How Has Fractional Ownership Changed The Real Estate Investment Landscape?

A mechanism known as fractional ownership allows multiple individuals to jointly possess a valuable asset, like real estate. Multiple investors split ownership into shares, with each investor possessing a piece of the asset's value commensurate with their contribution, as opposed to a single person or entity owning the entire asset. Based on an interview with Shiv Parekh, founder & CEO, hBIts- fractional ownership of commercial real estate platform, here we have discussed what changes have fractional ownership brought about in the world of real estate investment.

1. How has fractional ownership changed the real estate investment landscape, making it more affordable and accessible to individuals?

hBits is a tech-enabled fractional ownership platform dedicated to overcoming the traditional barriers that have previously restricted access to real estate investments. Historically, real estate has been the realm of the ultra-rich and institutions, excluding the broader investor base. Fractional ownership in real estate pools investment from many investors into premium Grade A commercial real estate and enables all investors to partake in a share of profits in terms of both rental yields and capital appreciation.

The investors are allotted 'fractions' based on their investment and they can sell the fraction later. The minimum investment to own a 'fraction' is INR 25 Lakhs. In a city like Mumbai, even a one-bedroom residential property will block almost twice the amount for you. Moreover, the fractions are derived from grade A commercial property that is managed by professional companies. With such reputed tenants and professional management of the properties, we can assume a 5-10% capital appreciation and an 8-10% rental yield annually.

As per these metrics, the sum of the rental yield and capital appreciation would give you steady long-term returns at a target IRR of 13-20% over a period of five years. This is a much more lucrative investment option when compared to 'Fixed Deposit' which is a minimum-risk asset class with an interest rate of about 7% per annum.

With fractional ownership of real estate, most of the risks of typical real-estate investment are covered.

Here's how hBits addresses the challenge:

• Low Entry Barrier: We recognize that not all potential investors have substantial capital. To address this, we offer access to premium commercial real estate assets with a modest entry threshold starting at Rs 25 lakhs. This opens the door for a wider range of investors.
• Tech-Driven Insights: Leveraging cutting-edge technology, our platform provides investors with detailed property data. Users can research and make informed decisions remotely, from their own environment.
• High Returns: hBits promises investors attractive returns, with average rental yields of 8-10% and an anticipated internal rate of return (IRR) of 13-20% over 5 years. These returns make real estate investment both accessible and financially enticing.
• Effortless Ownership: Our experienced team manages all aspects of property ownership, including rent collection and maintenance, allowing investors to enjoy the benefits without the hassles.
• Enhanced Liquidity: We offer a smooth exit pathway and continuous price discovery, enabling investors to divest their fractional ownership stakes effortlessly. This boosts market liquidity and provides clarity on asset values.
• Extensive Due Diligence of the property: The Grade A pre-leased commercial real estate is vetted and validated across all aspects by professional management. The 'fractions' that you invest in would have undergone significant due diligence across every aspect. It provides a great cushion of comfort for the investors and gives them comfort against any perceived risk with regard to the fractional property investment

In summary, hBits is committed to revolutionizing commercial real estate investing. We bridge the gap between traditional practices and everyday investors, making it more accessible, convenient, and financially rewarding to participate in this asset class. Our platform empowers individuals to enjoy secure cash flow, diversified portfolios, appreciation potential, cost efficiency, and tangible asset ownership, truly democratizing real estate access for all.

2. Can you provide examples of the types of commercial real estate properties available for fractional ownership through hBits, and what are the advantages of investing in these properties?

As of now, we are offering Grade- A pre-leased office spaces, the specifics of which are available on our online platform www.hbits.co. However, we are in the advanced stage of negotiation for Warehousing, Industrial & Data Centres as well.

The advantages of investing in these asset types:

• Higher yield
• Better lock-ins
• Lower vacancy
• Grade A+ tenants

3. With rental returns of 8-10% and expected profits of 13-20%, how has hBits achieved such attractive returns for investors, and what sets it apart from traditional real estate investment?

We have hired an excellent team of real estate veterans who specialize in different aspects of transactions. This helps us to source the best deals in the market and to do thorough due diligence on the deal.

We have built strong relationships with developers and international property consultants, who offer us proposals to purchase Grade-A high-yielding commercial assets that fit our investment criteria. Of the INR 45,000+ crore of deals we have sourced. This ensures that we provide the best deals to our customers, at below-market rates and with high potential for capital appreciation. We look to acquire assets with Grade A+ tenants, the best location, good rental yield, and high IRRs.

hBits addresses the problem of limited accessibility to the lucrative asset class of commercial real estate. Traditionally, commercial real estate investments were primarily accessible to ultra-high-net-worth individuals (HNIs) and institutions, creating a barrier for everyday investors. hBits' mission, which began in 2019, is to democratize access to real estate and make it available to a broader range of investors. In summary, hBits is solving the problem of exclusivity in commercial real estate investments by offering a platform that provides accessibility, simplicity, attractive returns, hassle-free ownership, liquidity, and transparency to a wider range of investors, thus democratizing access to this asset class.

4. Could you share some insights into hBits' successful exit from a commercial property with an industry-leading IRR of 17.54% and the strategies contributing to this achievement?

One of the most important factors in any investment is an exit strategy. We entered the asset 32 Der Deutsche Parkz at a value of INR 7.07 Cr. located in Nahur, Mumbai with Viaante Business Solutions as the tenant - one of the fastest growing BPOs with a presence in the US & UK.

We exited our asset at an industry-best IRR of 17.54%, far above our expected IRR target of 16.20%, at a sale value of INR 8.10 Cr. Our advisable holding period was 4 years, however, when an exit opportunity came at a lucrative price, we decided to move forward.

