupancy rate of all the properties involved in the fund is imperative. An occupance rate of 80-90% is considered to be healthy and investible. 

Bottomline

While traditionally CRE has been limited to a select few, the recent rise in affordable options have boosted CRE investment among the retail segment and like every other asset class, CRE has its own set of risks. They range from idle assets to inefficient funds management, from legal challenges to regulatory ambiguity. Investors should definitely conduct an in-depth research and do proper homework before parking their money. 

Having said that, multiple new-age tech platforms are evolving to help mitigate these risks by ensuring end-to-end due diligence and underwriting risks. Thus, it is safe to say that this is the golden age for investing in India’s flourishing real estate industry.



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Disclaimer

Views expressed above are the author’s own.



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