CRE-Edge: Wealth generation through investments in Commercial Real Estate

India's Commercial Real Estate (CRE) sector has played a vital role in India's growth story, leading to significant development in office infrastructure, IT hubs and knowledge parks. It has provided employment opportunities, and created investment avenues for many. In 2022, Colliers reported that the total leasing in the country hit a record high of 50 million square feet, underscoring the sector’s momentum.

With a vast array of options including office buildings, retail spaces, warehouses and industrial properties, this sector has the potential to generate consistent income through rent as well as wealth generation through property appreciation over time. Ideally, this sector should attract both global and local investors, HNIs and funds. However, it is only very recently that retail investors have started participating in investments in   commercial real estate

In a bid to create awareness around the immense potential of this asset class, Moneycontrol and Property Share present CRE-Edge: Wealth Generation Through Commercial Real Estate. The first episode kicked off with an interview of Kunal Moktan, co-founder and CEO of Property Share, whose expertise in this field has been honed over 13 years of buying, managing and selling real estate across the globe. Moktan's 8-year stint with Blackstone Group, which manages over $150 billion in assets worldwide, also gives him a nuanced understanding of the various ways in which the real estate market grows and evolves.

For the Love of Real Estate

Indians love real estate. Residential investments aside, many invest in commercial real estate as it has proved to be a strong asset class. For instance, the commercial real estate market in Mumbai's Nariman Point is mostly strata-owned, with different individuals owning different floors. According to Moktan, “People recognize the fact that commercial real estate is a hybrid instrument between a debt instrument and an equity instrument, so you get 8-9% rental yields. If you buy it for Rs. 100 you know you're getting Rs. 8 or 9 every year. On top of that there is this capital appreciation, so you could also get growth on your underlying asset, which is typically 5-10% percent a year. So basically you end up making 13-18% unleveraged IRRs in commercial real estate as long as supply and demand stay in check.”

Every lease in India is structured as an Index to Inflation, which makes this a strong asset class to invest in, to create an inflation proof source of passive income. Moktan does the math, considering an escalation of just 5% per annum. "What happens is your eight percent becomes 8.4% the following year, 9% in the second year. Basically the yield plus equity portion of the instrument is something that's really appealing.”

The Landscape

The investor profile of commercial real estate is undergoing significant changes with the introduction of Real Estate Investment Trusts (REITs) and fractional ownership. These innovations are making it possible for retail investors to invest in the growing commercial real estate sector with small amounts of money. As a result, a large number of retail investors who were previously discouraged by high investment prices are now investing in commercial properties. However, as Moktan pointed out, REITs don't give investors the best yields. "A portion of the REIT portfolio must include under construction properties or land. This means, that even if the yield on earning properties (80%) is 8, the remaining 20% investment into non earning properties brings the yield back down to 6-6.5%."

The other option is to buy commercial real estate directly. The trouble is that these properties tend to have much higher ticket prices in comparison to residential real estate. They also attract higher interest rates on property loans. Moreover, unless you understand the commercial real estate market really well, the risks can often outweigh the returns. And then there are things over which we have no control: for instance, commercial real estate properties worldwide suffered during the Covid-19 lockdowns. Even if we don't go to those extremes, recessions can hurt the best laid plans.

Property Share: Enabling Stronger Decision Making

When it comes to commercial real estate, location is key. Moktan highlights the importance of research and access to high quality data before investing. He suggests that investors, along with the location of the property, should also consider the replacement cost, rental yield vs market rental yield, developer reputation, construction quality, building quality, and tenant quality.

PropertyShare replicates how institutional investors invest in real estate. Their website listings feature rigorous analysis, financial modeling, sensitivity analysis, layouts, photographs, videos, and everything needed for informed investment decisions. “We use a tier one law firm for legal due diligence to ensure clear title and proper approvals. We also use high-quality technical diligence to ensure building quality, functioning elevators and DGs, well-designed lobbies and floors, and so on."

As with any investments in property, all paperwork must be verified and regularized as needed. "We do detailed financial diligence to ensure no outstanding issues on the property. We pass all of this information to our users, and our tech platform allows investors to invest online within seconds from anywhere in the world." This level of transparency is new to the Indian Commercial Real Estate market, and is inspiring greater confidence among users of Property Share's services.

Property Share is also making great strides in using the best technology has to offer. "We use technology, such as artificial intelligence tools that allows us to make decisions about a location, property, or tenant based on millions of data points. This ultimately replaces the need for an investment manager to travel and look at properties."

For more insights, you can watch the full conversation here

 Moneycontrol journalists were not involved in the creation of the article.