Commercial real estate (CRE) in India has emerged as a favored investment choice among global institutional investors, often dubbed the “Blue Eyed Boy” of private equity funds. This asset class closely aligns with the country’s macroeconomic conditions, making it an appealing, risk-adjusted investment proposition in the context of the Indian Growth Story. Thanks to innovation and technology, CRE has become more accessible, extending its reach to retail investors.
Alternative Investments: A Historical Overview
Alternative investments, once exclusive to Ultra High Net-Worth Individuals (UHNIs) and institutional elites, have progressively gained traction among retail investors and high-income professionals. Events like the 2008 housing crisis, the tech bubble burst, and the COVID-19 pandemic underscore the value and significance of alternative investments, offering diversification, stable returns, alpha potential, and protection against inflation. This trend is not limited to India but is a global phenomenon. The Blackrock Report reveals the growth of alternative investments from 5% in 1995 to 26.0% by 2019. Tech-driven platforms have democratized access to these assets, allowing a broader audience to participate.
Supported by SEBI reports from December 2021, alternative investment funds grew by 38%, surpassing Mutual Funds’ 22% growth compared to the previous year.
Why Consider Alternative Investments in CRE?
Indian investors are exploring alternatives to traditional equity markets and fixed deposits due to diversification advantages, potential for higher returns, low FD interest rates, market volatility, and long-term growth prospects. Regulatory support, innovative investment platforms, and global trends in favor of alternatives are driving this shift.
India’s diverse demographics and favorable economic fundamentals make CRE an attractive asset class and an appealing alternative investment. Here’s why:
1. Diversification: Alternative CRE investments diversify an investor’s portfolio, serving as a hedge against traditional real estate market downturns. For instance, during the 2008 global financial crisis, alternative CRE investments experienced comparatively smaller declines compared to mainstream real estate, although exact figures may require further validation.
2. Rising Demand: The changing work culture in India has led to increased demand for flexible office spaces. Across the top seven cities, operational flexible office spaces have grown to over 53 million sq ft, marking a significant 75% increase from pre-pandemic levels of approximately 30.3 million sq ft. Additionally, robust consumer demand and increased investments in manufacturing have boosted warehousing as a high-growth real estate asset class. Projections indicate that India’s warehousing supply will expand from 344 million sq ft in 2023 to around 516 million sq ft by 2026.
3. Potential Returns: Alternative CRE investments often offer higher yields, particularly when entering the market at the right time. Based on historical data, the internal rate of return (IRR) for alternative CRE investments typically ranges between 12% and 17%.
What You Need to Know Before Investing
Before delving into the complexities of CRE investments, familiarize yourself with the essentials:
1. Asset Types: CRE is a diverse category, encompassing various assets such as office spaces, warehouses, data centers, and specialized retail spaces. Understanding the nuances and potential of each type can significantly influence investment decisions.
2. Market Dynamics: Like all real estate, CRE is influenced by location-specific socio-economic factors. Research regional growth indicators, infrastructure developments, and urbanization trends that can affect the asset’s value.
3. Developer and Building Credibility: Assess the developer’s reputation before investing. Quality infrastructure and amenities can attract blue-chip tenants, enhancing the asset’s appeal and the potential for sustained rental income.
4. Liquidity Considerations: Be aware that CRE investments may have longer lock-in periods. Understand the lock-in period and evaluate your financial situation to ensure you are comfortable with the liquidity terms before making a commitment.
5. Seek Expertise: Especially for first-time investors, consulting financial advisors or experts in the CRE field can be invaluable. They can provide insights, warn of potential pitfalls, and guide investment strategies.
How Digital Platforms Enable CRE Investment
Innovative tech-driven digital platforms have disrupted the status quo by offering fractional ownership in curated CRE assets across India. However, choosing the right platform requires diligence and careful evaluation:
1. Reputation and Credibility: Prioritize platforms with a proven track record. Look for user reviews, ratings, and any awards or recognition the platform may have received. Also, consider the platform’s history of successful exits, indicating realized returns on investment.
2. Transparency: Choose platforms that provide detailed insights into properties, including location, tenant details, valuation reports, due diligence documents, and more. A transparent platform often signals reliability.
3. Fees and Charges: Every platform has its cost structure. It’s crucial to understand associated fees, whether they are management, transaction, or hidden costs. Ensure that the fee structure aligns with your returns.
4. Complaint Resolution: Ensure the platform has an effective system for handling investor grievances and complaints. A responsive redressal mechanism reflects the platform’s commitment to its users and overall credibility.
Staying Informed in the CRE World
The world of CRE, like all investment domains, evolves continuously.
