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How Shiv Parekh is disrupting commercial real estate investing | hBits
164 Plays1 year ago
We are a constantly evolving species, from discovering fire to inventing the wheel to now inventing AI - humanity is on a relentless path of progress.
And while each new technology may have a different flavour to it, the one broad outcome that remains constant is that we are constantly reducing barriers to access. Be it access to education or access to jobs or access to investment opportunities.
Today, thanks to platforms like hbits, you can access a real estate asset worth hundreds of millions of rupees through fractional ownership.
In this deep dive into the new era of real estate investing, your host Akshay Datt speaks to Shiv Parekh - the founder and CEO of hBits.
Stay tuned for a knowledge filled episode of the founder thesis podcast to understand how the business of real estate investments is getting disrupted by nimble tech-enabled startups.
Recommended
Transcript
Introduction to HVITS and Evolution of Investment Platforms
00:00:00
Speaker
Hi everyone, Shiv Parikh here. I'm the founder of HVITS.
00:00:19
Speaker
We are a constantly evolving species, from discovering desire to inventing the wheel to now inventing AI. Humanity is on a relentless path of progress. And while each new technology may have a different flavour to it, the one broad outcome that remains constant is that we are constantly reducing barriers to access, be it access to education or access to jobs or access to investment opportunities.
00:00:43
Speaker
For my father's generation, investing in real estate meant owning a real estate asset that was worth a few million rupees. Today, thanks to platforms like Hbits, you can access a real estate asset worth hundreds of millions of rupees through fractional ownership. In this deep dive into the new era of real estate investing, your host Akshay Dutt speaks to Shiv Parekh, the founder of Hbits.
00:01:06
Speaker
Stay tuned
Fractional Ownership in Commercial Real Estate
00:01:07
Speaker
for a knowledge-filled episode of the Founder Thesis podcast to understand how the business of real estate investments is getting disrupted by nimble, tech-enabled startups. So Shiv, can you start by just giving a very broad elevator pitch of what is HVITS?
00:01:35
Speaker
Yeah, sure, Akshay. So, each bit is basically a real estate fractional ownership platform. You know, whereby at a very, you know, one line, this thing, one can own a share in a commercial property. The same way one can own a share in a Tata or a Reliance talk and make the returns associated by owning that property.
00:01:55
Speaker
So generally the properties that we look at are commercial, which is really office warehousing kind of properties, where these are grade A constructions. You have long-term leases with grade A tenants.
00:02:08
Speaker
could be an MNC, could be a large Indian corporate. Generally these property values will be 20, 50, 100, 500 crore. And with 25 lakh, one can earn rental income, which is generally eight to 9%. And then along with appreciation, one can make 15 to 18% IRR. And obviously it's investment processes completely tech enabled. Okay.
Understanding REITs and Investment Options
00:02:34
Speaker
Um, there are multiple ways in which, uh, as an investor, I can put money into real estate. Like I could directly buy a property and, uh, rent it out myself and whatever, or I could invest in a REIT, which is a real estate investment trust. And the third is fractional ownership. These are the three broad approaches to, yeah, these are the broad ways to own properties. Yes. So just help me understand, uh, you know, you are, um,
00:03:02
Speaker
You are representing fractional ownership. How does it compare with the first two approaches where I directly buy versus I invest in a REIT and then third is fractionals.
00:03:15
Speaker
Yeah, sure. I'll give you a little bit of the pros and cons of each approach. And there's obviously, there's not like one is better than the other. There's always pros and cons to every way of investment. So firstly, in terms of directly buying a property, you know, generally with a ticket size of 25 odd lakh.
00:03:34
Speaker
you're not going to be able to own a commercial property. So predominantly, you'll be a residential property, right? And the issues with owning a residential property as an investment is one, your yields are only one to 2%. Your rental that you're going to get versus in commercial, it's eight to 9%. So that in itself is a large difference. Number two is obviously your tenant profile and residential. You're going to have to deal with individual families or individual people who are renting your property.
