Most Indians consider real estate (RE) as one of their primary investment avenues. Hardly any HNI portfolio would there be where real estate doesn’t feature. However, as markets and investment opportunities evolve, no smart investor can ignore the lure of commercial real estate opportunities for perceived steadier returns. Be it office spaces or retail, savvy investors are trying to get a piece of the commercial real estate boom across urban India.
Smart commercial investments, however, are not just about picking the right asset but also about optimising investible funds to ensure you get the best value for that investment both with capital appreciation and as a potential income stream. Regulatory changes and evolving market dynamics have created several investment options other than conventional options such as Real Estate Investment Trusts (REITs) and Alternate Investment Funds (AIF).
Take a look:
Direct purchase/pure play: Traditionally the option to buy real estate directly in your own name used to be the only preferred mode of investment, but it came with its own shortcomings and nuances. The biggest one was the title and execution risk with such transactions. In addition, price discovery was always more an estimate than a science. Such kind of ownership also carried leasing risk and the burden of maintenance.
Virtual ownership: To solve the issues related with direct purchases, some developers provided options of virtual ownership, where the investor did not own a unit but an unidentified area in a larger space (floor or building). The developer in such cases also took over the burden of leasing, maintenance etc. This provided a stable return but carried vacancy risk and the risk of not being able to have an identified space.
Real estate funds: Run by various financial and wealth management fund houses in India, RE funds take the same exposure as direct purchases, but in a scalable and institutionalised setup. The fund manager bets on land parcels, developers and cities, while unit holders hold a portion of the diversified pool of assets and get returns by way of dividends and NAV (net asset value) appreciation thanks to capital value improvement. These funds are typically 6-8 years in tenure with harsh exit clauses in case of exit prior to fund life.
REIT: With India’s first REIT listing on the anvil, this newest asset class allows investors to invest as little as Rs 50,000 while adding to their portfolio institutional grade assets, which have been consolidated by the REIT sponsor over time. This mode provides stable yield flow and minimal execution, leasing and default risk.
Debt: The above options mostly talk about equity in RE, but debt is also an option. Secured RE debt sold through fund houses and papers of developers are usually priced several basis points higher than G-Sec yields. Although riskier by nature, they do provide a notional cover of security.
Which option is right for you? The answer depends on your risk-reward expectations. The decision should be made on the matrix. The chart provided here will help you understand the time-tested trade-off between risk and return. What is refreshing though is the plethora of options to choose from.