18 Oct 2017
Technology has helped the consumer change the way they go about their daily lives, be it hailing a cab, renting a bread and breakfast or buying phones and groceries. With smart phones and tablets and a faster internet connection came a new wave of platforms that drove people away from brick and mortar to online stores that promise better experiences and prices.
While tech has entered every aspect of our lives, one area where it is yet to make a big impact is a real estate – a sector often associated with grubby developers, opaque contracts, and smooth talking hustlers. For years the sector has been dogged by rogue developers profiting at the expense of the common investors and a property cycle that turns faster than an iPhone release often leaving hapless investors standing in a musical chair.
Broking platforms like Housing, NoBroker and CommonFloor have tried bringing a semblance of transparency to the sector but are now left with mass listings many of which are by brokers or developers themselves flooding the platforms with sub-standard images, phony numbers and expired listings. With little or no monetization triggers, these platforms are increasingly dependent on venture capital firms to keep the engine running.
Fintech start-ups in the property buying and investing side (also called PropTech) are however using technology to disrupt the traditional investing models. Start-ups like Property Share are bringing a unique, scalable and monetizable model that allows retail investors to own a piece of completed property for a fraction of the price. The commercial real estate is a large asset class that has virtually gone untapped in a country like India where investors are faced with two basic products for any investment decision – a 6% fixed deposit (taxed at 33%) and a volatile stock market dominated by institutional investors.
While fixed deposits are seen as safe and liquid and stocks as risky but profitable, there exists no middle ground for an investor looking for rent yielding paper with capital appreciation. Real Estate Investment Trust or REITs were supposed to fill a part of the void but have been mired in legal and structural complexities with the first one still months away. Yields on REITs are also likely to be sub 5% as they come with a 10-20% development portfolio that does not generate any cash returns.
Grade A commercial real estate provides the fixed returns of a fixed deposit with the opportunity of an equity upside. India has a rent-yielding office inventory of 537 million sq. feet worth over $70 billion The rental yields in commercial office vary between 7-8% a year, which are only taxed at 21% with capital appreciation of 10-15%, which is taxed at effectively 10%. Contracted escalations in rent of 5% per year, increase the yield effectively providing a shield against inflation.
With international conglomerates flocking to the tech hubs of Bangalore, Pune and Hyderabad office leasing has seen strong year-on-year growth with rents and property values growing at 10% per year. Office leases are also much more stable with tenants signing 9-15 year leases with 3 year lock-ins. Tenants like CISCO, Accenture, Cognizant, HSBC, Goldman are as blue-chip as they get and have their biggest offices outside of their home countries in these locations.
Despite the growth potential, not many concentrated on this piece of real estate? There are 5 reasons why commercial property remains the preserve of institutional capital and Ultra High Net Worth Individuals
Ticket sizes which vary between Rs. 5-40 crores
The ability to analyze and model complex lease structures and cash flows
The degree of personal management involved
Liquidity due to large ticket sizes
The concentration of investment (little diversification opportunity)
Entrepreneurs are now changing this by using technology to democratize the property investment market by allowing normal retail investors access to the product in a transparent and simple manner.
Start-ups like Property Share allow investors to participate in a tenanted commercial property for as little as Rs. 10 lakhs without the corresponding management hassles. Liquidity is provided on the platform through resale to other investors while the investment thesis is broken down into simple financial models allowing retail investors to invest like institutions would. Smaller investment sizes also mean investors can diversify their holdings across various offices, tenants and locations.
This seems to be a welcome innovation in a sector known for unscrupulous operators, grimy paperwork, and frustrated investors. Start-ups should help improve the real estate sector by making investors allocate savings to less risky asset classes and making developers focus on products that buyers are more interested in than peddling substandard residential in pioneering locations without social or civic infrastructure.