After completing his MBA at Harvard and returning to India, Shiv Parekh who had prior experience working in commercial real estate development realised the opportunity in the space. Commercial real estate offers a rental yield of 8- 9 per cent for finished properties rented out to Grade A tenants like top-rung MNCs. In comparison, residential real estate offers rental yields of around 1-2 per cent or maximum 3 per cent.
However, the flip side is that commercial real estate has a high-ticket size with properties costing upwards of Rs 24 or 25 crores.
So Parekh decided to use technology to fractionalize commercial real estate and reduce the ticket size so that investors can have access to this asset class as well as the higher rental yield and the appreciation benefits that come along with it.
For every property that Hbits invests in, a separate special purpose vehicle (SPV) is created. The investor becomes a shareholder as well as a debenture holder in that SPV for the amount that he’s investing, says Parekh.
So for instance, if it’s a Rs 25 crore property, and an investor puts in Rs 25 lakh, then he gets 1 percent of the shares and 1 percent of the debentures of the company. In terms of the returns, monthly rentals from the tenant result in monthly payments to the investors. Besides, he gets the benefit of capital appreciation.
The minimum ticket size for investors is Rs 25 lakh. “That is because currently it’s a relatively new product in the market we only want sophisticated investors who understand the full product to invest,” says Parekh.
The company started in 2019 and has so far invested in five properties, with assets under management of Rs 80 crore. In its most recent deal, Hbits closed an asset of Rs 25 crore in Andheri with ICICI bank as the tenant. While most of its properties are in Mumbai, Hbits is eyeing expansion to the top six cities in India.
Comfort to investors due to digital investment
Hbits offers a completely digital investment process from discovery of the asset, to understanding the full product, to final paperwork, and tracking the portfolio. Parekh says 65 percent of its investors are Indians while the rest are NRIs. “But a large part of our investors, even the resident Indians, are those who work with these MNCs or with these corporates themselves. So they’re familiar with what they’re investing in,” he adds
To offer transparency, Hbits offers all important documents such as license agreement, title report, on its online platform.
Also while the concept of fractional ownership is new to India, the possibility to invest in a group and get exposure to commercial real estate with steady rental yields is one of the biggest advantages. According to Parekh, even after the lock-in period, there are single digit vacancies in commercial real estate with the possibilities of making 15 to 18 per cent internal rate of return (IRR) with much lower risk as opposed to equity investments where higher investments will come with higher risks.
“There is minimum downside risk because you own a hard asset at the end of the day. So compared to a stock, it’s not going to go to zero, there’s still certain value in the property,” adds Parekh.
Also, on the fractional side, the product is structured in such a way that investors can exercise control and a property is sold only if 75 percent of the investors agree.
By FY21, Parekh expects to have assets in all the top six cities and expects to reach an income of Rs 500 Crore by the end of the year and Rs 5,000 crore in the next three years.
Parekh says, there are two ways the investor can exit. One, he or she can sell his shares at any point in time either in his personal network, or come to us and list on our platform and sell. “We have no exit fee for the sale. Otherwise in four to six years we sell the whole asset and give appreciated returns to all the investors. With the ongoing pandemic, though, economic activity has almost come to a standstill,” he says.
“Yet, Hbits has had 100 per cent collection and 0 per cent delay in rent due to the combination of our tenant selection and the strength of the agreement,” adds Parekh.
But how will the pandemic really affect commercial real estate? Parekh believes it’s the best time to acquire properties. “That’s because you’re getting good prices in the market. In three to four years, there will be a lack of supply and the demand will kind of pick up again. We expect to see an appreciation in three to four years in the commercial real estate space,” he adds.