Why HNIs are Preferring Commercial Real Estate?

By Ashish Bhutani, CEO, Bhutani Group     

High Networth Individuals (HNIs) in India are once again focussing on real estate like never before. Thanks to the ever-increasing volatility in the various asset classes in the market and enhanced regulatory environment in the real estate market in India.

Though the definition of HNIs varies according to financial markets and geographical areas, HNIs are considered individuals who have more than five crores in investible surplus, and those who have more than Rs 25 crores in investible surplus are considered the ultra-HNIs. India has the fourth highest number of ultra-HNIs in the world with 982 such households, according to a report from BCG. Among BRICS nations, India has the highest growth rate in the number of ultra-HNIs. A study showed that majority of such ultra HNIs are less than 40 years of age and are spending more time on recreational activities like health clubs, yoga, smart wearable technology, fitness apps and sleep management programmes. The number of such people is expected to grow to 3.3 lakh with a cumulative net worth of Rs 352 lakh crore by 2021-22, according to the study by Kotak Wealth Management.

Commercial real estate has emerged as a popular option for such HNIs along with allocations in Fixed Maturity Plans (FMP) and equity assets. HNIs are also spending on overseas education for their children and are participating generously in philanthropy activities.

Against the Asia Pacific average of 7.4 per cent and global average of 7.5 per cent, India’s HNI population grew at 9.5 per cent to 2.19 lakh in 2016. Whereas in India, HNI wealth increased to 344 lakh crore in financial year 2017 with a growth rate of 10.91 per cent from 310 lakh crore in financial year 2016 with 8.50 per cent growth.

Rising bond yields have added to India’s FMPs. Besides tax-free bonds, experts suggest lock in savings at the high yields through investments in FMPs with AAA-paper compositions for debt allocation. The markets are also bullish in terms of warehousing, students’ housing and pre-leased commercial real estate spaces.

Experts prescribe a 70:30 kind of allocation to real estate and other investment instruments through Alternate Investment Fund or Portfolio Management Service routes or through Mutual Funds.

So far, the bull forces have been under pressure in the domestic equity market owing to outflow of investment by Foreign Institutional Investors (FIIs), declining value of rupee against US dollar, concerns over global trade wars and rising bond yields. The uptick in the stock market indices is primarily due to large-cap, blue-chip companies while mid and small cap companies have remained under stress. After a big run-up in the last three years, the smallcap and midcap indices have witnessed over 10 per cent correction on a year-to-year basis.

There is hope that with a bottom-up approach and three to five years in the bag, there will be a portfolio of companies with strong earnings and cash flows.

However, HNIs are always looking for stable investments in real estate yet dealing with volatility in the markets. Office real estate has undoubtedly emerged as a potential option capable of producing higher yields than other segments such as residential and retail.

According to experts, there is a projected rise in discretionary spends especially on valuable products like diamonds. This, they say has led to increase in designer and branded jewellery in both diamond and gold. According to reported figures, HNIs are willing to spend 0.5 per cent to 1.5 per cent of their earnings for charitable purposes too.

Corporate Comm India(CCI Newswire)