During conversations with his friends and family, Sudarshan Lodha realized that 60-70% of their money was invested in real estate and it was arguably the largest asset class. Research also showed that most of the savings of Indians went into gold and real estate. And surprisingly, 24% of India’s money is put into residential real estate as an investment where house-owners buy another house as an investment.
“We realized that the mindset of Indian investors is that they want capital preservation; safety of capital is their top priority and returns are secondary,” says Lodha, Co- Founder and CEO, Strata Property Management.
Commercial real estate as an asset class is aspirational to many as it meets all the criteria of returns, capital preservation, safety of capital stability, etc. Lodha, a lawyer, and Priyanka Rathore quit their jobs in March 2019, served their notice periods and Strata was incorporated officially to provide data driven insights to allow investors investment opportunities in the fractional commercial real estate segment on its online platform.
Currently, Strata has a portfolio of nine assets, which it has funded, generating returns of over 8.5 to 9 per cent. On average, for the entire lease duration, they are making about 10 to 11 per cent.
“So we anticipate our investors on an average can make 13-15%,” he said.
The minimum investment requirement is Rs 25 lakhs. He adds while they can accommodate smaller ticket sizes, they are constrained as there is a restriction on the number of shareholders in the Special Purpose Vehicle (SPV) that the company floats for every asset.
The majority of its investors, almost 45%, comprise CXOs and senior executives of large organizations and around 20% of its investor are NRIs. Lodha adds that they expect to add more NRI investors and take it up to 50% as it provides them better returns, especially since they have access to low cost of borrowing in their respective countries.
The average age of investors in Strata is 38-39 years, and consists of investors who have bought their own house and are looking at more real estate exposure.
Lodha feels fractional investment in commercial estate is a superior alternative to fixed income instruments and residential real estate investment as it provides a higher return with capital safety.
Strata has funded 8 assets and manages about Rs 320 crores with an AUM of around Rs 440-450 crores.
He admits that while they could have grown faster but they have taken a call to be cautious with the pandemic on. He adds that expect to hit AUM of around Rs 1000 crore in a year’s time as this new asset class gains awareness and popularity.
Liquidity and exit
Lodha cautions investors into investing in real estate schemes that promise to double your money in a couple of years as he says real estate is past its boom period. He says that real estate is a long-term investment, so an investor must have a horizon for at least 5 years.
He says that the primary exit option for investors into Strata is when majority of the shareholders agree to sell the asset. It also offers a resale platform on its website where prospective sellers can find buyers. “Typically all our assets have a good waitlist of people who are keen to participate as real estate investment is a timing game,” he added.
Also every year they open a dedicated ‘sale’ window during Diwali every year where investors are offered a discount of 2 per cent as an incentive. The other option is to transfer holdings to friends, families as well. But he adds the best time to exit is during the sale of an asset since investor will make maximum value for the property.
Lodha says most of the investments they made have been during the pandemic; they have been careful in selecting assets.
Due to the stress on office space with work from home, it has focused more on industrial and warehouses.
However, he says for opportunistic investors, commercial office segment which is under stress now is a good bet since it is available for a good discount.
As lockdowns started easing, Lodha says they also convinced their investors and acquired office spaces and signed fresh leases and lock-ins. Lodha adds that its investments consist of a mix of office, industrial, warehousing so that their clients can diversify investments.
He also expects a revival in office space in the near future as offices move to the hybrid working model.
Incidentally, the fractional commercial real estate space has seen a steady inflow of start-ups coming in to capitalize on the rising interest in investment. Lodha feels it is important that investors carefully evaluate the platform which they are investing in, their ability to pick the right asset, their track record, evaluate the promoter’s background, the core management team and the investors backing them to avoid any issues with corporate governance.
Strata has raised about Rs 7.5 crore primarily to scale up. Investors on its board include Kotak Investment Advisors, Gruhas Proptech (an exclusive fund by Nikhil Kamath of Zerodha and Abhijeet Pai of Puzzolana Group for proptech investments and special situations), Sabre Investments (an investment arm of Rahul Talwar, Promoter Family of DLF).
He adds that the core part of the fund raise goes into brand building and increasing awareness.
Lodha expects a recovery in the commercial office segment, as most large offices will resume work. Especially in the IT sector, as the cost of the office rental consist of just 1 per cent of their entire expenses and the main cost is the employee cost.
Also for the Grade A clients, which are Strata’s client base, rents constitute a very small percentage of their overall expenses. Also, industrial and manufacturing and warehousing, ecommerce adoption has seen an uptick. With Make in India push, Lodha says they are very bullish on the manufacturing segment over the next 5-10 years.
However, he expects that the retail commercial space will take another year to stablise and recover. Strata is eyeing tier two cities for investment as they have the potential for massive growth in terms of capital value risk reward ratio. These include Vijaywada, Coimbatore, Madurai, Cochin, Ahmedabad, and Indore.
“These are markets where there is tremendous amount of activity and we are very excited about it. We are convinced tier two is a great market and it’s a great story,” he says.
(Deepa Nair is a Mumbai-based journalist specialising in finance and international affairs.)