As interest rates still lag the rate of inflation, investments in fixed-return instruments fail to beat the pace of rising prices, especially after paying tax on the interest income. Despite the fact that the principal invested in such an instrument does not fluctuate and remain intact, the investors lose purchasing power of the money invested as the maturity value fails to beat the level of price rise over the investment period.
While fixed-return instruments – like Fixed Deposit (FD), Recurring Deposit (RD), Bonds etc – lag behind, there are a few investment options – like Equities, Gold, Commercial Real Estate (CRE) etc – that have generated superior returns over the years.
Out of the investment options that are capable of generating inflation-beating returns, risk averse investors carefully avoid equities due to fluctuations in invested capital during market volatility.
While gold acts like a hedge during economic and market turmoil by providing stability in the investment portfolio, real estate investments provide both return and stability.
“While the economy is racing towards post pandemic normalcy, macro factors such as repo rate hike, rising inflation, coupled with muted economic growth continue to heavily influence the investment patterns. Today investors are therefore looking for newer and alternate investment avenues offering the best of both worlds – stability and inflation beating returns,” said Sudarshan Lodha, Co-founder and CEO, Strata Property Management.
Although the requirement of huge capital traditionally keeps it out of reach for many, introduction of options like Real Estate Investment Trust (REIT), fractional investment, etc. make it possible for even smaller investors to participate.
“While real-estate has been one of the most preferred stable asset classes, there has been a drastic shift in the investment patterns across the real estate industry too. With the rise of new-age wealth-tech platforms, investors are now seeking greater flexibility with minimal manual intervention. Fractional investment in real-estate is gaining a lot of popularity now owing to superior capital appreciation, 3-4X rental incomes, combined with stable behavioral patterns. In this model, CRE properties offer a gross rental yield of anywhere between 8-12 percent,” said Lodha.
“In addition, assets also generate a net investor annual internal rate of return in the range of 13-15 percent thus creating a rewarding and stable asset opportunity offering inflation-beating returns while generating passive income in the long-term. Thus with robust technology platforms and avenues that offer no or lower correlation to the market, alternative assets are increasingly gaining immense popularity among investors,” he added.
Lodha shares details about the process of investments in CRE and its rewards:
CRE has always been a high return oriented asset class that has the potential to offer stability of investment and competitive returns over the long term. However, owing to high prices, illiquidity and administrative hassles, it has long been the playground for institutional investors and HNI audiences and has remained beyond the reach of retail investors. This, despite the fact that the asset class offers lucrative returns anywhere in the range of 8-10 percent vis-à-vis residential which offers returns in the range of 1-2 percent.
To address this challenge and with the objective of democratizing CRE as an asset class, Strata was founded in May 2019. Through fractional ownership, Strata envisions making investing in high-yield, Grade-A commercial real estate accessible, transparent and seamless for all investors .
The investment process
In this model, after stringent due diligence and property screening vis-à-vis varied specifications, the property that fulfills the criterion of perfect balance between yield, stability and capital appreciation is listed. Finding the right commercial property to invest in is a tedious task. The team goes through a stringent process of property screening with respect to data checks such as location advantage, building specs, superior specifications and tier-1 tenants, rental yields among others. This is then followed by rigorous due diligence by the legal counsel to ensure every asset is risk free.
The shortlisted properties are Grade-A commercial assets such as office spaces, warehouses, etc. that have been pre-leased to large conglomerates, retail chains or MNCs at a pre-decided rate for a specific lock-in period.
After a property is selected by Strata it is listed on its platform, a special purpose vehicle (“SPV”) is incorporated to acquire said property. The day to day activities of an SPV will be managed by independent directors who will form the board of the SPV. All the necessary details like the type of property, area, price, location, expected IRR, gross entry yield, lockin period, etc. are displayed on the investor dashboard. Interested can choose an asset of their choice and invest in the same, with minimum investment ranging between Rs 10-25 lakh.
Once the investment is completed, the investors become the fractional owners of the pre-leased commercial asset, in which each investor holds a proportionate stake in the form of convertible debentures. The rentals earned from the property are paid out by the SPV as interest on debentures to the investors. Strata undertakes accounting, reporting, compliance and asset management services for the SPVs. Investors can purchase one or more such shares in the property and have all decision making rights over the property as well as the SPV.
Commercial properties offer approx. 3X-4X rental returns as compared to their residential counterparts. Typically this ranges between 8-12 percent, which is dependent on multiple factors like location, type of asset, etc. The combined IRR can be 13-15 percent over 4-5 years.