00:04:03
Speaker
And you're going to have to look after the property management of the property as well. So obviously with that, there are a lot of headaches that come with that. But yeah, the main difference obviously over and above just the property management headache and leasing headache is you're getting one to 2% versus eight to 9%. So that in itself is the largest difference.
00:04:27
Speaker
It does a fractional ownership in REIT. There, yes, the underlying asset is similar in the sense that in both cases, you're owning commercial properties, office properties. So in India right now, there are four REITs. Three REITs are in the office space and one REIT is in the retail or the mall space. For people who don't know what is a REIT, can you just do a REIT 101? Sure. What is a REIT?
Marketing, Distribution, and Investment Risks
00:04:52
Speaker
So REIT is basically a way to, you know, own a share in property, similar to fractional ownership. But the difference is REIT is basically like a mutual fund where you're owning a bunch of different properties across the country with a bunch of different tenants. And then it's listed on the stock exchange. So you can own one share in that specific REIT, which will give you access to owning multiple properties across the country with multiple tenants.
00:05:22
Speaker
Basically, a portfolio manager can list his portfolio of properties on the exchange as a REIT. The minimum ticket size to get into an asset size that has to be a REIT is 500 crore.
00:05:42
Speaker
But practically speaking, with the cost associated with operating and running a REIT, if you look at that series, generally they have market caps of 15,000, 20,000 crore, which means that you need to have a portfolio of that size.
00:05:57
Speaker
to really kickstart a REIT, which is why if you look at the four REITs existing today, it's either by the top-sized developers in the country, or either your Blackstone or Brookfields, which are global payments in the real estate space and have invested in a large way in India. So what's happened is these guys have owned properties, developed properties, and now for them, this is an exit option in a way as well.
00:06:23
Speaker
So effectively, those are kind of the 40. Yes. For an investor, is there a minimum investment size for REIT? In REIT, I forget the exact investment size, but it's in the tens of thousands of rupees. So it's relatively low. It's either 20 or 50,000, but around that range. So that's the access that someone gets when they are investing in a REIT.
00:06:50
Speaker
Yeah. So yeah, it's a relatively low ticket size compared to direct property ownership. And so obviously you get much wider access or you're able to target a much larger segment of people. Although what the REITs have
00:07:11
Speaker
To be honest, have not been able to do so well is while the idea of REIT is to encourage retail investor participation. And if you look at the market cap of the three office REITs is about 55,000 crore. Really the retail investor participation would only be about 10,000 crore.
00:07:34
Speaker
So, you know, predominantly it's been large institutional investors, whether it's foreign or Indian, that are, you know, looking to invest in these rent generating assets. Because the incentive of the people who are listing REITs has not really been to go after retail investors. For them, it's just getting an exit.
00:07:50
Speaker
gives them the best price. So yeah, while the ticket size is low, really the retail investor participation hasn't been seen that much in the Indian REITs. I'm talking about only the Indian REITs, obviously say REITs from the United States. I mean, there'll be hundreds of REITs and it's a much more established and deeper
Tax Implications: REITs vs Fractional Ownership
00:08:08
Speaker
market outside India. So that's a completely different ballgame altogether. Your participation low in REITs, I'm of the opinion that
00:08:20
Speaker
Money flows where there is returns. You don't need to do marketing. If there is like risk adjusted returns, money will flow naturally there. So if REITs were offering good risk adjusted returns, money would have flown there naturally. If money is not flowing there, then there must be something which is holding it back.
00:08:42
Speaker
I don't necessarily agree that, you know, as long as you have good risk, just in returns, money will flow there. There's obviously a little bit of marketing and distribution involved. And predominantly, and now it's changing, but historically, distribution in India has always been done by, you know, IFAs or wealth managers.
00:08:59
Speaker
So effectively, it's what they are pushing to their customers, number one. Number two, yes, there's a grain of fruit that the risk adjusted returns need to be the right number. And the nuance, though, is that the first read in India was only listed in April or March 2019.
00:09:17
Speaker
So track record is also only, you know, four and a half years old for someone to really make, you know, compared to other like, you know, when people say stock markets, you get 11 to 12% and they go back 20 to 30 years, you're able to have that history and comfort. So in the REITs, it's not been, I'm sure it will happen and the depth of the market will be established going forward.
