Amit Uppal, Co-Founder, Frxnl
An alternative investment is one which is outside the traditional pail of investments in Bank Deposits, Stocks and Bonds, Property, and Metal (or Gold). The classification is not watertight. Some classify property and metal as alternative investments too.
India has had a long-standing affair with real estate. As per RBI, 84% of our wealth allocation is in real estate. We have over USD 1.5 trillion of rental home inventory in urban centres alone - a third of which is unoccupied. Investors of this low-yielding asset class hope and pray for a spike in capital appreciation to cover the low yields. But again, the last decade has not exactly been kind to a rise in residential home pricing in most parts of the country. So, what goes into this unusual high interest in residential real estate, and can we really take this proclivity for granted?
What has driven investment in residential homes?
It is a combination of factors; historically, it has acted as an inflation against inflation on a long-term basis, but more importantly, the trend has been supported by a strong legacy bias, and a slow rise in maturity of the Financial Markets. Its disproportionate allocation in one’s wealth portfolio also has to do with the relative size of the investment, which crowds out alternative opportunities.
Winds of Change
Disruption is being driven by three Ds: Digitization, Demography, and Diversification. Each aspect of our lives has been touched by Digitization. The current pandemic has only emphasised the impact of technology, and a relatively young demography, with an average age of 27 years, seeks technology-enabled solutions first before anything.
On the other hand, real estate investing is onerous - from search to registration and tenancy management - most of it is still a very physically demanding process. Furthermore, investors today feel the need (and have access to opportunities) to diversify - be it coming of age of Financial Markets and easy access provided by Mutual Funds or zero-brokerage trading platforms.
As a matter of fact, traditional real estate investing is now a counter-culture to these two prominent trends as it remains physical, illiquid, and unaffordable. So, as the more tech-savvy generation grows older and become decision makers, they will weigh in convenience, ROI, and break away from the legacy bias.
Rise of Alts
Alternative Investments (outside of the traditional markets of stocks, fixed income or cash) include non-traditional investment avenues such as global equities, sovereign gold bonds (SGBs), real estate investment trusts (REITs), hedge funds, private equity, commodities, collectibles, and the list goes on.
They essentially help diversify the wealth portfolio. In fact, JP Morgan had issued an advisory in light of the upheaval caused by the pandemic to transform the 60:40 distribution between Equities and Bonds to Equities, Bonds, and Alternatives (or Alts).
Alts are a growing segment that has doubled from the 6% share in 2004 to the current 12% of total global wealth. They are further expected to grow to 18-24% of the total investible market by 2025.
Focus on Commercial Real Estate (CRE)
As uncertainty remains high in public equity and bond markets, investors want to hedge their risks by diversifying their portfolios with Alternative Investments.
CRE is a property used for business purpose, be it an office, warehouse or a retail store. Besides superior return potential of 8-10% rental yields, what attracts smart money to seek CRE is the predictable cash flows and capital preservation through an asset-backed investment. CRE has a low correlation with public markets, and investors (globally) invest in this Alternative Investment class to hedge against volatility. As a matter of fact, smart money has been chasing Commercial Real Estate with both HNIs and institutional capital allocating over 90% of their capital to CRE.
Innovation driving retail participation in CRE
Not many have the ability to source, acquire, and manage a high-quality commercial space with locked-in multi-year lease with a highly credible tenant. Thankfully, recent market innovations have brought this attractive asset class within the reach of retail investors, who can now generate a healthy passive income through such high-yielding investment properties.
These are primarily listed Real Estate Investment Trusts (REITs) and private Fractional Ownership platforms. Essentially, both provide access to retail investors and take away the hassle of acquisition and management.
Fractional Ownership: New Way of Investing
Fractional ownership, simply put, is a method of ownership where investors collectively put small sums of money to individually own a fraction of a high-value property. The unified purpose is to gain superior returns over time.
While such kind of holding structures in real estate are quite old, the innovation is about how new-age platforms are using technology to increase depth of its investor base, making the whole process of acquisition and management hassle-free, and leveraging professional expertise to differentiate. Investors can now invest in real estate with affordability and liquidity, which is opening up a whole new way of investing.
Fractional Ownership will emerge as a USD 5 billion market opportunity by 2030 and will find a much wider industry acceptance as investor awareness and process maturity of this nascent ecosystem grows. Real Estate developers should consider having fractional ownership products in their portfolio to keep pace with the times.