While the pandemic has changed the rules of wealth management, especially for retail investors, the recent macroeconomic trends have further revamped the dynamics of all the major asset classes. Today it is imperative to future-proof investments and look for newer alternative asset classes with better returns and financial cushioning. Even in these volatile scenarios, commercial real estate is growing stronger and has become a promising investment avenue for investors, says Sudarshan Lodha, CEO & Co-Founder, Strata.
In an exclusive interview with Sanjeev Sinha, Mr Lodha talks about the latest trends in the commercial realty space and how retail investors can make the most of this segment. Excerpts:
Why do you think investment in premium commercial real estate (CRE) is no longer limited to High Net Worth Individuals?
Earlier, premium commercial realty was limited to the HNIs and Ultra HNIs as it required big-ticket investments to own it. While commercial real estate (CRE) is still a sector that attracts HNIs and other affluent investors, newer investment avenues also lower the barrier to investing in commercial real estate across metro cities.
With internet penetration and digitisation, the fractional ownership investment model is changing how investors invest in premium-grade properties.
Investors can invest in grade-A commercial property according to their investment bandwidth in a fractional investment. At Strata, investors are facilitated to own a slice of grade-A commercial property of their choice. The options presented to investors range from premium office space opportunities to industrial parks and warehouses. The minimum ticket size to invest in commercial property through Strata is Rs 25 lakh. Post the purchase, the investor will be a part of a special purpose vehicle (SPV), which will own the property. Monthly rentals will be transferred to the SPV and shall be divided proportionally amongst the members of the SPV.
The returns on CRE are lucrative. Investors enjoy rental yields of 8-12 per cent per annum on the amount they have invested, which is three times higher than what a residential property could yield.
Within commercial real estate, which segments can prodive better returns to the investors?
Premium office spaces have attracted investors owing to a sharp uptick in demand by IT companies, software and BFSI firms. Recording a 66 per cent rise, the office space leasing has witnessed an absorption of 42 million sq ft. Growth of co-working trend, reverse migration, and MNCs making India their new APAC bases have contributed significantly to the numbers.
Similarly, e-commerce shopping and retail consumption have increased investor sentiment towards warehousing. According to reports, leasing of warehousing space in India’s eight metros grew by 62 per cent in the last fiscal to a record 51.3 million sq ft, surpassing pre-pandemic levels. Data centers also fuel the demand for CRE as their need is speculated to rise by 25-35 per cent by 2025, presenting an excellent opportunity for investors.
The National Logistics Policy is also expected to promote investment in warehouses. So, overall, the office space and warehousing are set to fly high in the commercial real estate.
With a rise in inflation, do you think commercial real estate will be a better bet for investors?
While the pandemic has changed the rules of wealth management, especially for retail investors, the recent macroeconomic trends, such as repo rate hikes by RBI, constantly rising inflation, and the falling rupee, have further revamped the dynamics of all the major asset classes.
Today it is imperative to future-proof investments and look for newer alternative asset classes with better returns and financial cushioning.
Being an asset class topping the list of preferred asset classes, real estate has attracted many investors’ life savings, especially in the residential segment.
However, even in these volatile scenarios, commercial real estate (CRE) has remained an asset class that is growing stronger and has become a promising investment avenue for investors for two reasons – high returns and higher stability. With the advent of fractional ownership and REITs, this premium asset class is now accessible to retail investors like never before.
Contrary to the dip in sales seen in residential real estate, the leasing activities in the office and warehouses have recorded significant growth. With back-to-office norms post-pandemic and MNCs setting up offices in India, CRE offering attractive appreciation and recurrent rental income is witnessing renewed investor interest.
How do NRIs or Indians working overseas invest through the fractional ownership mode in the country?
Indian real estate has been one of the top three investment avenues preferred by NRIs. They have always been opportunistic in their investments and Indian real estate has always proven to be very profitable for them in the long run. Besides the high stability factor, owning a property in India has seen strong sentimental values in NRI communities.
NRIs have invested over $13.1 billion in the Indian real estate market in the last fiscal and the investment is to grow by 12% in the current fiscal.
Amongst 2000 investors that have invested in commercial real estate through Strata, 15% are NRIs residing in Australia, Malaysia, Singapore, and UAE. Also, Strata has witnessed a 50% growth in NRI investors for its latest investment opportunities. They majorly comprise business owners and C-level executives at MNCs.
What are the things one must keep in mind while investing in commercial real estate?
Investment in commercial real estate can be done on an individual level. However, the high cost of investment makes it difficult for retail, individual investors to enter the market.
Investing in commercial real estate must always be one’s long-term investment plan. At Strata, we always advise our (potential) investors to come onboard with an investment mindset of at least 3 years. Anything less than that would not yield the benefits one must be looking forward to.
Just like any other form of investment, the thumb-rule says that one must always do one’s own research before investing in anything. When it comes to commercial real estate, market dynamics play a crucial role because different markets act on different factors. Changes in the market can have a direct bearing on the vacancy rate, rentals, and the stability of occupancy. Therefore, closely monitoring the businesses in a particular market and the nature of impact it is having on the economy would be a good way to understand the market dynamics and as to which market one should consider. Just like residential real estate, location also plays a key role in reflecting the value and performance of a commercial asset.
Additionally, considering asset appreciation is a crucial part of CRE investing. In case an asset does not appreciate at the promised pace within five years, one should consult one’s financial advisor or investment manager.