00:09:40
Speaker
So in that sense, the market is still nascent. Okay, yeah, four years is too small to make an opinion. But what does a REIT give on an average, within this four-year track record? Is it like 15-16% equal to what you're offering in Fraction? I think the difference is that the REITs, where they've gone wrong is when they listed, they're listing their own assets.
00:10:09
Speaker
they would have tried to maximize value for themselves. So they have not left as much money on the table for investors as say in a fractional ownership where for us, it's not our assets that we are listing on the platform, we are getting third party assets.
00:10:26
Speaker
So that's the answer there. So it would be slightly lower in the case of REITs. And other ones is that REITs are listed. So the price of the exchange is also guided a lot by overall stock market and how it's performing.
00:10:42
Speaker
So traditionally, at least if you look at the US, again, in India, the history is only four and a half years. But if you look at the US, there is a good amount of coordination between stock market returns and REIT returns. So you're not really getting diversification benefits from the REIT. So yeah, in the REITs, there would be slightly lower than the 15-odd percent, what's happened in the last four and a half years.
00:11:10
Speaker
I have a more basic question about REITs. Is it not like a mutual fund, like a mutual fund listed net asset value? And that net asset value is the value of your holdings. So that's not the case with a REIT. They must be sharing a net asset value that all my properties together have this much value divided by number of shares gives this value because it's a fairly objective way to measure.
00:11:36
Speaker
Yeah, but ultimately it's listed, right? So the difference is that, suppose I'm owning a share in the REIT and you want to come in and buy it. Ultimately, whatever someone lists as a price, for me, if I'm happy with the price that I'm getting, it's a bid and ask, right? As it is in a stock market. Okay. It's not a redemptive. It's not a redemptive. No, it's not a redemptive. So when you are coming in, you will need to see two things, right? You will need to see that the yield
00:12:06
Speaker
from day one, you're getting it attractive as well as the potential appreciation. So yield would be very clear. You look at the yield that's happened in the last three months, you study if there's going to be any escalation, you would calculate your yield. And as of today, generally the yields on reach are about five to 6%. So lower than the age to 9% I mentioned, because a lot of the appreciation has been work by still. What does yield mean
Process of Fractional Ownership and Investor Engagement
00:12:31
Speaker
here?
00:12:33
Speaker
Yield is the rental. Effectively, it's a rental. Okay. Okay. Okay. And this rent is not given back to the REIT or investors. It just goes into the bank of wealth. Yeah. So it goes to the investors, right? The investors that are owning shares in the REIT. And REIT's managed because you have to distribute 90% of the income that they get. Okay. So it's a dividend income which you get if you own a REIT.
00:13:03
Speaker
Well, how it's structured. Effectively, it's like dividend, but from a tax perspective, it's a combination of dividend interest and amortization of loan payouts. And the CFO still reads today, they have various proportions as to how they are paying it out. But yeah, it's a monthly or quarterly payment. And what is the tax implication? Is it a tax-friendly investment?
00:13:26
Speaker
Again, it depends on the split between dividend interest and the principal repayment, each have their own tax treatments. And all three of them have different proportions or rather four, three of them are always have different proportions. Effectively, you know, if one studies it, one of them is more suited towards HNI, you know, retail investor than other is more suited towards institutional investor based because of, you know, the form in which you're getting it in.
00:13:54
Speaker
But if tax paid by the REIT, like they distribute money post-tax or it is pre-tax? Who pays the tax? Exactly what I'm saying. There are three different streams, right? They are distributing part of the 6% or 5% is distributed dividend. Part is interest and part is amortization of loan. So with dividend, it's taxable. If it's interest, it's not taxable because it's passed through. So it effectively depends on, and each three REITs have different proportions as to how they're distributing it.
00:14:25
Speaker
This is exactly the point, right, when we are looking at resources, fractional ownership. Just to explain this to someone and say each read is different. Then you look at the proportion that's coming through dividend. The proportion that's coming through this. Each separate year to calculate the tax incidents to finally calculate their next net tax.
