Easy way to own Commercial Real Estate: Fractional Investment

Dear viewers, welcome to yet another episode of Experts Speaks. In this episode, I'm going to talk to you about something of a very interesting investment opportunity called fractional real estate. Who doesn't like real estate? Everybody wants the fat returns which come from real estate, but nobody wants to get the trouble of real estate, the illiquid nature of the asset, the problems you face with the documentation, troubles you go through with the tenants, difficulty of getting a loan, managing the brokers and agencies is a very, very difficult thing. That's why many times you shy away from real estate. What if I say you can solve all these problems with this new investment opportunity? The fractional real estate, the investment concept that is being floated now is a solution for all the problems which are facing the real estate. In this episode, my expert of the week, Mr. Niharsha is going to tell you about the exciting opportunity of investing in fractional real estate. This is NRI Money Clinic for you. And I am Dr. Chandrakant, your financial guide for a happy living. Dear viewers, to bring all the finer points of fractional real estate and why it makes a very good investing opportunity for you, I have brought to the studios my eminent faculty, the expert of the week, Mr. Niharsha. Mr. Niharsha is a management professional for excellence. He has a rich experience of 16 years working with private equity, wealth management, asset management, distribution, and fundraising. Currently, he is head of investments for Strata Fractional Real Estate. Welcome to the show, Mr. Niharsha. Thank you, Mr. Bhatt. It is indeed a pleasure being on the show with you. Mr. Nihar, I want you to spend the next 20 minutes explaining how fractional real estate is a great investment opportunity for people who want to invest in real estate without the negatives of it. Let me start from the beginning. Mr. Nihar, we are all new to this fractional real estate investment. For the benefit of my audience, can you please tell me in brief what is fractional real estate and what are the things the audience should know about it? Fractional investment is one of the best options to invest and own premium A-grade real estate assets, which could be warehousing, commercial office, industrial assets, data centers, retail malls, all of that, which earlier one could not invest into because the investment amount required was very high. The management capability of the asset and the tenant was not available with everyone. And at the same time, these kinds of assets were not accessible or not available for one to invest. So, by bringing transparency into real estate and by solving all these problems, fractional investment has become one of the best modes or ways to invest into real estate as of now. Mr. Nihar, you said that you fractionally own the real estate, that is the investor. How is it possible? How he can own fractional investment? How he can own it? If he owns it, a portion of it, who manages the property? Who looks after the document, finding a tenant, collecting the rents? How does this system actually work? Great question. So, this is a passive investment, which you will do. What happens over here is Strata, which is an asset manager. The only job which Strata does is managing these assets. We form a private limited company, also known as a special purpose vehicle or an SPV. So, each asset is owned by a special purpose vehicle, which is a private limited company in nature. And investors who want to deploy 25 lakhs or a higher amount can become shareholders of this company. So, the asset is owned by the SPV or the company, which is formed only to own this asset. And investors become shareholders of this company in the proportion of their investment into the company. The asset is managed right from the time of due diligence to registration of the asset, collecting and disbursing rents, collecting and paying off the GST or the taxes, collecting and paying off property taxes, insurance, common area maintenance charges. All of that is done by Strata, which is an asset manager. Eventually, when the tenant moves out and another replacement tenant has to be found, that is also done by Strata. And when the asset has to be sold, that sale responsibility also is taken by Strata. So, in a nutshell, today an investor invests into multiple properties or multiple assets which generate income for them regularly, but they do not have to spend even one minute on managing the asset or looking at day-to-day matters of the rent collection and all of that. All of that is done by Strata. If I have understood you very clearly, Strata is not the owner of the assets. Whenever an asset has to be bought, a special purpose vehicle in the form of a limited company is formed and every investor becomes a shareholder of this. Strata is the professional management team which takes care of this company. Is my understanding correct or is there a mistake in this? That's correct. Nihar, for me, whatever you said looks like something like REITs or INWITs, which is slowly gaining traction in India. If it is same as the REITs or INWITs, why a fractional real estate if it is similar? How does it differ from these two entities? Can you give me a difference between these three entities, fractional real estate, REITs and INWITs? Great question, sir. So, there are multiple differences between both the structures. Today when you invest into REITs, you invest into a portfolio or a bouquet of assets. When you invest into properties through fractional investment, you actually invest and own into a single property. You can make your own portfolio unlike what you have in a REIT. While you deploy, let's say, 25 lakhs in REIT, you can't choose where the money is being invested. But over here, if you invest 25 lakhs, you can choose whether you want to invest in a property which is in Bangalore or Mumbai or Delhi or Pune or wherever. At the same time, the other differences and the biggest difference is that REITs are mark to market, which means if the stock market goes up and down and what we've seen in the last two, two and a half years as well, you would have seen that the returns of REITs have also gone down. While here, in this case, through fractional investment, the properties are not mark to market, which means irrespective of whatever happens on the stock market globally or within India, the property prices or the asset price or asset capital value does not go up and down and does not fluctuate to the tune what we see in REITs. Third is that in REITs, money can be invested by the portfolio manager. 