Real estate investments, especially commercial real estate (CRE), have always been considered a big player’s game. With passive income generation and long-term capital growth, it offers portfolio diversification and a three times higher return compared to residential real estate. However, the enormous ticket size limits the sector to institutional investors and HNIs.
Sudarshan Lodha, an experienced legal advisor in the real estate industry, and Priyanka Rathore, a real estate and financial analyst, want to change the game here with their proptech platform.
Started in May 2019, Strata was built to create new investment opportunities in the prime commercial real estate space for aspiring middle class Indians.
“Each year, 84 percent (approximately $ 22 billion) of retail investment in real estate ends up in residential real estate; of this, more than 42 percent (approx. 10 billion US dollars) went to investments and 58 percent to final consumption. Strata aims to convert these small investors into CRE by breaking the hurdles and by fractionating CRE to give investors a much better ROI on their investments, ”said Sudarshan.
For newcomers to real estate, fractional ownership allows customers to own a fraction of Class A real estate assets and benefit from that portion of the income and any appreciation of the asset.
The journey so far
Sudarshan comes from a family of entrepreneurs who have been involved in financing and financing products for decades. In addition, he is an experienced legal advisor in the real estate industry, which gives him a clear idea of the great opportunities at the intersection of commercial real estate and finance.
He met his co-founder Priyanka through a mutual friend. “At the time, she was working as an analyst at WeWork and was a little reluctant to accept the idea. However, she left when WeWork was planning an IPO and joined me, ”recalled Sudarshan.
In March 2020, Strata collected in a seed round led by. $ 1.5 million SAIF partner and Mayfield India. With over 10,000 registered users, the startup operates in Chennai, Bengaluru and Mumbai.
In less than two years, Strata has multiple assets equal to one asset under management. financed Rs 270 crore. The company is backed by WeWork Labs and has an exclusive data partnership with Propstack, a commercial real estate data and analytics platform.
Even during the challenging COVID-19 pandemic period, the startup closed $ 140 billion worth of deals only in warehousing. Strata raised funds for a consortium of three Grade A storage facilities. Strata Avigna Warehousing I & II, based in Hosur, received 100 percent investor approval within just 42 days of its launch, while the pharmaceutical warehousing asset in Bengaluru closed within just seven days.
“Ten percent of our investor base consists of NRIs. Our investor base is otherwise diversified and includes, among others, HNIs, family offices, top management of Fortune 500 companies as well as private and institutional investors. We also have more than 500 channel partners, investment managers and brokers working with us, ”he said.
Channel opportunities and tackle gaps
Sudarshan said assets like warehousing, logistics and data centers, which despite excellent returns in the 8-14 percent range, could never be considered as an investment option are now available to retail investors.
The real estate industry has long been plagued by the lack of adequate data, information gaps and a lack of transparency. “At Strata, we are trying to fill all of these gaps under one roof by leveraging our data analysis capabilities,” he added.
Investing in CRE is not limited to just choosing the right asset, it encompasses several factors such as purchase price, maintenance costs, possible repairs, storage costs, etc. Rental agreements and leases must be designed in such a way that they attract tenants, offer flexibility, reduce vacancies and limit the liability risk.
At Strata, all administrative tasks relating to tenant and asset management are carried out entirely by the team. The management of files, the constant communication with the tenants, the mediation in case of possible disputes, among other things, bear a great responsibility in the management of a property that is looked after exclusively by Strata.
The company also provides access to detailed reports and fair prices explained in advance.
“Our investors have instant access to the ‘Investor Dashboard’, which tracks their investments and returns in real time. It also provides access to live commercial real estate data to make future investment decisions and better understand the CRE scenario, ”he added.
How does it work?
Finding the right commercial property takes time, resources and a lot of know-how.
Sudarshan said her team goes through a rigorous property review process using data analysis, due diligence, and the creation of special purpose vehicles (SPVs) to ensure Strata has the least amount of involvement in the management or decision-making of the SPVs.
In the private placement, each investor is allocated unlisted securities in the form of convertible bonds, which make them shareholders of the SPV and, in turn, shareholders of the pre-leased commercial asset.
After completing the investment, investors are basically the owners of the property and have all decision-making rights about the property and the special purpose vehicle. Strata provides accounting, reporting, compliance and asset management services for the special purpose vehicles.
The convertible bonds have a coupon rate that is proportional to the rental income of the asset. The rents generated from the property are paid out to the investors by the special purpose vehicle as interest on bonds. The same will be dematerialized and made available to investors on the DEMAT account or a physical copy of the securities will be made available to investors and the originals will be kept by their custodians.
To liquidate the investment, investors can list their fraction on Strata’s proprietary resale market and sell their holdings offline through a personal network or through a dedicated secondary window.
Strata charges two types of fees. One is the one-time fee for acquiring assets, which is between 1-3 percent. It charges an annual maintenance fee (one percent of the total investment) for the comprehensive value-added services over the entire life cycle of the system.
“We also charge a performance fee that only applies if an investor’s capital appreciation exceeds a predetermined hurdle rate upon liquidation of their stake,” said Sudarshan.
Competition and the way ahead
Lately the CRE segment has seen players like hBits, DEFINITE and Fracsn making a name for themselves in the sub-real estate space. With the ongoing pandemic unlikely to end any soon, more players are expected to join the bandwagon to meet demand for commercial real estate.
However, Sudarshan said that Strata’s technology-enabled approach and exclusive partnership with a leader like Propstack enable them to offer their investors the best-in-class investment opportunities.
“This gives us an industry advantage and sets us apart from any other player targeting the same sector,” he added.
Sudarshan shared some key trends, watched based on Strata’s data, that will spearhead commercial real estate investment growth. These are:
- With the fractional CRE model, the investor base has grown nearly 195 times, meaning that cohort now has about 1.5 million investors in India alone.
- This model offers a rental yield of 9-12 percent.
- Rising investor confidence will pave the way for growth.
“The first Rs 54 billion Tamil Nadu asset launched by Strata in May 2020 took 45 days to be fully funded. However, it only took 48 hours for the latest Rs33 billion fortune to be fully funded in March 2021 in Mumbai, ”he added.
Strata intends to raise Rs 600 billion worth of assets by the end of June 2021. The team wants to expand its presence in Mumbai’s major metro markets, alongside forays into Delhi and Pune.
The proptech startup has a large number of asset classes in view, such as industrial plants, office space, warehouses, data centers. “We will also be open to sale-and-lease-back deals.”