00:14:45
Speaker
Right. So even though risks say theoretically risk adjusted returns might be good to even calculate what your returns are going to be. Finally, you really go into the detail. It's also the time taken to study the investment, right? And this makes it a little bit complicated while they're trying to simplify. This makes it a little bit more complicated. And that's exactly where fractional ownership comes in, where it makes it much more simplified and much more streamlined for the retail investor.
00:15:10
Speaker
Okay. So in a read, the tax calculation is the investor's headache. They have to figure out what is the tax. Yes. Okay. So not for definitely not for retail investors or not for casual retail investor. You need to be a slightly sophisticated investor. Yes. Yeah.
00:15:28
Speaker
Okay. Interesting. Interesting. Okay. So how does fractional ownership work? Like, you know, maybe you can give me a case study of one of your properties. Maybe give a case study of the very first one you did. How did you launch your very first property? Yeah. So, so just, just high level first. So read basket of assets, like a mutual fund, fractional ownership, it's like you can pick and choose which stock you want to invest in and you're owning a share in the property.
00:15:55
Speaker
So in terms of the first property we listed, that was a much smaller property than the sizes that we are listing now. It was about an eight crore property. It was in the eastern suburbs of Mumbai. It was an office unit within a building.
00:16:10
Speaker
Tenant was an Indian BPO, but we studied the balance sheet. Zero debt on the balance sheet. Revenue had tripled in the last three years. Profit had tripled. So we looked at the credit volumes of the tenant. They had a long lock-in. They had invested into the fit-outs of the property.
00:16:30
Speaker
in terms of how it works. So generally what we would do is we'd negotiate with a sender of the asset for a certain price. And then we'd list the asset on our platform. At which point, you know,
00:16:45
Speaker
investors come in either through our direct marketing channels onto our platform or through, we work with a lot of channel partners, whether it's wealth managers, IFAs, real estate brokers, and they understand the nuances of the property. It's all available in a streamlined way that you can see photos, you can see video work view, you can see the financial model.
00:17:07
Speaker
You can see the other tenants in the building, we give an education of how that building is, what are the features of that building, how that micro market is doing. We give someone insight into, you know, ultimately, what is your rent, and capital value isn't below the market range, and even below the market rent and capital value, so there's appreciation potential.
00:17:28
Speaker
You
Structure and Regulation of Fractional Ownership
00:17:29
Speaker
can study on the dashboard. You can look at the leave-in license agreement. If you want to study, you can look at the title report. We get a title report from a tier one law firm. So all of that. The report is proof of ownership.
00:17:44
Speaker
Title report is basically saying that exactly proof. So the current owner is the whole and sole owner of the property. Uh, and there's no, there's no third party claim, et cetera, that can come up later when I buy the property. So I'm buying the property from the rightful owner and there's no litigation. This, that, that someone might come up and say, no, no, I had a stake in this property. Uh, so effectively you want clarity, uh, that, you know, the person you're buying home owns it fully so that you are, you're paying the right person and he's selling it to you.
00:18:15
Speaker
It's a very important piece of owning any property because ultimately that jeopardizes the whole value of your property. There's some, you know, issue in the title. And in fact, just to give an example, we've given up and not gone ahead with properties. And we have one example so far where there was an issue in the title. So we return back all the investors their money.
00:18:41
Speaker
but built a lot of trust with the investors. So yeah, we do all of that and then ultimately the investors will become every asset is housed in a separate private limited entity and investors become shareholders and CCD holders in that private limited entity as per the amount that they've invested. What is CCD?
00:19:04
Speaker
CCD is a compulsory convertible debenture. It's effectively a debt instrument. The reason is structured like that. So for example, if it was a 50 crore property and you were investing 50 lakh in the property, your 50 lakh would be split into 5 lakh investing in equity and 45 lakh in the CCD or the debenture. The reason is structured like that is whatever rent comes into the private limited company is paid out to investors as interest in CCD.
00:19:34
Speaker
So in your hand, as an individual investor, it's interest income. And the reason we do it that way, as opposed to pure equity, is effectively because it's more tax efficient.
