Why is diversifying your portfolio with commercial real estate a smart move?
debt mutual funds etc) and the volatility of equities (including direct stocks, equity mutual funds, ETFs etc). An astute investor should look towards creating a diversified mix of fixed income, equity and hybrid security investments to optimise returns on his/her portfolio. Smart investors will try to find a balance between the high-risk & high-reward world of equities and the reliability of fixed-income (Debt) investments.
Needless to say, of paramount importance in the entire asset allocation process is liquidity (ability to quickly convert your investment to cash) and the ability to consistently generate REAL returns (investment returns measured against the yardstick of inflation). While Indian investors have traditionally been heavy on real estate, a significant chunk of retail investor capital is historically allocated to residential real estate - which suffers from very low yields (sub 4% in most cities) and the returns don’t compensate for the inherent illiquidity of such investments. It is at this juncture that I want to introduce commercial real estate.
Commercial real estate provides 8-9% annual returns through rental yield and an opportunity to participate in the appreciation of the underlying property, giving it characteristics of both debt and equity. By virtue of being a real asset the principal amount is also considerably safer. The real icing on the cake is the annual inflation-linked rent escalations.
Most commercial leases escalate by 5% every year or 15% every 3 years providing a strong cushion against inflation. The real rate of return is therefore always 8-9% with the capital appreciation providing the additional equity kicker. CRE investments in the right institutional-grade properties with
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