The commercial real estate (CRE) market, which represents innovation and connectivity, is impacting the urban ecosystem and most investors are keen to take advantage of the opportunities it presents.
According to Mordor Intelligence, the Indian CRE market size was $40.71 billion in 2024 and is expected to reach $106.05 billion by 2029, at a CAGR of 21.10% during this period. Experts predict a growth rate of 7-8% in the CRE sector due to the growth of global competency centers.
Investing in CRE requires a large amount of capital, but the field can be explored by retail investors looking for shopping opportunities. Developers strategically employ tactics such as “leverage” to maximize returns from CRE assets. By leveraging borrowed funds, investors can access higher-value CRE assets that would otherwise be out of reach. This has proven to be a suitable investment option for risk-averse investors who want a stable source of income and minimal exposure to market volatility.
Debt is increasingly an investment option to diversify your portfolio. This means investing in the debt of a real estate company rather than purchasing the property directly. The investor acts as a lender and earns a certain amount of income secured by the property. This minimizes risk as the real estate acts as collateral in case of default. While stock investments offer higher returns, debt offers stable income and lower risk.
Alternatives to debt financing
Real estate projects require large amounts of capital, and there are various ways to obtain debt financing. One popular option is Lease Rental Discount (LRD), where financial institutions leverage future rent receivables to provide financing to property owners. Another option is to raise funds through a mortgage secured by real estate (LAP). Real estate non-convertible debentures (NCDs) are high-yielding investments typically held by wealthy individuals. Compulsory convertible debentures (CCDs) are corporate bonds that must be converted into equity over time. Each financing option has its own benefits and considerations, depending on the specific requirements and financial goals of your real estate project or investment opportunity. Therefore, it is important to carefully evaluate each option before making a decision.
Debt investing in CRE is becoming increasingly popular among investors due to its stable returns. Additionally, assets that serve as collateral provide a degree of safety and increase investor confidence. Lenders can also invest in different segments, providing ample opportunities for risk management and portfolio diversification.
However, it is important to note that no investment is risk-free. Investors may face challenges such as borrower defaults, which may affect their ability to receive payment in a timely manner. Additionally, investors may not receive their full proceeds if the proceeds from the sale of the property are not sufficient to cover the principal amount.
Investing in debt can be inherently illiquid, meaning that a commitment to finance a real asset locks in principal. This can make it difficult to access investment funds in an emergency.
To mitigate these risks, it is important to plan carefully and select the appropriate debt instruments that meet your investment objectives. This includes conducting a thorough investigation of the property, its location, and the financial stability of the borrower. It is also important to have a contingency plan in place to deal with any problems that may arise during the investment period. Investors should be aware of the potential risks involved and take steps to mitigate them through careful planning and due diligence.
Although debt investments provide predictable returns, they come with risks that investors must consider, such as market volatility, borrower default, and uncertainty. Balancing these risks requires strategic planning.
One way to reduce the risk associated with bond investing is to choose senior tranche bond investments. These investments are prioritized in the event of default by the borrower, thereby repaying the principal to the investor. Mezzanine tranched debt investments, on the other hand, combine debt and equity financing, giving investors the option to convert debt into equity in the company in the event of a default after payment to the senior lender.
Apart from these investment options, loan origination platforms allow investors to connect with borrowers and access a wider variety of CRE options not possible through traditional means. Investing in high-quality, institutional grade properties with relatively low risk of rent arrears can also be a good option for investors.
Real estate crowdfunding platforms allow small investors to pool their resources and fund large-scale projects or gain access to unique projects. Regularly monitoring the performance of real assets is important to assess the viability of investments and make informed decisions.
To unlock the potential for capital appreciation and passive income, define your investment goals and consider alternative real estate investment options. Investors can seek the assistance of real estate advisory platforms to make wise choices and leverage the untapped potential of his CRE market in India.
(The author is the founder and CEO of Assetmonk)
(issued April 14, 2024, 21:17 IST)