The time frame for this exit was about 1.5 years. While a shorter than anticipated hold period, our extensive industry network resulted in an attractive unsolicited offer. With our excellent team always carrying out thorough market research, we continuously monitor similar deals in adjacent areas and frequently get our properties valued by leading IPC partners.

We saw an opportunity with a great offer to take to our investors.

With this exit, we were the first fractional real estate company to have successfully closed a deal and exited a property.

5. What prompted the launch of hBits Asset Management Company's Category II alternate investment fund of INR 500 crore, and what are the anticipated benefits and returns for investors participating in this fund?

With our fractional ownership platform soon to be regulated by SEBI, it restricts us from investing in under-construction & unleased assets. The AIF allows us to invest in these restricted assets.
Additionally, this opens up Broader investments in terms of asset class, asset sizes and risk-return profiles, and provides higher IRRs for investors with higher risk appetites, allowing them to achieve a 20-21% IRR as compared to the IRRs of 14-16% in our relatively lower risk pre-leased assets in the fractional platform.

Below are some other benefits of investing in AIFs:

Diversification: Diversification is key for every investor. It is even more crucial for HNIs who have large ticket sizes. AIF allows investors to diversify their portfolios. They act as a cushion in times of market volatility.

High returns: AIFs can deliver higher returns to investors compared to other options. The massive pooled amount allows fund managers to prepare flexible strategies for maximizing returns.

Low volatility: AIFs are unlinked with the stock market. Therefore, the volatility is less in these funds.

6. How do you envision the creation of an exchange for commercial real estate, and what impact do you anticipate this will have on the industry?

Transitioning into an MSM REIT will

• Increase Investor Trust, as we will be listed & regulated by SEBI
• Increase Liquidity
• Reduce Ticket Size, allowing a larger pool of investors
• Open our network of Large Brand Name Distributors

7. What are the key components of hBits' investment strategy in the commercial real estate sector, and how do these strategies align with the current market trends?

We have built strong relationships with developers and international property consultants, who offer us proposals to purchase Grade-A high-yielding commercial assets that fit our investment criteria. Of the INR 45,000+ crore of deals we have sourced; we typically acquire less than 1% of the total pipeline. Post-sourcing, the investment process is as follows:

• Visit the asset, and complete the due diligence checklist to understand factors that affect price and yield.
• Calculate yield and IRR for deal selection.
• Micro-market analysis of average lease rent and sales
• Analysis of average lease rent and sales specific to the asset
• Research on risk profiles and market factors like infrastructure, asset quality, and developer risk can estimate asset appreciation potential.
• We offer a price to the seller through their property consultants after analysing different valuation scenarios and expected returns.
• We sign a binding term sheet with the seller at an agreed price post successful negotiation, to acquire the asset at terms that fit our expected IRR.

8. Can you share insights into the sentiment among investors regarding commercial real estate investment, especially in the context of fractional ownership?

Fractional Ownership is a great way to ride the real estate boom with almost all risk factors addressed. It can help you to sleep peacefully while your fractions make a good return over time. As per many reports on the state of the economy and real estate, the commercial real estate boom is not going to fade away soon, and hence the time is ripe and right for fractional investing of grade A pre-leased commercial real estate.

Also, Investors across the country can now access Grade A properties leased to Grade A tenants, with as small as 25 lakh investments, which was earlier accessible only to the HNIs and UHNIS. This has sparked a positive mentality towards commercial real estate, specifically for retail investors who wanted access to top-quality assets which were otherwise out of their reach.
Retail investors looking for steady returns like fixed deposits can now earn 8-9% yearly, own a piece of their aspirational real estate assets, and enjoy the benefits of capital appreciation in the fast-growing commercial real estate sector in India.

"I must laud the hBits team for their customer-centric approach. The journey from ownership to regular monthly rental returns is seamless and transparent. The investment managers helped us at every step, they were very supportive and made us understand the true value of fractional ownership. They had the financial understanding to guide us through the taxation complexities also. In this new fractional ownership industry, you need a seasoned and experienced guide who can help you to the finish line of success." - Mr.Jariwala, IKEA

9. Given the varied types of commercial properties available, could you discuss the specific investment potential and trends in areas like data centres within the hBits platform?

India's data centers have attracted over USD 10 billion in investments over the past 2.5 years

As per JLL, India's data center capacity is set to double by the end of 2025, totalling up to 20 million sq.ft., growing at a CAGR of 21%. Capacity is estimated to increase 1078 MW by 2025, and the industry will attract additional investments of USD 4.8 billion over the next 3 years.

Microsoft is investing heavily in Indian data centers, positioning them as a global hub.

Digital Edge JV is committing $2 billion to construct a massive 300MW data center in Mumbai. Mumbai, Chennai, and NCR-Delhi are key growth hubs, with Mumbai leading with a 49% share. Tier II cities like Vijayawada, Nagpur, Raipur, Kochi, Patna, and Mangalore are also witnessing steady growth.

The surge in smart devices, e-commerce, and cloud services is driving exponential growth
Regulatory support, like the Digital Personal Data Protection Bill 2022, is expected to further fuel the sector.

Investing in India's booming data center sector offers retail investors a golden opportunity for substantial future profits. Currently, we do not have any live data centre opportunities on our platform. However, we are in the advanced stages of acquiring a data centre, the details of which are currently proprietary. We strongly believe in this asset class. With an increase in internet penetration and the passing of the Data Protection Act (2018) there is a very strong demand for these data centres which will lead to very low vacancy rates and higher yields.