Covid-Resilient CRE: Secure Future with Fractional Ownership25 Oct, 2021
So you’re looking to invest your money, but you’re no longer sure what the safest bet is going to be in a post-Covid-19 market? Well, read on, because we’ve done the research for you.
The Covid-19 pandemic this past year has resulted in severe economic upheaval, shaking up the investment markets as well. As we have now emerged from these times of uncertainty, now is when we would most appreciate some certainty and stability in our financial returns from investment. And yet, post-lockdown, some avenues of investment, such as stocks and mutual funds have become more volatile, while other “stable” investments such as bank deposits and debt funds are yielding ever-decreasing returns due to falling interest rates lower returns making commercial real estate stands out as an attractive and secure option in this evolving economic landscape.
So what’s the best bet under the current circumstances? We think Commercial Real Estate (CRE) is the way to go in the current market. Fractional ownership of commercial property, in particular, is the path to the future. We’ll explain why, with the help of these 4 new-age goals for every investor across the globe post-Covid-19.
We'll explore the key factors that make commercial real estate a safer investment after COVID-19:
1) Stability in income streams
The first thing one should look for in a good investment is solid, regular returns, and commercial property — especially Grade A commercial property that hBits specializes in — provides consistent rental income, month-on-month.
Straight to your pocket: Every month, the rent from your property will go straight to your bank account as liquid, disposable income. No need to wait for your fixed deposit to mature, or for the lock-in period on your bonds to expire before you can access the income.
High rental rates: Premium CRE provides rental returns as high as 6%-10%. This means an investment of ₹10 lakhs could fetch you anywhere between ₹5, 000 and ₹8, 300 per month (or ₹60, 000-₹1 lakh per annum).
Long-term tenants: Premium commercial property attracts high-profile tenants with deep pockets, such as MNCs (multi-national corporations), banks, retail stores, or IT offices. These tenants tend to not only pay their rent on time or in advance, but also lease the property for 3 to 5 years, and tend to extend the lease further. Residential property, on the other hand, has way lower rental returns (1.5%-3%) and is also prone to high tenant turnover (every time a tenant vacates the house, the owner incurs losses due to repairs, cost of searching for new tenants and the lost rental income while the property is vacant).
Commercial properties offer investors a reliable and consistent income stream. Through long-term lease agreements with reputable tenants, this asset class has demonstrated its resilience, even amidst economic downturns. The ability of tenants to uphold their lease obligations during turbulent times has showcased the reliability of commercial real estate as an income-generating investment.
2) Long-term Capital Appreciation
In addition to providing steady rental returns month after month, one of the biggest advantages of premium commercial real estate is the potential for capital appreciation, which increases the value of your original investment. Over time, as the property value continues to appreciate, the rental rates will also rise hand-in-hand.
Commercial real estate has given 16% CAGR (Compound Annual Growth Rate) over the past 5 years, and 15.3% CAGR over a 10-year period. CAGR is used as a measure of the average yearly growth of investments.
The India Commercial Real Estate Market size is estimated at USD 67.08 billion in 2023, and is expected to reach USD 223.25 billion by 2028, growing at a CAGR of 27.19% during the forecast period (2023-2028) (report from Mordor Intelligence)
Let’s use this same yardstick to compare a commercial property to the stock market (considered to be a high returns investment) and gold (considered to be stable). The Sensex has a considerably lower CAGR — 13.4% over the last 5 years and 10.8% over the last 10 years. Meanwhile gold has yielded even less, at about 10.25% CAGR over the last decade. This means commercial real estate is the clear winner, as it has not only provided higher capital growth but combines the high profits of stocks with the stability and security of gold.
3) Stable Asset Class
The third factor to consider before investing your hard-earned money is how stable the asset is. Real estate has always been considered among the safest assets, including gold and government bonds, and fixed deposits. Unlike real estate though, gold does not generate regular income, and the returns from bonds and deposits can be very slow and not liquid. Once again, real estate emerges as the winner, as a stable asset class with high returns. This is particularly true even during these difficult times in the Covid-19 pandemic.
Pandemic-proof: If anything, this is a great time to invest in commercial real estate, especially if it is a pre-leased property like the kind hBits offers. Pre-leased commercial properties have witnessed minimum fallout from the pandemic since tenants are locked in for the duration of the lease. However, under-construction properties are facing a huge cash crunch and ready-to-use vacant properties have also suffered setbacks, as most companies have employed a ‘wait and watch’ attitude before pouring money into an office lease. Compare this to residential property, which has taken a huge hit in the pandemic, due to people leaving metro cities and returning to their hometowns from where they are working remotely. This has led to a decrease of 2%-7% in residential values in India this year.
