We have read a lot about diversification of our investments across different asset classes like Equity, Debt, Real Estate, Gold, etc. Today we will talk about one good option to invest in real estate space.

Often times, when we hear about real estate, most of us think only about either buying a land for constructing house or buying a house or flat for rental yields. These are called as domestic real estate assets. There is another segment called Commercial real estate which is nothing but renting out your assets for businesses. Ex, your office space, hospital, bank, etc. We need to first understand the characteristics of these to know which is better for us to invest our money.

1. Long term leases – In domestic space, we often see that tenant changes frequently and this involves a lot of maintenance cost. Mostly we end up having a max of one year agreement between the landlord and tenant. This happens only in urban areas. In rural areas, most of the people never get into agreement itself. This will cost the landlord a lot of trouble and the hassle of finding a new tenant is always there. In commercial space, majority of the leases or created for long term. Minimum 3 years is the industry standards and we deal with professional companies which abide by the legal agreement.
2. Rental returns – In domestic space, rental yields are mostly in the range of 2-3% and this varies slightly based on the cities we are in. In commercial space, these are averaging around 7 to 8%. This also varies slightly based on the type of business and the lease terms.
3. Ticket Size – Domestic assets are mostly having low ticket size around 50L to 1.5Cr. You can buy a decent house in this price range. Tier two cities have the range around 50L and metro cities have the range around 1 to 1.5Cr. When it comes to commercial space, we need higher ticket size. The range of this varies a lot so we don’t have a defined range but usually it will be in the range of 15Cr to 20Cr. Here am talking about spaces in a IT office, warehouse, retail malls, etc and not about small shops.
4. Liquidity – Domestic spaces are easy to liquidate since the demand is always there and capital required is also low. Commercial spaces are not that easy to liquidate and hence require proper planning if incase you need to exit out of it.

If we notice, we see commercial space always offer better returns and hassle free maintenance provided you deal with professional business. But we as a Individual may not have the required capital to buy a good commercial space for rental yield. So is there any options for us ?

Yes, that is where Fractional Real estate comes into picture. It may be difficult for 1 person to invest 25Cr for the property but if 100 people can invest 25L each, then its highly possible. This is called as Fractional Real estate investment where you own a fraction of the property and get your fraction of rents. Sounds fantastic ! but do you think its easy to form a group of 100 people and buy a property ? No way.

To solve this problem and make the investor stress free, companies like StrataProp, Propshare, hBits, etc are formed. What do they do ?

1. Find good commercial properties at attractive value.
2. Do legal due diligence.
3. Find good tenant for the property or find one with existing tenant.
4. Get ready with an agreement on the lease period, lock in, rental escalation, penalty, etc.
5. Reach out to investors and collect capital.
6. Form a SPV with these investors as share holders and transfer the ownership of the asset to the SPV.
7. Collect the rentals from the tenant and distribute it to investors.
8. Help investors if they need an exit
9. Exit the property at right price at right time.

How do they earn money ? They charge few percentage as maintenance cost which is usually 1%. So every year 1% will be deducted from your rental returns. Eg, you have invested 25 lakh for a property, then you will be charged 25,000 for the year. They also earn based on the huddle rate. This is nothing but on the time of exit, if the appreciated value+rental is more than a few percentage, then they charge 10 to 20% of the gain. Ex. You have bought the property at 25 lakh and company told the huddle rate is 10%. After 5 years, if the property price and rental income is 44 lakh which is 12% gain year on year. Based on our huddle rate of 10%, the property price+rental is 40 lakh. So the difference between actual appreciation and huddle rate is 4 lakh. So you have to pay 20% of the extra gain which is 80,000.

This also make sure the company which is facilitating our investments have a skin in the game. Only if they were able to sell the property for a good rate, they can earn money out of it. So its a win win situation for both the investor and the company.

Let’s see where does this asset class fit ?

The average returns here will be 7 to 8% rentals and 3 to 4% appreciation. So you can expect an IRR of 12 to 13%. This could vary based on the asset type, lease term etc. Earning 12 to 13% on a low risk investment is really a good bet.

1. Equity – 12% IRR – High risk
2. Debt – 7% – Low risk
3. Domestic real estate – 3% rental + 5% appreciation – 8% – low risk. Maintenance cost is not included.

If someone needs to diversify the investment and want to have real estate in their portfolio but don’t have enough capital, then fractional real estate is a good option. We need to be careful in choosing the right company, right city and also make sure if its bought at the right price. Check if the tenant is a good company and lease period is satisfactory.

Some good players in this are.

1. Strataprop
2. PropShare
3. YieldWiseX
4. hBits

This is not a recommendation of these companies. Please do your own research and find the right property.

I hope this post would have given you some insights about this space. Do subscribe to get timely updates on our post and share it with your friends and family.