📈 20% Rise in Rents of Commercial Properties!

Welcome to this week’s issue of the Altsights newsletter!

✅ India won the T20 World Cup 🏏 What a Game that was!

✅ The Budget 2024 has been postponed to later this month 📜

✅ The stock market remains green, with Sensex at 80,000 and Nifty racing to touch 25,000 📈

Here's What's in Store for You Today:

• The Big 3️⃣ Numbers

• How to Own a Piece of Business Parks? 🌆

• Understanding CRE 🏛️

  • India’s CRE Market: Valued at $5 Trillion 💰

• How to Get a Slice of the CRE Pie? 🍰

  • FOPs vs REITs ⚖️

  • The Rise of SM REITs and the Way Forward ⏩

• Reader’s Spotlight💡

The Big 3️⃣ Numbers  

How to Own a Piece of Business Parks? 🌆

Commercial real estate rents skyrocketed by 20% in Q1 2024. 

This eye-popping growth was led by major business hubs like Bengaluru, Hyderabad, Pune, NCR, and Mumbai.

According to a report by Colliers, Q1 2024 has kicked off on a high note, with total leasing reaching 13.6 million square feet across the top 6 cities. That’s about the size of 12 Vatican Cities!

It is also a 35% rise in leased area for office spaces compared to Q1 2023.

But why are we discussing commercial rents? 🤔

Because these rents are being pocketed by investors and fractional owners of commercial real estate!

Commercial real estate is an emerging investment opportunity in India available for you through regulated and transparent instruments.

Before diving into the specifics of this opportunity, let's first quickly understand the Commercial Real Estate (CRE) space.

Understanding CRE 🏛️

Commercial Real Estate (CRE) refers to properties used solely for business purposes or as workspaces - basically, income-generating activities.

CRE includes:

• Office buildings: IT parks, co-working spaces, and corporate offices.

• Retail buildings: Shopping malls, individual stores, and big-box retail spaces.

• Industrial properties: Factories and warehouses.

• Hotels and hospitality properties.

India’s CRE Market: Valued at $5 Trillion 💰

The Commercial Real Estate (CRE) sector in India has been growing steadily and the growth is expected to continue.

By the end of 2024, CRE in India is expected to be worth $5.47 trillion. With an expected annual growth rate of 11.2%, CRE is expected to be valued at $8.36 trillion in 2028.

To put this in perspective: The global Commercial Real Estate market is expected to be valued at $118.80 trillion by the end of 2024 which means India’s share in the global CRE market is about 4.6%.

Here comes the most important aspect: 🚨

Commercial properties tend to generate rental yields at 7-9% p.a. This is 2-3x of residential rental yields which lag at about 2-4% in India’s large cities.

So, if you ever think about buying a 2nd house just to earn some rent, think about commercial real estate first.

Apart from higher rental yields, commercial real estate enjoy many advantages over residential real estate. We discuss them in the next few sections.

How to Get a Slice of the CRE Pie? 🍰

Owning small entire commercial spaces may look easy, but retail investors often face high costs, information asymmetry, and other complexities.

Fractional investing solves the challenges of being the sole owner of a commercial real estate property.

Fractional investing enables retail investors to own a portion of a commercial property instead of buying the whole thing. This makes CRE investing more accessible and less risky. 

There are two ways to invest in slices of CRE:

1️⃣ Fractional Ownership Platform (FOPs)
2️⃣ Real Estate Investment Trusts (REITs)

Through these instruments, you make returns from 3 sources:

1️⃣ Rentals paid by the tenants of the properties
2️⃣ Appreciation in the value of the property
3️⃣ Interest on the security deposits of the tenants

FOPs vs REITs ⚖️

If commercial real estate can be equated with stocks or equities, REITs would be like mutual funds whereas FOPs would be like PMS or Portfolio Management Services.

Here are some other key differences between the two:

In the following sections, we look at FOPs and REITs individually.

Fractional Ownership Platforms (FOPs)

FOPs enable multiple investors to collectively own property by buying shares or fractions of it.

Each investor owns a piece proportional to their investment and shares both, the costs and the returns, of the property.

Consider a ₹1 crore property owned equally by 10 investors who invest ₹10 lakh each on a fractional ownership platform.

The FOP is the single point of contact for these investors - responsible for the proper investment of money, management of property and distribution of rentals.

For this management, the FOP charges a management fee that’s deducted from the rent collected from tenants of the asset.

Some Examples of FOPs in India:

Real Estate Investment Trusts AKA REITs

REITs, just like FOPs, help you own a piece of an income-generate real estate. However, this ownership is through a trust (the REIT) instead of direct ownership like in the case of FOPs.

The important advantages of REITs over FOPs are:

1. Low minimum investment

2. More diversified → less risky

3. Indirect ownership

4. Much more liquid

5. Stricter regulations

However, FOPs, like any other concentrated investment opportunity, can potentially generate much higher returns than REITs if managed well.

Performances of REITs: 📈

The Rise of SM REITs and the Way Forward ⏩

To boost retail participation in REITs, SEBI has recently introduced guidelines for Small and Medium Real Estate Investment Trusts (SM REITs).

These guidelines also aim to regulate FOPs that now manage over ₹4,000 crore under SM REITs for better investor protection.

Unlike traditional REITs that need a minimum asset base of ₹500 crore, SM REITs can now be set up with just ₹50 crore - making real estate investing even more accessible to retail investors.

Reader’s Spotlight💡

Last week, Suba from Mumbai asked:

Like Suba, are you too curious about personal finance and investing?

I’d love to hear from you!

Simply reply to this email with your question. Each week, I'll select the most insightful question and answer it for everyone’s benefit.

So, go ahead and ask. I can't wait to engage in meaningful conversations!

Cheers,
Madhu,
Founder, Altcase