4)Type of property and tenant asset class & tenant gentry:
Be sure to invest in pre-leased Grade A commercial property. Buying a vacant non leased property would still mean you’d have to search for a tenant while losing out on rental returns in the meanwhile. And with Grade A real estate, even after the lease period expires, tenants are far more likely to extend the contract. Failing that, these properties always have a consistent demand for leasing and resale. These are the properties that have not been hit too hard by the pandemic either, as the tenants are MNCs or large corporations who have deep pockets and have continued to pay rent on time even during these uncertain times. hBits selects the most promising Grade A properties in high-demand locations such as business districts after doing all the research, and the tenants are also audited to ensure that the lease and your rental agreement will remain stable. This audit report is also shared with buyers before the purchase.
Set for a price boom: Right now, property prices are more favorable for buyers as cash-strapped developers are looking to sell cheap to bring in liquidity. However, these affordable prices won’t last long. Due to the ensuing economic slowdown, RBI is eyeing further interest rate cuts. When interest rates fall, so do cap rates (capitalization rate is a measure of risk in real estate). This means lower risk, which makes the commercial property even more lucrative, resulting in a price boom. This will be exacerbated by rising inflation. The current economic scenario can actually be perceived as an opportunity to claim a stake in commercial real estate at discounted prices and make a handsome profit once the market picks up again.
5) Finding a fair price:
While the residential property is fairly simple to valuate simply by doing a little legwork and researching current market rates and local facilities, the valuation of commercial property is more complicated with the commercial property because there are many factors to consider. To assure investors of a fair price, hBits provides certification from Jones Lang LaSalle (JLL), an independent real estate consultancy that checks the local resale prices, rental rates, and ther factors before certifying that a property is being sold and rented out at a fair price.
Hedge against inflation: hBits ensures a consistent increase in the rental yield, with contractual agreements that rental rates will increase by 15% every three years. This built-in escalation clause factors in inflation and provides steady returns over the years. So if your property fetches ₹1 lakh per year currently, in three years, this will increase to a return of ₹1.15 lakh. This sets off any inflation in the future.
6) Continued demand:
Commercial real estate in India witnessed gross leasing activity at 25% year-on-year in 2019. Even during the pandemic, between May and July 2020, India witnessed deals of approximately 11 million sq ft in commercial real estate and another 8 million sq ft is expected to be absorbed in the future.As per JLL’s report, India’s gross leasing activity for Q1 2023 across top 7 cities was recorded at 12.8 mn sq ft., better than the quarterly run rate of 2022 hBits sources premium, sought-after property that is always in demand, and will continue to fetch handsome returns even in a post-Covid world.
7) Diversified portfolio
The final point investors need to keep in mind is to maintain a diversified portfolio that balances risk and return. If you have already invested in stocks or mutual funds, commercial property is a great way to bring more stability to your portfolio without compromising on returns.
Diversifying the portfolio is a good idea even if one were to invest solely in commercial property. This becomes all the more convenient with hBits and its format of fractional ownership, which has reduced the entry barrier to a minimum investment of ₹10 lakhs. For example, instead of investing a lump sum of ₹30 lakhs in an asset, now you can invest ₹10 lakhs in one property and ₹20 lakhs in another, and so on. This reduces your risk even further since you are no longer putting all your eggs in one basket.
8) No-fuss investment for NRIs
Tech platforms like hBits, which offer fractional investment in CRE, are particularly convenient for NRIs because it allows them to invest in their homeland without the requirement for travel. Even after the travel restrictions due to Covid-19 are lifted, it may not be possible for NRIs to visit too often for maintenance of the property, to enter a new lease agreement or for the resale of the property. With hBits, all of this can be done on your laptop from anywhere in the world. Not only can you track the status of your property, but you can also sell it on the same platform or look for the next property to invest in.
Also consider that as compared to international cities such as Dubai where demand and rental returns have steadily been falling, the Indian office space is still in the growth stage, despite the pandemic. In Dubai, rent has dropped by as much as 10%-20% year on year, depending on location. Compared to this, major cities in India have shown positive growth of 5%-12% in commercial real estate in the last few years. As mentioned earlier, even during the peak lockdown months of May-July, deals were made for as much as 11 million sq ft of CRE in India. It’s safe to say that as long as one picks a solid, Grade A property, returns and resale value will be stable here.
9) Commercial property is the future
As per the above mentioned factors, commercial real estate is one of the most favourable option undisputed champion that will bring you solid and consistent returns, while providing strong growth and stable investment. You may ask yourself then, why doesn’t everybody invest in it? The answer The reason it is not operational on large scale as of now is, CRE will be the investment of the future, especially since more and more people are buying stakes in it through fractional ownership, which makes commercial property affordable for retail investors as well. This is the new-age vision that hBits has for the future of investment in India, bringing Grade A commercial real estate within the reach of the common man.
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