Direct vs Indirect Investment: Exploring Commercial Real Estate Options in India

Direct vs Indirect Investment: Exploring Commercial Real Estate Options in India

There are different ways to invest in real estate in India, specifically in commercial property: direct and indirect. The decision between these approaches depends on various factors such as financial situation, investment goals, risk tolerance, and preferences.

1.      Direct Investments in Commercial Property:

Direct investment involves an investor having ownership of the commercial property, effectively becoming a landowner. This form of investment has the potential for higher returns but requires a deep understanding of the market. Direct ownership comes with additional responsibilities, such as property maintenance, managing tenants, and ensuring compliance with legal and regulatory requirements. This option is suitable for investors with larger capital and substantial resources. Investors can buy full buildings, floors, or strata spaces. As a CRE investor, there are a wide range of options to invest in real estate, including office spaces, retail shop spaces, industrial and warehouse options, hospitality establishments, and mixed-use buildings.

2.      Indirect Investments/Alternative Approaches to Investing in Commercial Property:

       Here are leading options in India to invest in commercial real estate.

              A. REITs:

            REITs offer an alternative approach to investing in commercial assets by allowing individuals to own a portion of large-scale                                      commercial properties. A REIT is a company that owns and operates income-generating assets. Like mutual funds, they pool capital                        from numerous investors to invest in real estate.

o    Post-IPO, REITs are listed and traded on stock exchanges like equity shares.

o    Income is distributed in the form of dividends and interest at regular intervals.

o    Access to income-generating assets can be as low as Rs. 300.

o    Capital appreciation arises when the underlying property value increases.

B. Fractional Ownership (Through Platforms):

Fractional shares make high-value properties accessible to a wide range of investors with smaller budgets. The model of fractional ownership is carried through a Special Purpose Vehicle (SPV). Through the SPV, funds are raised to own and manage a property, allowing an investor to purchase a share of an asset instead of paying the full price.

Investors can spread their investments across multiple properties to mitigate risks. Various platforms offer properties through this mode, with the choice of platform, location, and property left to the investor.

C. SM REIT:

SEBI introduced the SM REIT regulations to make smaller real estate assets valued between Rs. 50-500 crores more accessible to retail and institutional investors. Mainboard REITs are only allowed to list assets over Rs. 500 crores, but there exists a significant market of rent-yielding assets valued at less than 500 crores that can also be monetized through a listed and regulated trust vehicle similar to mainboard REITs. The SM REIT regulations have also helped bring existing fractional ownership platforms within the regulatory ambit.

Similar to REITs, SM REIT units are traded on the stock exchange and are fully regulated by the Securities and Exchange Board of India (SEBI). However, SM REITs are still not available for investing, though many platforms have applied for the license with SEBI.

D. Real Estate Private Equity Funds:

Real estate private equity funds raise capital from outside investors, known as limited partners, and use that capital to acquire, develop, operate, and improve properties to realize a return on investment. The Indian real estate market is experiencing a surge in investor confidence, with private equity (PE) investments reaching a record $1.7 billion (Rs 142 billion) in the first half of 2024 (H1 2024). This marks a significant 42% increase compared to the same period in 2023.

In summary, direct ownership offers control and potential for high returns but comes with significant responsibilities and risks. On the other hand, REITs or similar structures provide more liquidity and less direct management, often at the expense of control and potentially lower returns. Therefore, selecting the right option to invest in real estate depends on personal circumstances and investment strategy to best fit individual needs.