The US Commercial Real Estate Landscape
US Commercial Real Estate is one of the world’s most mature and sophisticated industries. With an emphasis on free cash flows (yield), as opposed to capital appreciation, the US Commercial Real Estate (CRE) industry is worth approximately $6.75 trillion. As one of the largest components of global real estate, it makes up 25% of $26.6 trillion global commercial real estate industry (excluding Africa).
Unlike India, where individuals take pride in ownership, commercial US real estate is primarily a rental market, where companies are motivated by US tax law to lease their space from institutional owners, such as real estate investment trusts (REITs), insurance companies and pension funds. REITs own around 30% with a market size of $2 trillion.
How the US CRE industry differs from the Indian CRE industry
- Focus on cash flows: US institutional ownership is focused on cash flow from rent-paying tenants, who themselves are motivated to lease space for the tax benefits. Long-term appreciation, generally the focus of Indian investors, is of less interest to US investors.
- Defined entitlement and permits: This pre-construction requirement from project lenders ensures that project delays are minimal or non-existent
- No title disputes: Land ownership in the US is only 300 years old, with accurate and documented boundaries and ownership, and can, therefore, be protected by title Insurance with negligible costs
- Known exit strategy: A broad and efficient CRE market with institutional players and publicly traded REITs provide stable exits
- Property valued on the ability to generate cash flows: Credit quality of a building along with long-term leases provide stable valuation, almost always with a higher valuation than the “replacement cost” of the physical real estate
Advantages of US institutional CRE market vis-à-vis ownership driven private transactions in India
- REITs primarily scout for stable cash flowing real estate transactions which generate yields for their investors. This ensure that liquidity is present for a developer completing quality cash flowing CRE projects in the US vis a vis exits dependent on the liquidity of an individual UHNI real estate investor in India (primarily prevalent in secondary sale)
- Since most REITs are listed entities and publicly traded, buying and selling from and to them adds a layer of authenticity, and therefore instances of fraudulent transactions in the US are rare.
Comparison of returns between Indian and US CRE industries
Indian CRE investments offer yields in the range of INR 8% to 11% (P.A.). This works out to roughly INR 3%-6% (P.A.) for inflation-adjusted real returns (assuming IN CPI @ 5%), while private US CRE investments offer yields between USD 8% and 12% annualised. In effect, this works out to be an attractive real return of USD 6% to 10% (US CPI being 2%). Investments from listed REITs generally offer yields of 3% -8%, which is equivalent to an inflation-adjusted 1% to 6%.
How US Freedom Capital (‘USFC’) adds value to Indian HNIs
Many sophisticated Indian investors have a keen interest in US CRE investments. But at the same time, they must tackle cumbersome US taxation as well as overseas direct investment rules laid down by the RBI and IRS (USA tax authority).
USFC brings highly institutionalised and non-discretionary US commercial real estate investments to sophisticated Indian UHNI investors. These investments are highly stable and generate consistent returns.
USFC provides value by
- Providing sophisticated and tax efficient structures allowing investors to earn high returns with the stable risk-return payoff (ranging between 8-12% in USD P.A.)
- Primarily investing in healthcare facilities and lease-only housing facilities (non-discretionary CRE) with stable cash flows, which qualify for institutional exits (REITs)
- Investors are classified as preferred equity and hence get preference and need to be paid out prior to developers /promoters
Indians love to own real estate which is capital intensive and tends to be 'illiquid'. The same capital can be invested in liquid, credible, and mature investment opportunities in the US at attractive yields.