Current Investment Landscape - Opportunities and Challenges

Wealth per adult in India has risen at an impressive average annual rate of 8.8% since 2000 and stood at US$15,535 at the end of 2021. We've seen an unprecedented growth spurt in liquid wealth - today, we account for US$12.8 trillion or 3% of Global Wealth. India’s Ultra High Networth Individuals (UHNWIs), with assets over US$30 million, are expected to grow 63 per cent over the next five years. At present, India is home to around 7,000 UHNW households and 113 billionaires.

Indians today have a multitude of choices when it comes to growing our wealth: stocks, bonds, real estate, gold, commodities and even alternative assets like cryptocurrencies. However, one principle stands firm even as markets fluctuate and change the world over - diversification by spreading investments across different asset classes can not only mitigate risk and shield against market volatility, but also maximize potential returns. It is a sound investment strategy that ensures a balanced approach to wealth accumulation and long-term financial stability.

In India, 50% of buyers prefer real estate to stocks, gold and fixed deposits - we still see real estate as the base from which to grow our wealth. Given the promise of India's Commercial Real Estate sector and its suitability to the Indian investor mindset, Moneycontrol and Property Share came together for a webinar under the aegis of CRE-Edge: Wealth Generation Through Commercial Real Estate.

Host Mugdha Kalra was joined by Andrew Holland, CEO of Avendus Capital, Public Markets Alternate Strategies, and Kunal Moktan, Co-founder and CEO Property Share, to discuss the pros and cons of diversifying one's investment, and the relevance of commercial real estate in an investor’s portfolio

Diversification across asset classes is key, according to both Andrew and Kunal. Andrew explained his rule of thumb - "you take a hundred minus your age and that's the portion you should have in equity because if you're a young person you don't want it all in high yield in debt because that's not going to give you the returns for the long term". He also talked about building one's long term portfolio starting with housing, then equity, and then alternative investments. "The bulk of it should be in your real estate and your equities and bonds; that's where you're going to get your compound growth over time."

Andrew also spoke of risk appetite and how that plays into investment decisions: it's easy to switch from asset class to asset class because of short term blips in performance and returns. He stressed on the importance of understanding what each asset class can give them over the long term horizon, and accordingly switch as and when need be.

Kunal's perspective was slightly different. According to him, age aside, it also matters greatly where you are in your investment cycle and what your goals are with that particular investment. Each asset class is suited to a particular type of gain - long or short term, underlying asset of earnings and so on. He explained this with an example, "Commercial real estate has performed consistently over time - if you're looking for additional income, or if you're planning for retirement for instance, it can be a stable bet. Rent yielding commercial real estate won't give you 20-25% returns, but you can definitely expect to make 12-15% unleveraged returns."

Kunal also broke down the tax implications of rental income: in India, owners don't pay the full tax rate of 30% on rental income. In addition, capital gains also works differently with real estate because the government allows us indexation benefits if owners hold on to real estate investments for more than 3 years.

Kunal explained that for the longest time, commercial real estate has been the preserve of institutional investors, "For institutional investors, commercial real estate serves as a fantastic security to buy: a rent yielding commercial property can earn 9-10% returns and provide underlying appreciation, providing a growth factor in addition to current income on the asset class."

Now, REITs and platforms like Property Share are slowly bringing about a change, and opening up opportunities for retail investors. REITs today start as low as Rs 300 per unit. Tech enabled platforms like Property Share also create several avenues - one can invest on their own in a commercial property, or buy a portion of it. This makes commercial real estate much more accessible to the retail investor. In Mumbai for instance, buying commercial real estate in any of the central business districts is unaffordable for most people. However, through portioning, retail investors can share in a high growth, high rent yield property that helps them grow their wealth much like any other real estate asset, while also diversifying their investment portfolio.

However, as with all investments, even in commercial real estate, the devil is in the details.

Kunal highly recommended leaning on a financial advisor in commercial real estate investments. After all, it isn't a simple asset class: it isn't liquid, it's meant to be held long term, and there are various nuances you need to understand before one commits. "If I speak about commercial real estate you should be able to understand these structures. Who's done the interior fit outs? That plays a big role. The location, who the tenant is, what kind of escalations are built into the deal, what are the vacancies in that particular micro market, what is the supply coming in, the demand… a normal retail investor will will not be able to devote the time, effort or even have the resources available to go and see some of these things! That's why you have asset managers who specifically look at this particular asset class."

Andrew, too, recommended using a financial consultant or an advisor, to keep from making hasty (and costly) decisions. "I think having a financial advisor gives you that comfort that what you're doing is correct but also to hold you back when you're getting too excited in one asset class. They're also great at putting a little bit of a damper on your enthusiasm to get you to the right asset allocation rather than saying "I'm going to put all my money in crypto tomorrow because of xyz reasons", because that would be a hugely risky thing to do."

For more insights, you can watch the full conversation here