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Commercial Real Estate

Let me make something very clear, we are not selling properties. If you’ve read about our investing philosophy the one thing, we repetitively talk about is how Indian Households have been making the mistake of investing in Real Estate a lot and blocking their funds.
Invest in Commercial Real Estate


Let me make something very clear, we are not selling properties. If you’ve read about our investing philosophy the one thing, we repetitively talk about is how Indian Households have been making the mistake of investing in Real Estate a lot and blocking their funds. But in all those statements, it is implied that we are talking about Residential Real Estate. Its large transaction size and value have meant that real estate has remained one of the largest components in most investors’ portfolios. Most Indians associate property with safety, status and prestige, given the feudal traditions of our country.

‘He is not a full man who does not own a piece of land.’
—Hebrew proverb

So, let me start by talking about the problems of Residential Real Estate.

For Indians, owning a house is seen as one of the prime necessities of life: roti, kapda aur makaan are critical priorities as far as Indians are concerned.

However, while the first two are affordable, the makaan has an element of aspiration packed into it because of the high prices of urban residential real estate. Until the mid-1990s, owning a house was restricted to very few wealthy families. This was an era where most jobs were either with the government or public sector companies. The employees stayed in the quarters offered by these companies. In that era, people typically built houses when they retired. A house was something which was built for staying, never as an investment.

Fast forward ten to fifteen years. In the opening decade of the new millennium, we saw a paradigm shift in the way retail investors started viewing residential real estate. For most of 2003–13, house prices seemed to be on steroids with prices moving up almost on a monthly basis. Along with the price rise, the other factor that led to a massive interest in this asset class was affordability. Interest rates came down significantly over these years. Along with this, an increase in Loan to Value (from 65 to 70 per cent in the 1990s to up to 95 per cent in 2004) and an increase in household income, along with tax incentives from the government, meant that buying a house was within the reach of the more affluent middle-class households.

The 2003–13 real estate boom established residential real estate as an asset class by itself.

‘House prices only go up’: Unlike other asset classes like equity and debt, which can have a cycle of three to five years (i.e. price movements change their trend every three to five years), real estate runs into super cycles of more than ten years. So, most people who made significant profits in the bull cycle of 2003–13 don’t have any experience or memory of a downward cycle. As a result, they get caught in the belief that real estate prices can only go up. The fact that there are no reliable real estate price indices helps to propagate this myth in India (one that is held by millions of Indians). However, veterans who saw the real estate crash of the late 1990s know better.


Thus, in spite of the positive publicity given to this asset class in weekend newspapers, in spite of the regular TV shows on investing in real estate and despite the pitch from the ‘relative’ who has made a fortune with his Apartment in Mumbai, real estate is a uniquely dangerous asset class for investors for the following reasons:

  • Heterogeneity: Bonds from a particular issue are alike, as are stocks of a specific company. However, no two properties are exactly the same because of location, size, age, construction materials, tenants, and lease terms.

  • Active management: Investors in stocks and bonds are not necessarily involved in the day-to-day management of the companies. Private real estate investment requires active property management by the owner or a property management company. Property managers and asset managers must make important operational decisions-such as negotiating leases, property maintenance, marketing, and renovating the property-when necessary.

  • High transaction costs: Buying and selling real estate is costly because it involves appraisers, lawyers, brokers, and construction personnel.

  • Depreciation and Desirability: Buildings wear out over time. Also, buildings may become less desirable because of location, design, or obsolescence.

  • Lack of liquidity: Because of the size and complexity of most real estate transactions, buyers and lenders usually perform due diligence, which takes time and is costly. It takes time to market and complete the sale of property.

  • Availability of Information: Stocks and bonds of public firms usually trade in active markets. However, because of heterogeneity and low transaction volume, appraisals are usually necessary to assess real estate values. Even then, appraised values are often based on similar, not identical, properties. The combination of limited market participants and lack of knowledge of the local markets makes it difficult for an outsider to value property. As a result, the market is less efficient. However, investors with superior information and skill may have an advantage in exploiting the market inefficiencies.
  • Demographic factors: The demand for real estate is affected by the size and age distribution of the local market population, the distribution of socioeconomic groups, and new household formation rates.

