Can you earn stable and long term returns on your investment without big risks? For a long time, financial experts would have said that such an investment does not exist. Conventional wisdom used to be that there is always a trade-off between risk and returns — the riskier the investment, the bigger the returns it will yield, and vice versa.
But in recent years, a dark horse has emerged that defies this trade-off and offers a win-win solution to investors — high returns with low risk. This dark horse is none other than commercial property, an investment that was once thought of as too expensive for the common man, but is now quite affordable, thanks to fractional ownership.
How profitable is it?
For any investor, the most important consideration is the return on investment, be it rent on property or interest on a deposit. Commercial property offers generous rental yield of 6%-10% on the investment. Rental yield is calculated on this formula:
Based on this formula, an investment of ₹25 lakh in a good, Grade A commercial property could yield between approximately ₹13,000 and ₹21,000 per month (between ₹1.5 lakh and ₹2.5 lakh per annum). Not only is this rental yield high, but it is also consistent, month-on-month because premium CRE is usually leased to MNCs, banks, retail stores, etc.
Compare this to investing in a fixed deposit; while this considered to be among the most secure places to park your money, the interest rate is a paltry 4%-6%. So the same investment amount could fetch you as little as ₹8,500 per month. To top that off, interest rates continue to fall at Indian banks this year, so returns will keep shrinking in the near future.
Even if one were to invest the same amount in residential real estate, returns would be less than half, with the residential rental yield as low as 1.5%-3.5%. This would fetch a mere ₹3,000-₹7,300 per month.
In addition, Grade A commercial property has huge potential for capital appreciation, which results in the value of your investment increasing as well.
Isn’t commercial property expensive?
This is hBits comes in, with the unique solution of fractional ownership. Imagine a scenario where a premium commercial building is available for sale at ₹100 crore. While the rent and capital appreciation is bound to be healthy, the investment amount is far too great for the common man, also known as retail investors or small-ticket investors.. This is why commercial property was restricted to High Net Worth Individuals (HNWI) in the past. However, on the hBits online platform, several interested investors can find each other and pool their funds for a shared investment. Say ten people invest ₹10 lakh each, they can comfortably buy the property. Sure, the returns will be shared among all 10, but so will the risk.
How can I ensure stability?
It’s now clear that commercial real estate is a highly profitable place to park your funds, but what really makes this a win-win investment is the stability and security it offers at the same time. Here’s how:
- Due diligence: One of the most important aspects to consider before investing in CRE is to research the property, its location, whether all the legal documents and permits are in place, as well as zonal laws and taxation laws. And here’s the main advantage with reputable real estate platforms like hBits — all the due diligence is already done, and only the best properties are offered to investors, with all the data about the property presented upfront.
- Virtual tour of property: Thanks to the tech-forward approach of hBits, investors can even do a virtual walk-through of the property before investing and ensure that it is well-built with all amenities. This means investors don’t need to be in the same city, or even the country in order to invest safely.
- On-time, consistent rent: Unlike residential real estate, where tenants can default on payments or frequently vacate the property, premium CRE is leased to big-time tenants such as MNCs, banks, retail stores, etc. These tenants usually make their payments on time with a long lock-in period of five to ten years or longer.
- Increasing rate of returns: hBits ensures a consistent increase in the rental yield, with contractual agreements that rental rates will increase by 15% every three years. So if your investment of ₹25 lakh is earning rent of ₹2.5 lakh per year, in three years, this will increase to nearly ₹3 lakh.
- Secure, easy transactions: New-age real estate companies like hBit have the added advantage of strong technology, which ensures that your transactions will be secure and all aspects of the investment are transparent and easy to track on the online platform, at a the click of a button.
- Easy exit: Real estate is generally not considered to be a liquid investment, but hBits facilitates greater liquidity by allowing investors to sell their investment to another buyer on the same platform.
- Diversified investments: Since hBits offers fractional ownership of commercial real estate, investors no longer need to pool all their funds in one expensive property, but can spread it across more investments, thereby reducing their risk even further.
What about other investments?
While there are quite a few financial assets or ventures that offer high returns, they are also usually accompanied by high risk, as we see in the stock market or even in mutual funds. Let’s take a look at a couple of the most common ones:
- Stock market: It is well known that the stock market is extremely volatile because the equity market is not just driven by corporate earnings but also by market sentiment, which is not predictable. This is why, according to an article in the Economic Times, only 5% investors make money in the stock market. Think about that number — just 5% are successful in the Indian stock market. Not to mention, Indian equity markets fell to their lowest in three years after the Covid-19 outbreak began in India. This time last year, one-year return of Nifty was 15%, which has now dropped to merely 5%. So, while a one-year investment of ₹10 lakh would have fetched rent worth ₹1 lakh, the same investment in Nifty could have earned half — ₹50,000.
- Mutual funds: Balanced mutual funds are considered to be among the safest formats for first-time investors as they combine the thrill and high returns of the equity market along with the safety net of the debt market. However, balanced funds have also shown falling returns over the last few years due to two reasons: an increased focus on riskier equity, along with a sluggish debt market plagued by liquidity issues and falling interest rates. High inflation has further squeezed the market, which means some funds are giving negative returns in real terms (which compares actual returns with inflation.) Take for example the average returns of low-duration, short-duration, corporate bond and banking and PSU debt funds over the past six months, which was between 5.18% and 6.19%. This would mean that over a period of six months, a ₹10 lakh investment in Grade A property could yield as much as ₹50,000. The same investment over the same period of time in a balanced mutual fund would have yielded about ₹30,000.
The unicorn investment
As we have seen, the combination of high returns and low risk is unique to commercial real estate, and that is what makes it a unicorn investment. By keeping the minimum investment at a reasonable ₹10 lakh, hBits has opened up the world of fractional ownership for the common man in India, making it the new-age synonym of the Real Estate and Financial Service industry.