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Commercial real estate products have the potential to deliver better returns for your clients while opening newer revenue streams for you.
To help you understand the opportunities in this space, Cafemutual hosted Nihar Shah, Director of Investments, Strata who simplified commercial real estate investing.
Here are the key highlights:
Commercial real estate investing
Investors enjoy complete/fractional ownership in commercial properties like offices, retail properties, warehouses, data centres and industries. Individuals and other legal entities like HUF, trusts, companies etc can invest in these products.
Strata, a real estate investment platform identifies such properties and floats an SPV for their purchase. It forms a separate SPV (Special Purpose Vehicle) for each property.
The minimum ticket size here is Rs. 15 lakh for first-time women investors and Rs. 25 lakh for others.
Due diligence and checks
Strata shortlists OC (Occupancy Certificate)-received properties or built-to-suit warehouses. It purchases already leased out properties with a minimum three-year lock-in and analyses lessee financials. The shortlisted commercial spaces have a vacancy rate of not over 5%.
Each lessee is asked is give three to six-month rent as a security deposit and serve a minimum three-month notice before vacating.
The above checks mitigate tenancy risk i.e. the risk of tenants vacating the property before lease expiry.
In case of defaulting lessees, Strata allows a one-month grace period and sends a notice if the default continues. It then proceeds with lessee replacement.
Transaction verification
The SPV comes under the purview of the Companies Act and has AOA (Articles of Association) and MOA (Memorandum of Association). Investors can visit the MCA (Ministry of Corporate Affairs) website, look for the SPV’s names and check for their names in the shareholders list.
They can access the SPV’s escrow account for rental credits and can view their month-on-month receipts on Strata’s online portal. Additionally, investors can visit the property at any time.
Further, relevant documents like sales deed and leave and license agreement are available with the custodian and are open for inspection.
Potential of generating stable cash flows
Investors receive monthly rental payouts in proportion to their investment. The payouts increase in tandem with the escalation clause. They can also benefit from appreciation in the value of the underlying asset.
Rental incomes are subject to TDS and reflect in investor’s Form 26 AS. NRI investors can avoid TDS and avail of double tax treaties benefit by submitting TRC (Tax Residency Certificate).
In case of a sale, assets held for over two years are treated as long term assets and are taxed at 20% with indexation benefits. Remember, asset sale takes place only with a majority consensus of 75% of shareholders i.e. investors.
The exit route
Commercial real estate products are advisable for investors with a horizon of at least three years.
They are subject to exit load in the first 12 months. Investors wanting to exit can take Strata’s help to connect with interested buyers and complete transfer formalities.
Diverse revenue stream and new association for MFDs
Strata currently has over 200 active business partners and offers a 3% upfront commission which could gradually increase to 4%. Notably, every investor is tagged to his/her business partner and can invest only through that partner. Even if a client invests through the platform on his own, it would generate brokerage for MFDs.
The platform also offers assistance to distributors to onboard clients.
Interested MFDs can visit https://partner.strataprop.com/ to register. The online registration takes less than 10 minutes and requires basic KYC documents along with relevant certifications like AMFI license.
You can view the video here.
Disclaimer: This is an educative initiative to make MFDs/RIAs aware of existing investment avenues. MFDs/RIAs are advised to perform their due diligence.
