Successful investing in this alternative asset class begins with understanding Commercial Real Estate (CRE) and the different types of commercial properties. CRE is a property that is given to occupiers (or tenants) on long leases and used exclusively for business, commercial and industrial purposes. For Investors owning CRE, it provides stable rental income and capital appreciation over time. Stable and predictable, because most CRE properties have long leases tied up from 5 to 10 years thereby offering stable monthly cash distributions through the rental income. Rents are additionally secured through lock-in periods of 3-5 years with the lessees.
Having a general understanding of different types of CRE is a good place to start.
This broad category of real estate includes:
Offices: All office buildings offering workspaces, available on rent for businesses to operate out of and these are usually located in the city.
Industrial and Warehouses: These low-rise developments are usually large and located in the outskirts of the city leased to 3rd party logistics players, e-commerce and manufacturing setups. They are attractive due to their lower Capital requirements, short construction cycles and longer leases with tenants (~10 years).
Data Centres: This is an emerging asset class in commercial real estate. It is basically a centralized physical facility used to house computer systems, storage systems, network and associated IT infrastructure and centralizes an organization’s shared IT operations and equipment.
Retail: Retail comprises of multi-tenanted shopping malls, single tenant hypermarkets and smaller community retail centres.
Hospitality: The hospitality sector covers hotels and serviced apartments providing accommodations, meals, and other services for travelers and tourists.
Like every other asset class, Real Estate Market has experienced impact in leasing transaction volume due to the pandemic. Recall early in the pandemic, uncertainty was unlimited. However, CRE demonstrated it’s resilience with private real estate capital values (CRE property price) remained rather rangebound during this pandemic whereas – Sensex from its peak at 61,220 on 1 January 2020 and tumbled down to 40,392 as of 29 March 2020 noting -34% dip.
The sector was also quick to rebound and in Q3 2021, the total office leasing has reached 83% of pre-pandemic 2019 quarterly average, which is an important milestone as 2019 was the peak year for India office leasing volumes (Source: Knight Frank). This reflects the Corporates need for physical office space as uncertainty reduces in this pandemic and growing vaccination coverage. Adapting to the new normal, 23 Mn sq. Ft of warehouse space take up was recorded in 2021 till Q3, a growth of more than 125 % year on year (Source: CBRE Report). The stability in this asset class has lured in investments from institutions.
As noted, Institutional capital continued into CRE assets in 2020 with Brookfield asset management’s $2Bn office acquisition from RMZ and Blackstone $1.2 Bn acquisition of office, retail and hotel properties from Prestige group.
Warehousing and Industrial parks have become a sought-after investment with demand led by online retailers and investors looking to diversify into other asset classes. Blackstone also partnered with Hiranandani Group in 2019 to invest 2,500 Cr in warehousing and industrial assets. In 2020, Singapore’s Mapletree Investments Pte Ltd bought 700,000 sq. ft in an industrial warehouse from KSH Infra for $40-50 million in Chakan, near Pune.
Historically, Real Estate has been the preferred asset class for Indians due to its high stable returns and collateral value, and is a long-standing indicator of wealth. In real estate, Commercial real estate (CRE) has a sizeable allocation in the portfolio of family offices, UHNIs and HNIs globally helping generate high returns in their portfolio along with added stability. In India also real estate in 2019 occupied the second highest allocation in the portfolio of this segment, in which CRE comprising offices and warehouses had 82% of the real estate investment share (Source: JLL Research).
The retail investor on the other hand has been left out from investing in this lucrative asset class due to its large investment capital requirements, thereby making the retail investor invest in second homes – with lower returns (5-8% annualised returns or IRR) and lower yields (2%~). Restack, an online real estate investment platform, is democratizing access for the retail investor to these attractive CRE assets by allowing them to invest in fractional interests starting at INR 10 Lacs. Each investment is screened by our team of investment management experts and thoroughly vetted on the title aspects by leading law firms, and are offered for investment through a simple and seamless fully online digital investment process.
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