  • Other factors: Other risk factors, such as unobserved property defects, natural disasters, and acts of terrorism, may be unidentified at the time of purchase. In some cases, risks that can be identified can be hedged using insurance. In other cases, risk can be shifted to the tenants. For example, a lease agreement could require the tenant to reimburse any

Chalk and Cheese: Commercial Real Estate versus
Residential Real Estate

Commercial real estate has two sets of buyers: the end-users and the investors. With end-users, it is a simple equation. For them, real estate is simply a capital expenditure or a cost which has to be incurred, and these costs have to be seen relative to the return that the business generates. If businesses don’t want to incur the heavy upfront cost associated with real estate, they end up renting the premises or moving to a cheaper location.

On the other hand, for investors, commercial real estate is a really interesting asset class as it offers a mix of rental yield and capital appreciation. Ultra HNW investors also have access to what are called the ‘Grade A’ office buildings. Grade A offices are large, modern and top-of-the-line buildings, typically built in the most prime locations. These are typically occupied by blue-chip Indian corporates or multinationals and are the benchmark of commercial realty in any country. Thus, one would measure growth in a Grade A property area to ascertain how commercial property as an asset class is doing. However, the ticket sizes associated with such deluxe office buildings are large—in Mumbai it is upward of Rs 10–20 crore for a single floor plate. Hence, the key investors in these types of properties are large Indian developers (like Raheja, Embassy, Prestige Estates and DLF) or very large foreign funds (like GIC, Blackstone, Brookfield and Canadian Pension Plan Investment Board). In fact, foreign players are the largest investors in Grade A property in India with Blackstone alone holding 70 million square feet in the country. With even single floor plates at times costing upward of Rs 10–20 crore, only a few ultra HNWs have the capacity to invest in such projects. For others, investment in Grade A properties has been through real estate funds, which are actually pooling vehicles (for clubbing together many dozens of investors).

Rental yields from commercial properties are a function of property prices and the underlying interest rates in the country. At 7 to 9 per cent today, these gross yields are far higher than the 1.5 to 3 per cent yields that residential real estate has to offer. Whilst an investor in commercial real estate also hopes for capital appreciation over time, given that the capital appreciation associated with this asset class forms a lower proportion of the overall gains, commercial properties are far safer investments than residential real estate (where capital appreciation is pretty much the only source of gains).

Commercial real estate prices have been less volatile in India than residential real estate prices primarily because of the interplay between two forces. Firstly, the end-users of commercial real estate have been businesses. For these businesses, it is imperative to make profits and if the cost of a particular building or location is too high, they will consider moving to some other building or location. This rational frame of mind is very different to the mindset of the residential real estate investor who invests in an overvalued asset and still expects future price appreciation (irrespective of the current cost of the property). These contrasting mental frameworks have created a remarkable anomaly in the Indian real estate market.

For example, in Mumbai’s Lower Parel, which is now a thriving central business district, commercial property prices are half that of residential properties. Given that land costs and quality of construction are more or less the same for both sets of properties, it is baffling why commercial properties (which give rental yields that are five to six times that of residential real estate) should be selling at half the price.

Why Invest In Real State 

  • Regular income: Investors may expect to earn income from collecting rents and after paying operating expenses, financing costs, and taxes.
  • Capital appreciation: Investors usually expect property values to increase over time, which forms part of their total return. 
  • Inflation hedge: During inflation, investors expect both rents and property values to rise.
  • Diversification: Real estate, is less than perfectly correlated with the returns of stocks and bonds. Thus, adding real estate investment to a portfolio can reduce risk relative to the expected return.
  • Tax benefits: In India if you have a holding period of more than 2 years, Long Term Capital Gains are taxed at 20% after Indexation which gives a great incentive for investors in the highest tax bracket.

How can investors access this asset classes?

As mentioned, Commercial Real estate has historically been the asset class that has created the highest wealth for investors around the world. However, large capital investment, specialised investment knowledge, asset management capabilities and understanding of market cycles has restricted the asset class to institutional investors, ultra-high net worth individuals, pension and sovereign funds. So, how do you get a piece of the pie?


We at Richfield Fintech have tied-up with the select few companies who offer this piece of pie by breaking barriers and cutting the minimum investment amount to as low as `25 Lacs. Since this product is dynamic in mature in terms of availability, we’ll have to connect to be able to share with you the available options.

Invest in Commercial Real Estate with Richfield!

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