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Investors typically invest majority of their funds across various traditional assets and miss on higher return opportunities. Nihar Shah, Director of Investments at Strata said at a recent Cafemutual webinar, “70% of the Indian wealth is across traditional assets. It is high time that investors explore other alternative avenues which can generate 3-4% higher returns.”
During the webinar, Nihar in conversation with Nishant Patnaik, Associate Editor, Cafemutual addressed some of the most commonly asked questions.
Here are the top 5 questions on commercial real estate investing that the webinar addressed.
How does investing in commercial real estate work?
In commercial real estate investing, investors enjoy complete/fractional ownership in commercial properties.
Strata, a real estate investment platform identifies a suitable property and creates an SPV (Special Purpose Vehicle) for its purchase. The SPV is a private limited company and comes under the Companies Act. Each investor becomes the shareholder and Strata facilitates the entire transaction.
Investors can choose to invest across offices, retail properties, warehouses, data centres and industries. Strata floats a separate SPV for each property.
All relevant documents like sales deed, leave and license agreement are kept with a custodian. Investors also get the right to visit the property in person at any time.
What are the risks involved? How are they mitigated?
Tenancy risk is the key risk. To mitigate this, Strata identifies those properties which are leased out and occupied or properties where lease and license agreements are in place and the fit-out work is in progress. Besides, the real estate investment platform filters out properties with over 5% vacancy and shortlists leave and license agreements with at least 3-year lock-in.
There also exists the risk of lessees vacating the premises or delaying/defaulting rental payments. To mitigate these, Strata evaluates the financial strengths and credit worthiness of lessees.
Next comes liquidity risk. Given the nature of products, there is no overnight liquidity. However, to help existing investors exist, Strata facilitates connecting with other interested buyers and also looks into the relevant transfer formalities.
What makes commercial real estate products lucrative?
Investors exactly know where their funds are invested - which property, its location and its occupants. This also differentiates these products from REITs (Real Estate Investment Trusts) where the end investment avenues are not known.
They offer monthly rental payouts in the proportion of investment held which gradually increases with rental escalation. Additionally, investors also benefit from the appreciation of property.
What are the things to keep in mind before investing?
Ticket size - HNIs can invest with a minimum amount of Rs. 25 lakh. Interestingly, to encourage investments amongst women, every asset has limited slots where women investors can start investing with Rs. 15 lakh.
Tenure - It is advisable to stay invested for at least three years. Exit before 12 months is subject to 1% exit load.
Taxation - Investments held for over two years are treated as long term assets and taxed at 20% with indexation benefits. This makes real estate commercial products tax efficient.
How can MFDs/RIAs offer these products to clients?
Empanelling with Strata offers an earning potential of 3-4% of the investment value. Interested MFDs/RIAs can visit https://partner.strataprop.com/ to empanel themselves with Strata. There are no empanelment fees but MFDs/RIAs must have AMFI and RERA licenses. Apart from a sound platform to review and analyse their investors’ portfolios, the dashboard will also offer co-branding features. Additionally, it will soon support raising invoices.
Disclaimer: This is an educative initiative to make MFDs/RIAs aware of new investment avenues. MFDs/RIAs are advised to perform their due diligence before dealing with any service provider.
