The real estate market has historically been the asset class that created the most wealth for investors but the need for specialised investment know-how and large capital investment has restricted the asset class – particularly commercial real estate investing – to institutional investors and ultra high net worth individuals.
One of India’s largest tech-enabled commercial property investment platform, Property Share, is looking to change this and drive the transformation in real estate investment landscape by making the asset class more accessible to ordinary investors with a significantly lower investment threshold. The company has democratised access to commercial real estate investments, making it more affordable and feasible for retail investors to participate.
In a conversation with Economic Times, Property Share Co-founder and CEO Kunal Moktan elaborates on how the platform’s technological advancements enable investors to remotely access institutional-level analysis, detailed property information, and ultimately engage in online real estate investment through intuitive applications.
Watch Kunal Moktan, Co-founder and CEO, Property Share in conversation with Miloni Bhatt, Editor – Digital Broadcast, EconomicTimes.com
Commercial Real Estate: Generating Income & Wealth
Kunal Moktan, co-founder and CEO of Property Share in conversation with the Economic Times on the topic of ‘Generating Income and Wealth through Commercial Real Estate
Rise of Commercial Real Estate in India
The commercial real estate sector in India has experienced a significant transformation over the past couple of decades. The influx of US and European multinational companies has driven the growth of the commercial office market.
“It was only in the early 2000s that a lot of the US multinationals started coming to India first to start call centres… and then more of higher backend office processing and research and development. The Microsofts, Apples, and Ciscos of the world came to cities like Bangalore, Pune, Noida, and Gurugram, and set up these large tech centres. So that’s where there was something to buy and there was a steady stream of leasing and demand that kind of came into the country,” said Moktan.
This growth in the commercial real estate sector was particularly pronounced between 2007 and 2010 when large institutional private equity funds entered the Indian market. The establishment of global centres by companies like Cisco and Goldman Sachs in Indian tech hubs like Bangalore and Hyderabad further fueled demand for commercial spaces. This trend has continued, with companies recognising the cost-saving advantages of operating in India. Moktan further emphasised that this influx of demand is what helped propel the commercial real estate market’s impressive performance in the country.
Accessibility and REIT Regulations
Historically, commercial real estate investment in India was primarily the domain of institutional investors. An important factor in opening up the sector to retail investors has been the REIT (Real Estate Investment Trust) regulations introduced in 2014-15, which made commercial real estate investment more accessible to smaller, less sophisticated investors, noted Moktan.
With the launch of the first REIT listing in 2018, it became possible for investors to own a fraction of commercial real estate through the REIT route. Property Share has also played a transformative role in the commercial real estate investment landscape. Since it was founded in 2015, Property Share has sought to make commercial real estate investment accessible to a broader audience. The platform capitalises on the growing comfort with online transactions and the widespread use of smartphones and provides detailed property information and institutional-level analysis through its online platform, which in turn enables its investors to make informed decisions remotely.
Current State and Future Demand
The recent years have witnessed robust demand for commercial office spaces in India. The year 2022 saw a leasing of approximately 50 million square feet, marking the second-largest annual leasing in the past decade. While the pandemic-induced lull in 2020 and 2021 contributed to pent-up demand in 2022, the historical trend of strong demand persists.
The drivers of this demand include factors like outsourcing by global companies looking to reduce costs, geopolitical changes, and the transition of manufacturing activities from China to India.
“When the world experiences a recession, as has been the case over the past few years with factors like high interest rates, inflation, the pandemic, and even bank failures in the US, companies often resort to outsourcing to countries like India. This strategy aims to achieve further cost reductions amidst challenging economic conditions,” said Moktan.
A similar trend was observed in 2001 and 2008, in the aftermath of the 2008 Lehman crisis, when India witnessed a surge in leasing as global banks like Goldman Sachs, Morgan Stanley, and Societe Generale set up large centres to cut costs, Moktan said.
“This pattern of cost-effective outsourcing persists today, significantly fuelling the demand for commercial real estate,” he said, while predicting that the commercial real estate sector’s attractiveness will persist for the next three to five years at the very least, despite variations in annual demand.
To be sure, commercial real estate investment involves complexities such as lease structures, tenant agreements, and escalations. Despite these complexities, commercial real estate offers enticing returns. Unlike residential properties that yield around 2% in rental income, commercial properties can yield 8-9% or higher, along with appreciation, resulting in overall returns of 15-16%.
Moreover, commercial real estate offers a distinct advantage over other investment options in India, providing a guaranteed and higher yield than fixed deposits and equities. The combination of rental income and property appreciation sets commercial real estate apart as a valuable investment choice for retail investors, Moktan said.
This is particularly true in periods of high inflation and high interest rates. “In a high inflation, high interest rate environment, the opportunity cost of investing increases. When you compare a product like commercial real estate, which also has a yield, you would want some sort of premium to the risk-free rate, because then you’d rather invest in a risk-free bond than invest in commercial real estate. So, prices of commercial real estate also go down when interest rates go up, just like any normal bond or coupon-bearing instrument,” said Moktan.
He notes that investing in rent-yielding assets like commercial real estate during such periods can yield significant returns as entering the market at the peak of the interest rate cycle often translates to purchasing properties at lower prices. As interest rates eventually stabilise or decrease, property values tend to rise. This strategy positions investors to potentially buy low and sell high when economic conditions improve.