90% of the funds have to be invested into assets which are generating income, but 10% of the money is also or could be invested into assets which are under construction and not generating any income. While in fractional investment, entire 100% of your investment amount is invested into an asset which generates regular income for you. Fourth, when you invest into a REIT, the payouts are not monthly, it could be quarterly or half yearly. In fractional investment in the assets which we do, the rental payouts or the interest payouts which are given, those are month on month passed on to the client, so there's a monthly payout. Again, one more fundamental difference is that in a REIT, if the REIT owns or the portfolio owns a certain asset, they cannot sell it before three years. While in fractional investment, the asset could be sold anytime even after one day. However, we recommend investors to stay on for a longer time, but that flexibility is also available. So, these are three or four fundamental differences why one would invest in REIT, but otherwise if you want wealth creation and regular income, fractional investment is the way to go. So, if I understood correctly here, so the investor has a choice here, the place of his choice, the type of property he wants to own or he can pick up what he wants. Whereas in case of REITs and INVITs, so the investor has to go with what the REITs, the trust has to offer and it can be a bouquet of different vehicles on which he doesn't have control upon. Is my understanding correct? Absolutely correct, sir. Absolutely correct. Mr. Nihar, finally, when an investor invests in any kind of an asset class, he looks for rewards from this. By investing in fractional real estate, what is the reward an investor can expect by investing in fractional real estate? Great. So, when an investor invests into any commercial real estate asset, he expects generally rental income coming in if the asset is given on lease and at the same time he's talking about or expecting a capital appreciation. So, same happens over here. When an investor invests through fractional investment model into any of the assets which we have to offer, you will get something called as an interest payout, which is nothing but the rent which is collected from the tenant and that payout happens on a month-on-month basis. So, that is the first cash flow or the payout or the reward which the client gets. Eventually, when the asset is sold, could be after two years, three years, four years, the property value will always be appreciated when we sell the asset and that appreciated value or capital gains will also be passed on to the investor. So, when you invest, you can expect a monthly cash flow which is in the form of interest payouts and the capital gain also is passed on to you when the asset is sold. So, even if a person is looking for capital appreciation as well as a regular income, probably fractional real estate answers to his needs of income as well as a capital appreciation as times pass by. And it is a well-known fact that the rentals as well as the real estate values are inflation proof. When the inflation picks up, it is obvious the rents will pick up as well as the prices of the properties will also go up. One of the doubts that come to my mind or the points I need a clarification is, there are different kinds of real estate which are available. You mentioned a few rental real estate is there, plots of lands are there, different kinds of real estate are there. From a point of view of fractional real estate, what are the different types of real estate your company Strata looks for to invest in that? So, sir, again, excellent question. As I said, one of the most important benefits or advantages of investing through a fractional investment model is diversification. Today, when you invest into any other asset class, you want to diversify. So, why do you want to lock your investment into a single asset? So, when you invest through Strata, you can actually diversify your investment across asset classes, across cities, across tenant profiles. You can invest into an office asset where, let us say, you could have kept Gemini as a tenant. You can invest into a warehousing asset where we have microplastics, wake fit, those kinds of tenants which are into manufacturing, toy manufacturing, mattress manufacturing, all of that. You can also invest into offices, for example, Puma's head office is with us. So, you can invest into that as well. You can also invest into industrial assets and you can also invest into retail assets. We have an asset in Chennai where Westside Trend Limited is a tenant. So, you can invest across these asset classes. And going forward, we will also be offering you alternate asset classes, which is hospitals, hotels, and all of that. So, there is a bouquet of these asset classes which you will be able to invest into and earn benefits of each asset class. Investors generally think about real estate from a residential purpose. The types of real estate, what you said, is primarily into commercial real estate. In case of rental real estate, usually the rental yields are very, very small, just around about 2% or 3% kind of a thing. What kind of a rental yield you can expect from this kind of commercial real estate, warehousing or data centers or shopping malls or whatever the other real estate you spoke of till now? So, on an average, any investment into commercial real estate, where the subtypes are what I mentioned, will give you anywhere between 7.5% to 8.5% to 9% as your rental return year on year. There is a fixed escalation on the rent also, which kicks in every year or every three years, depending on what that agreement has made. But apart from that, you should also be investing to get capital gain. So, we are looking at generating a bare minimum IRR of anything between 12% to 14%, which is a blend of rental return, which is 8% to 9% and the balance comes as a capital gain. That looks to be a very, very attractive proposition. So, we have heard about stock markets giving in the long run 12%, 14% kind of a return. Here you are talking about owning a fractional real estate, which might give you a similar return that too with a regular flow of cash month on month. Is