Personal Finance

This is an opportune time to look at Grade-A real estate, says PropShare Capital CEO Kunal Moktan

Bavadharini KS | Updated on May 03, 2020

However, we are advising investors to hold off any decisions till some form of normalcy returns : PropShare Capital CEO

The commercial real-estate segment had been resilient even when the residential segment was struggling. But the continuing slowdown due to the coronavirus outbreak has made retail investors jittery about committing new capital across all investment classes, including the office segment, says Kunal Moktan, CEO of PropShare Capital. Excerpts from an interview:

How does PropShare Capital operate?

PropShare Capital is a tech-driven platform for retail investors to digitally invest in grade-A, (superior quality properties in prime locations with amenities such as lobby, lift and better views) completed commercial, retail and warehousing properties.

We are regulated by the SEBI under the PMS regulations where the minimum investment requirement is ₹25 lakh.

But in January this year, the limit was increased to ₹50 lakh. We don’t own any property, but invest in them.

We deal in one property at a time and we list a new property once a month. All necessary legal checks and background details are verified before listing it on the platform.

Upon listing, we provide property and tenant details, including rent-escalation clause.

Depending on the size of the property, it takes about 10-14 days for a property to be fully funded.

We then form an SPV (a private limited company) which buys the registered property in its name and all investors become shareholders of that company (SPV).

The rent is distributed to each of the investors in proportion to their ownership.

What kind of return can an investor expect?

An investor can expect around 8-9 per cent, which is the rental yield. Then there is rental escalation clause which will further increase the return by 5 per cent per year. On top of that, he/she can expect a capital appreciation of 8-12 per cent annually of the asset. This is where the investment managers’ role comes into the picture, that is us, PropShare Capital.

For instance, Umiya Business Bay, a commercial property on our platform, was purchased three years ago; our investors made almost 18 per cent (internal rate of return) per year.

Our portfolio is predominantly office. The maximum risk we see right now is non-payment of rent for 1-2 months, which is also unlikely. We have received full rents for April from all of our office tenants.

A two-month non-payment of rent will impact the IRR (internal rate of return) on the investment by less than 0.25 per cent over the holding period.

What is the impact of Covid-19 on your listings and on your investors?

The volatility and significant fall in equity markets around the world have made ordinary investors, understandably, a bit jittery about committing new capital across all investment classes. We believe this will be an opportune time to invest in Grade-A real estate.

However, we are advising our investors to hold off any decisions till some form of normalcy returns to the economy and stock markets. As such, we will not be listing any new property until we see a strong evidence of the pandemic being controlled.

Can you elaborate on liquidity of the investments — as to how frequently an investor can enter and exit?

There is no lock-in on the platform, which means that investors can sell their shares at any time. We appoint an international property consultant like JLL to do a quarterly valuation of all properties through a discounted cash flow, capitalisation rate and comparable sales in the market methods.

Investors are free to sell their share at current market rates.

However, given the high ticket-sizes and penal tax rates if sold before three years (due to short-term capital gains tax), investors tend to hold their investments for a longer time.

As such, we have seen few resales on the platform.

Whenever that happens, we have been able to provide liquidity to those investors.

How much do you charge for providing the services?

We charge a management fee and a performance fee. The management fee is 1 per cent a year and the performance fee is based on the returns made by investors.

That is, if the investor ends up making a return of more than the hurdle rate, then we charge a performance fee. The hurdle rate is 8 per cent.

Let me explain with a simple example. Let’s say that you invest in a property for ₹100 and at the end of the year it stands at ₹120, then we will charge management fee, which is ₹1, and a performance fee. So, at the first ₹108 (which is the hurdle rate plus capital), we don’t charge anything. But for the remaining ₹12, which was the extra profit that you made because of investing in what we told you to, we take 20 per cent, which is ₹2.4. In this case, totally we charge ₹3.4.

What is the tax liability for investors?

Rents and capital appreciation are the two sources of income for investors. On our platform, we deduct a 10 per cent TDS on rent distributions and a 20 per cent capital gains tax on capital appreciation, which reduces to an effective 10-15 per cent after indexation.

Published on May 03, 2020

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