00:19:45
Speaker
Because whatever rent is coming in, in the company's books, it's an interest expense. So it's zero. And so there's just tax at your hands. If it was dividend, then there would be corporate or profit tax, you know, at the company level. And then there'd be dividend distribution tax at your end as well as the investor.
00:20:05
Speaker
When companies distribute profits, then there is double taxation, which happens. One is the company pays tax on it. And the second is the investors who receive the dividends also pay tax on it. Whereas if you're giving it back as interest, then it is a part of your expenditure in your P&L. So it reduces your profit. So you're saying this is typical, like 10% equity, 90% as debentures or debt.
00:20:35
Speaker
Generally, that's standard market practice, you know, whether it's in this fractional ownership model or, you know, funds that are owning properties, 1090 is kind of, you know, any 1090, 2080, generally is kind of market practice. Okay. Okay. Understood. Okay. So, so just one caveat, you know, or like one interesting thing, which is kind of revolutionary for the fractional ownership industry. Is this the structure we follow today?
00:21:03
Speaker
But SEBI has come up with a framework to regulate this. So we've been in touch with SEBI since 2022. They came up with a consultation paper in May of 23. In November, in their board meeting, they kind of, you know, said, okay, we're giving a go ahead. Then they're calling it MSM REIT, Medium's Fallen Micro REIT.
00:21:25
Speaker
And now we're waiting kindly for the final fine print to come. But we have some broad idea what it's going to look like. So now the structure is going to change. I mean, the structure becomes much more attractive towards investors. And I can talk about that, but it's a game changer for the industry.
00:21:46
Speaker
Okay. Interesting. Yeah. We'll, we'll come to MSM. I'll make a note of it. So yeah, coming back to the, so this gets listed on your platform. Each property that is listed is essentially a new legal entity, right? And that you would find a new set of investors and some, some part is debt, some part is equity would be invested in the legal entity. Okay. Okay. Okay. Understood. So, okay. You listed it and then what happened? The first eight crore property.
00:22:17
Speaker
So the first eight-color property, you know, actually the first one was, you know, we had just started, right? And it's a funny story. This speaks to, you know, when you start a business, how difficult or how hard it is, right? At that time, we had a team of four people, including myself, you know, one person in marketing, two people in sales and myself.
00:22:41
Speaker
And we listed that property and I wrote 1 to 30, it was kind of a different office, but similar. We wrote 1 to 30 on this thing because we needed approximately 30 investors of 25 lakhs to fill up the property. And I said, let's fill this up in the next 30 days.
00:22:59
Speaker
And by the end of 30 days, we had zero investors. So, you know, because at that point, you know, for someone to trust a new company, where, you know, I did have decent amount of educational pedigree, but still young, not that much degree here. That is how I want to trust someone.
00:23:28
Speaker
At that time, this was 2019. So I would have been 27. Yeah. So, you know, it's a completely new brand, not heard of it before.
00:23:42
Speaker
a lot of skepticism from people. They're like, good concept, good idea, but you know, when it's not, it's not like someone's investing 10,000, 20,000 rupees, someone's investing 25 lakh. So it's a large sum of money. So although people, and the other thing was also market education at that point, and even as of today, people didn't know in commercial properties, you get eight to 9%. You speak to someone and say, what do you get in real estate? One to 2%, you know.
00:24:12
Speaker
Because the access to commercial is never there. So sometimes if this is too good to be true also. Then there are questions about the structure. There are questions about how will my money come? Will you be capable to handle it? How do I know this is a good property? Obviously I don't have my rationale, but skepticism was there.
00:24:34
Speaker
Ultimately, it became a function of just speaking to as many people as possible. So in about six odd months, we did finally close the property. And then that property we held on for a year and a half, generally we look four to six years, but in a year and a half and being in the market, we got an offer for that property. And we exited for our investors at a 17 and a half percent direct. And those investors all reinvested, barring one in our next properties.