that correct, Nihar? That's absolutely right, sir. Nihar, there are different kinds of investors. Some people like retirees or some people want regular income. Some people say, I don't need regular income, but I'm looking for capital appreciation. Who can invest in fractional real estate? Likewise, is there any hurdle? Can the general public, each and everyone can come and invest in this fractional real estate, let's say with a 5,000 rupees or 10,000 rupees, or are there any hurdle range to be crossed to participate in this good opportunity of yours? Great, sir. So, generally, people who are looking at getting regular income, passive income, should be definitely investing in this. But at the same time, if you're also looking at wealth creation or capital appreciation in long term, then this is the investment tool which you should definitely look at. So, it serves both the purpose. While it gives you a long-term capital gain or appreciation or wealth creation, it also gives you passive income. A lot of people who are otherwise investing in debt assets or bonds and all of that, they will also be looking at investing into these assets. As we speak, we have more than 2,500 investors who've invested with us in the last two and a half to three years. The minimum investment amount starts at 25 lakhs. So, once you have 25 lakhs as your minimum investment amount, you can start investing with us. Absolutely anyone, right from a public limited company to a private limited company, to an individual, to an NRI, HUF or trust, anyone and everyone can invest into these kinds of assets. So, you have to be a legal entity or you have to be an individual of Indian origin or NRI or resident Indian to invest into these kinds of assets. Nihar, when we talk about real estate, people suddenly get an idea that they can invest in real estate using cash. Thus, fractional real estate is open to individuals who bring in loads of cash or how does the system work? What are the KYC requirements? What are the checks and balances out there? What is the disclosures or what is the reporting that you need to make to the tax authority when somebody invests in the fractional real estate? Right, sir. So, the common thought process or common idea which comes to someone when you talk about real estate is, okay, I have cash, let me invest, let me park my money into real estate. But in fractional investment, there is zero cash which is absorbed. We at Strata do not want to even deal or talk about cash. So, the properties which you see, we have done 19 assets or 19 properties. Our portfolio is completely AAA-grade portfolio with tenants, buildings, assets, all of them being in the Fortune 100 or Fortune 500 kind of a space. So, cash is absolutely not entertained. We also do not take money from any third party to adhere to the anti-money laundering laws. We want the investment to come from your individual account or your company's account, whose director you could be. And the KYC done is, everything is done online. The money also has to be transferred online through a virtual account which we create. So, there is a complete ring fencing which is done from a safety standpoint for anyone who wishes to invest. And the money flows into the escrow account of the SPV. And once the asset is registered, the shareholders or the investors get share certificate and the CCDs of this particular company. So, KYC is done as per the KYC norms, what we see globally across wealth management products. But at the same time, we do not take cash and we do not accept money from any third-party people or third-party agencies. Nihar, you have told all good points about the fractional real estate. I am excited. But as an advisor or as a financial guide, I also want to know, tell me from your heart of heart, is it a safe investment? What are the risk factors that are built into the fractional real estate? An investor could just not only look at the opportunities, should also look at what might go wrong. From your experience of working in this field, please let us know, the investor, what are the risk factors he should know? How safe are these investments? Absolutely. And again, you know, people traditionally used to invest into real estate because this asset class has known to be the safest of all. Even if you look currently, more than 60% of the networks of people in India is into hard real estate, right? So by the virtue of this asset, it is the safest asset what you can get into. Unlike a lot of other funds, unlike a lot of other alternative platforms, here you are investing into a hardcore asset, which means the money which you are investing is not only on paper, but it is backed by an actual physical property, which is there. How we safeguard the investment of every individual is something which I would like to tell you. And what are the risks which could be associated with this asset class and how do we mitigate? That is also something which I would like to talk about. So Stata appoints a trustee and a custodian for every asset, which means that collection of the money goes into an escrow account. After that, registering of the asset, collecting rents on a month-on-month basis, dispersing into clients, all of that is done by the trustee, which is in place. We work with Vistra and Universal Trusteeship Company. All the papers are actually kept in the custody of Universal Trusteeship, which also acts as a custodian. And all of that is something which you can go and verify at any given point of time. One more way how you can check and verify your investments is that if you become a shareholder of a company, you can verify your investment and shareholding with Ministry of Corporate Affairs website or also you can go on to the Registrar of Companies website. But even before that, when we spoke about transparency today, before you invest, you will get access to the actual documents of the SPV, which is as per the format, is as per the Indian Companies Act. You will get access to the lease documents and sale deed agreements and all of that so that you know very well and you can go through every document before you make a decision to invest. So, all the money which you invest is ring fenced through an escrow account. And at the same time, the property is actually bought and registration is done and the papers are safely kept with a custodian, which is appointed by Strata for every asset which you invest in. So, all in all, it's a safe investment. There