Real estate news on Real estate developers open office space to retail investors

Investors/ Investment proposal, Real Estate services, Real Estate Investment Trust (REIT)
Posted on Oct 04, 2016
Real Estate Investment Trust (REIT) is expected to boost investment and expand the rental market. But even before the roll out of REIT, the commercial real estate sector has got a shot in the arm with yet another developer introducing collective ownership of office space in the city.

Bangalore-based Puravankara developers have opened up two floors of a commercial office building at Thoraipakkam in South Chennai to retail investors looking at investments as low as 28 lakh. Unlike conventional ownership models, there is no clear-cut demarcation of the propertys boundaries in the collective part ownership model. Though the investor gets a registered sale deed, the title is only for the undivided share of land and building. The developer takes back the space on lease and lets it out to corporates. The investor, apart from getting about 6%-7% rental returns, can look forward to capital appreciation also in the long run.

Prestige Group, another Bangalore-based developer, has been active in the part-ownership portfolio for more than 20 years, but the lower ticket size may make Puravankaras offer attractive to medium investors.

Prestige, which started off with a ticket size of 50 lakh two decades ago, is now offering space to investors at a higher price bracket of ‘1 crore and above, said Prestige CMD Irfan Razack. “Our overall portfolio of commercial office space is about 18 million sq ft, out of which about 50% is under collective ownership,” said Razack. In Chennai, out of the 1 million sq ft area, the group holds, about 40% would fall under part-ownership, he said. “This is an unstructured REITs model and has worked quite well for our investors,” said Razack.

To start with, Puravankara has offered about 30,000 sq ft space in a 13-storeyed building to the retail investors.”This model has been designed to provide an opportunity to investors to earn long-term alternative income, without the hassles involved in traditional office space leasing,” said Ashish Puravankara, MD of the company. The group was encouraged by the success of the model in Bangalore and Hyderabad, where it was introduced more than a year ago, he said.

About 2 lakh sq ft of office space was sold to retail investors in Bangalore and about 1 lakh sq ft was sold in Hyderabad, said Anand Narayanan, president, sales, of Puravankara. “There is a vacancy risk involved in the deal. But once rented out, there is no such risk for nine years. Moreover, every three years, the owner can look forward to about 15% increase in rental,” he said. The average rental returns works out to about 7% of the investment, he said, adding that for 28 lakh, the group was providing 350 sq ft of space to the investor.

There are challenges, though. “Traditionally, people have been keen on knowing the metes and bounds of properties when it comes to real estate investment. That is why there arent too many developers in this business of promoting part-ownership buildings,” said N Nandakumar, MD of Devinarayanan, a Chennai-based developer.

“If one owner disagrees to lease out his space, it could pose problems to other owners also. How smooth it functions depends on the quality of legal paperwork one does,” noted Ajit Kumar Chordia, MD of Khivraj Estates. Resale of such space is another hurdle. Unless someone with a similar bent of mind approaches, resale of an undivided share of property could be difficult, he said.

Ashish, however, feels resale is never a problem as there are a large number of investors in a queue. When the unit cost is low, there is a huge attraction, he said.

Chennai office space leasing has been in a recovery mode in the past three years, said Chordia. “Over the past one year, there has been a 10% increase in rentals for office buildings,” he said.

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