00:25:05
Speaker
Yeah, 17 and a half percent is a mix of appreciation on the price. Okay. Correct. Interesting. Okay. What gave you the courage as a 27 year old to go out and tell some property developer that I will buy this eight crore property from you? Essentially to a developer you're saying, I will buy it. And then you find investors who invest in you, right? Yeah. So what gave you the courage to do that as a 27 year old?
00:25:35
Speaker
No, sir. I was lucky in that standpoint, in the sense that the first property I listed was actually my father's property. So we had that base and that helpful. That's also how I got into this industry, into the commercial real estate space, which is why we also got slightly longer to fill up the property.
00:25:55
Speaker
So we had that, you know, ability. Although the third property or the fourth property we listed, you know, was a 45-hour property where, you know, we were listing the property and this was in COVID lockdown too. And, you know, there you have 45 days, 60 days to fill up the property.
00:26:23
Speaker
There at least we had that confidence and conviction because we had built up the base of investors. But even at that point, we were comfortable doing maybe a 15 to 20 kilo block. It's the velocity of sales.
00:26:35
Speaker
So, but ultimately you have to take that, the benefit of that property was an amazing property at an amazing price, right? ICICI bank is the tenant you're picking up at a, you know, COVID pricing, which was, you know, we picked it up just to give numbers. We picked up approximately 11,000 rupees per square feet. Two years later, there are transactions in the building at 16,000 rupees per square feet. So the courage is also knowing the market and knowing that if there's a good deal,
00:27:05
Speaker
you'll be able to send it. And it was a great deal, that one. So then it becomes a question of making sure it's the right property and analyzing enough properties, knowing how to analyze properties and then analyzing enough properties. And then we quit to put an offer to the sender and close again quickly because good properties don't stay in the market for long. All right. Interesting. What happened from first property to fourth, the 8 crore to 45 crore journey?
00:27:35
Speaker
You were four people in the first property. How did you build your go-to-market muscle? I'm guessing that is like a key strength of the business needs to be the ability to get clients in it. Absolutely. So in fact, we closed the first property towards the end of 2019, closed the second property in the beginning of 2020, and then COVID it.
00:28:05
Speaker
Right. So, 2020 over it. And that's when we focused on the properties that we had. And we're like, we have to make sure that we're getting rent on time for it. That was the primary thing.
00:28:22
Speaker
And I think we were able to do that very well, primarily because of three reasons. So during COVID, 100% collection and rent, 0% delay. And primarily, even three reasons, right? One is because we made sure that the tenants were good and credit worthy before entering. So one of the tenants had zero leverage. Number two is we had strong leave-in license agreements in place.
00:28:47
Speaker
Right. With good force majeure clauses. So we put in a lot of expertise to ensuring that. What is the term you use? Leave-in license. Leave-in license agreement. That's the, basically it's the rental agreement. How do you spell leave-in? L-E-A-V-E. Okay. Leave-in license. Leave-in license. Okay. Okay. Okay. Yeah. Tell me about this. What is this agreement?
00:29:13
Speaker
This is effectively the agreement between the landlord and the tenant. So those are all the terms and conditions, how long the tenant is locked in for. I mean, obviously the basics are there, rent, security, deposit, term of the agreement, lock-in, but other clauses also, right? What happens if the tenant defaults into the delay in rental, force majeure. So we had a very strong contract. And number three is we had the ability to
00:29:40
Speaker
because we use the market well, we have that ability to negotiate with the tenant from a good standing and also show them reason. So we show them reason that, see, I know your employees are not in the office, but all your furniture, fit-outs, servers are in the office. And let's not do this because if you look at your cost and all of these large companies that are occupying these, whether it's an IT company banking,
00:30:08
Speaker
Their real estate costs would be less than 5% of their manpower cost. Forget their revenue. Just like, why do you want to get in this headache? Because we have mandates from investors. So if we, if you delay and then we'll have to then take a certain route, which we don't want to take, you know, legal route, et cetera. So just, you know, let's be reasonable. We're going to be here for a long time. So we negotiated with that. And so we got a hundred percent collection in that.