could be one or two risks which are generally associated with real estate anyways that also comes here. But we mitigate that as well. Just to tell you, let's say if you own a property and if you've given it on rent, your tenant might leave after two years, three years, four years. What do you do? Then you go back in the market and find another tenant for that property. So, that is something which Strata does. We never take a property which does not have enough lock-in. We never take a property where the tenant has not spent money on furniture and fit-out, which means he's going to be sticking around for a longer term. At the same time, we take enough and more security deposits from the tenant to ensure that he, before he leaves the property, he gives us enough and more notice and we get time to get a replacement tenant. So, all of that is also managed by us. So, it only means to say that you are quite conversant and you know the risks which come with it and you have taken enough steps to mitigate this obvious risk. Like in any other asset class, you can't make a risk zero. You can manage, you can calculate and you can mitigate the risk. So does the risk which are there in the fractional real estate. A professional management around the properties, what you're going to own, is something which will be very, very helpful to you. Dear viewers, you have heard about the opportunities and the threats and the risks and the precautions you have to take while investing in the fractional real estate. As usual, I would request you for you also to do your due diligence. Check your risk profile. Talk to your chartered accountant. Consult your financial planner. See whether this fractional real estate is for you or not. When you are convinced that this is where I have to take an exposure, keep your exposure control as prescribed by your respective advisors. That is the right way to invest in any asset class. Nihar, you told about income which gets generated because of this investment. You also mentioned about capital gains that can accrue at the point of time of sale. How does the taxation around fractional real estate work? Is it like any other real estate or is there a different law which is governing the treatment of taxes for this kind of an investment? So, the taxation is pretty simple. As I said, there are two kinds of cash flows which an investor would make. One is the interest income which comes to them on a monthly basis. So, that will be taxed under the heading other income sources. So, you'll be taxed at whatever is your liability, taxation slab and all of that. But when you decide to exit or the asset is sold, after two years, the long-term capital gain comes into picture, which means the taxation is going to be 20% with an indexation benefit. This is for resident investors. But at the same time, taxation for NRIs will differ a bit. The taxation for them is going to be in terms of long-term will be 10% without an indexation benefit if it's a long-term capital gain. And there is a 20% TDS deduction which happens on the interest payout. However, if they give a TRC certificate, then the TDS will not be deducted. Thank you, Nihar, for that explanation about the taxation. Now, this is something which is new. When something new comes into the marketplace, it is the innovators and the risk takers who will first come and invest in this kind of an investment opportunity. From your experience and the data which is available to you, can you please explain to me how big this industry is at this point of time? Absolutely. So, industry in India in terms of fractional investment in real estate is close to 2000 crores. Strata has an industry share of close to 55 to 60% into the industry as we speak. But we understand that this is going to be a billion-dollar industry in the next two to three years to come. Thank you, Nihar, that's quite a big opportunity. And there is probably space for everyone who wants to come and make most of it, whatever the fractional real estate offers for the investor community. One thing that comes to my mind is any industry develops when there is robust regulation around it. We have seen SEBI or banking or insurance, IRDA. You have the Reserve Bank, you have got the SEBI. Is there a regulation around fractional real estate, whether SEBI overlooks it or is there a role for RERA to supervise on this? How does the regulation look at this particular asset class or is there anything which is developing around this? So, fractional investments as a business is currently not governed by SEBI, but we have still taken RERA licenses. Having said that, every SPV or every company or every asset which is owned by a private limited company is governed by the Indian Companies Act. And we adhere to the Indian Companies Act. And every draft, every documentation, every process is as per the Indian Companies Act. So, at this point of time, we are adhered to the Indian Companies Act and we work accordingly. Thank you, Nihar, for all these points which are about the fractional real estate. Dear viewers, fractional real estate is a vast subject. There are so many points that need to be discussed. There are so many questions that come to my mind. There are so many answers I am still looking for. To keep the length of the video small, I have decided to do this program on fractional real estate in two parts. I will conclude part one here. Next Tuesday, Nihar will talk to you about more about other aspects of fractional real estate, how you can invest into it, how the selection of properties happen, and various other things which we could not cover it in this episode due to want of time. Mr. Nihar, thank you very much for bringing all these points for the benefit of our viewers. I look forward to interacting with you again next week with the rest of the things that we need to inform our audience. Thank you very much for your time. It's an enjoyable thing to know about the fractional real estate, the person of your caliber. Thank you very much. Thank you for having us on NRI Money Clinic. And I think it's a great platform for everyone to understand new investment opportunities. And we are happy to be associated with you and with everyone else on this platform. Thank you very much for watching this episode on NRI Money Clinic. I shall be connecting with you with yet another episode next week. Till then, stay safe. And don't forget to like this video and share this video with your near and dear ones.