Real Estate: Fractional investment to drive the change

Investing in a residential property comes with its own sense of achievement but if an investor’s focus is on wealth generation, then they can now conveniently explore Commercial Real Estate (CRE) as an alternative investment class.

In the last few years, commercial real estate has emerged as the preferred asset class for institutional investors and HNIs. Taking into consideration the current market situation, collateral-backed fixed-income products have become scarce. Institutional funds and HNIs have increasingly gravitated to CRE as an alternative investment avenue due to the stable monthly rental income (8%-10%), that is secured by long term lease agreements with MNC tenants, and the added upside of annual capital appreciation (17%-25% IRR).

The office segment particularly has been a favourite among institutional investors. Despite the fear of COVID-19, this segment has seen investments of $3.1 billion in 2020 compared to $2.8 billion investments in 2019, as per JLL’s report titled, ‘India Real Estate Outlook: A Growth Cycle’.

Covid-19 impact

The second wave of Covid-19 has made an indelible impact on our lives and businesses, however certain sectors such as the IT/ITeS industry continues to remain stable and predominantly insulated from Covid impact. International and national funds continue to aggressively acquire such assets. The IT sector has been the key driver of India’s office market. It contributed 44% of cumulative office space demand in the last 10 years (2010-2019) as per Knight Frank’s research report.

Despite all this, the major concern with investing in CRE for retail investors has been the large ticket size, liquidity concerns, property management and maintaining tenant relations.

The inaccessibility has recently been addressed by CRE fractional Ownership Platforms. Such platforms provide an avenue for everyday investors to participate in institutional grade investment opportunities at a fraction of the cost. The other benefits of owning a fraction of a property are end-to-end hassle-free management, personalised and diversified asset portfolio, stable rental income and annual capital appreciation! Investors are using such platforms to build their own rent yielding CRE portfolio diversified across cities, tenants, locations, and developments. This is a convenient option as all the management is provided by the fractional ownership platform.

Utilising technology

In a post-pandemic world, many organisations and companies are globally transitioning to a more IT dependent, digital and tech-oriented strategy. Due to the affordable talent and rentals, India has been the preferred IT location for MNCs. Keeping these trends in mind, we anticipate the IT industry to grow significantly. Cities such as Pune that predominantly cater to the IT/ITeS industry witnessed higher occupancy rates of ~96%+ despite of the pandemic. Micro-markets and cities with strong fundamentals have predominantly been insulated from vacancy and tenancy issues – this makes asset identification and selection a pertinent aspect to evaluate when investing into this asset class.

Apart from this, hiring is in force at major IT/ITeS companies which means that the demand for office spaces is expected to gather momentum and the demand is expected to continue in 2022 and 2023. Sustained IT sector growth and increasing demand from other sectors such as e-commerce, healthcare and the growing presence of institutional investors will help to drive the office market in the times to come

As industry adoption and investor awareness grows, the concept of fractional investing is going to evolve CRE and provide access and empowerment to the everyday investor to participate in India’s growth story. With the vaccination rollout and expectations of economic revival, there is a lot to look forward to in the India office market in the coming years.

(The writer is founder and CEO, MYRE Capital. Views expressed are personal)