HNIs investing in Commercial properties

The super rich in India are not just buying luxury homes, but they also betting their money on pre-leased commercial properties offering good rental yields. These big-ticket investors are locking 30-40 per cent of their portfolio in real estate, higher than any other investment category including equities.  
A majority of ultra HNIs—some define them as those with a net worth of over Rs 100 crore while others as those with a networth of over Rs 25 crore—are mandating what are called family offices to help them cherry pick grade ‘A’ commercial properties. Family offices are specialized financial firms managing investments and trusts of wealthy clients.
“Ultra HNIs are increasingly investing in commercial real estate generating fixed income. They are also entering into joint development agreements with the developer for commercial ventures,” according to Rajesh Saluja, CEO and Managing partner at ASK Wealth
A recent study titled ‘Top of the pyramid’ by Kotak Wealth Management and CRISIL Research found that real estate holds the greatest attraction for ultra high networth households (HNH) in Delhi and Bangalore. Over 50 per cent of ultra HNH investments in Delhi are in real estate, followed by 37% in Bangalore. But ultra HNHs in Mumbai put more money in equities (37.2 per cent ), followed by real estate (32.8 per cent).
The report, which defines ultra HNHs as having a minimum net worth of Rs 25 crore, estimates that there were around 62,000 ultra HNHs in India in 2010-11. The shift towards commercial real estate is driven by higher rental realization compared to the residential market. “The annual rental realization from commercial offices is between 8-10% compared to 4-5 per cent in the residential space,” said Sunil Shah, promoter of Evergreen Family Office. Karun Varma, MD-Bangalore and Kochi at Jones Lang LaSalle, says even if an ultra HNI buys a commercial property at Rs 4,000 per sft, he can expect Rs 40 per sft as monthly rental that translates to 9.5 per cent annualised returns. In comparison, if he buys a Rs 50 lakh flat and rents it out, he can expect a monthly rental of Rs 20,000 that translates into five per cent annual return.
Ultra HNIs prefer commercial properties as they come with greater clarity on tenancy rights and it’s easier to evict tenants from these buildings. Some ultra HNIs are broadening their portfolio to include real estate private equity funds. Around 200 ultra HNI clients of Ask Wealth Advisors have invested in ASK-promoted real estate PE funds. “We advise our clients to co-invest in real estate PE funds through debt or equity. When capital is scarce, many HNIs help developers with last mile financing where they charge between 18-36% as interest,” said Saluja.
But Jones Lang Lasalle’s Varma says ultra HNIs are still averse to real estate PE funds because it’s a new product and there is lack of clarity on income generation. “They don’t commit fixed returns. Some may give a lump sum at the end of the lock-in while others many look at annualized returns. If land acquisition is delayed, the project runs late and income generation is delayed. They are comparatively new products and there is a learning curve that everybody has to go through,” he said.