00:30:32
Speaker
So that was our focus during the beginning of COVID. Nobody used force majeure. Force majeure was a term I think we all learned during COVID. Nobody used force majeure. No, they tried, but then it was a definition of the specific force majeure clause in each contract. And the clause that was in our contract
00:30:56
Speaker
Uh, was, was not to do if they're still using the office, right? Therefore, on a choice of the office. So in that sense, the office is still in use.
00:31:07
Speaker
They're saying if they're not able to use it, the way it was structured is more of the office itself is destroyed because of a fire, because of an earthquake. That's generally how force majeure closes. Or at least in our case, that's how force majeure closes. If the office itself is destroyed because of an earthquake or a fire, then force majeure would be applicable. The office is still there. It's because of some government law. I mean, government law is because of the pandemic.
00:31:33
Speaker
But effectively, the reason you're not able to use it is because of a government law. And on the flip side, there were companies that could use their office if they were having an essential service. Like say banks had a certain amount because bank was an essential service. So you could use the office. So it's always very technical, but that's where the force major clause became very important. And then the nuances of how that clause is drafted in each agreement.
00:32:03
Speaker
Force majeure basically says if such and such things happen, then you don't need to pay rent, something like that. Yeah, so then it depends. In some cases, they'll say you don't need to pay rent. In some cases, they'll say the agreement itself is terminated. So that depends on case by case, what prior the parties would have negotiated. But yeah, generally, it's either one of those two things.
00:32:23
Speaker
Okay, understood. So once COVID hit, you focused on collections and you managed to achieve 100% collection. And the sale also would have happened during COVID, right? The sale happened in 2021, around March 2021 of that first property. So as we did that, first we were slow for the first six, eight months, and then in October, we started expanding aggressively. So then we started building up the team, the sales team realized we need more sales people.
00:32:54
Speaker
And we realized we need more senior marketing talent. From the tech perspective, we are still working with the vendor. But we need marketing talent to be able to make sure we're running the right campaigns, whether it's Facebook, Google, content marketing. And from the sales, obviously, we need more sales people to either speak to more channel partners or brokers, or what's it called?
00:33:23
Speaker
tend to the marketing leads. And then we also decided, I mean, that was a little early on, but we also realized that we needed a pregnant in Bangalore in the South because this concept, you know, has been more established in Bangalore in the South.
00:33:38
Speaker
And, you know, even traditionally before the platforms like us came up, people have been historically investing in this co-ownership model in Bangalore in the South, much more than other markets in India. So we thought to tap that market as well. So we hired sales people there as well.
00:33:53
Speaker
So effectively, that was the journey until we launched that next property and say, it was in February 2021, we launched this 45 crore property, ICICI bank and the tenant in Andheri. And then that was the 60 days we had to close the property, which we pretty much did. But it was, the experience during lockdown in April was kind of surreal.
00:34:22
Speaker
It's pretty sad, but there was a scenario where someone had invested the funds and then he passed away.
00:34:28
Speaker
So then you're dealing with stuff like, you know, luckily the allotment hadn't done. So we were just refunding the money to his, you know, rightful heirs. But then we, we had to make sure that it was a rightful heirs, right? How do we know who it is that's for the wills or to follow the probate? So it was a, those are the kind of challenges that you run into. So it was a very surreal experience during COVID marketing this property.
00:34:56
Speaker
Okay. And so property three was 45 crores. There's a fault property. Okay. Okay. Yeah. Yeah. And what was the third one? And when did you do the third? You did two pre-COVID and the third one during COVID? And then third one was during, towards the end in December, December of 2020. Okay. Yeah.
00:35:21
Speaker
So how much have you, I mean, you know, the typical assets under management may not apply here because you raised and exited for one of the properties, but how much have you total raised from investors? Approximately 260 crore. Okay. And out of this 260 crore, the first one has been an exit. Any other exits or just that one?
00:35:48
Speaker
Just that one that we exited so far, but if you were looking at all the valuation of the properties, they're pretty much higher than the IRR that we expected. So they're all doing well. In that case, we got a very good offer. And the reason we got a very good offer is also a small property. So they are more universal buyers. Now we're waiting for three years to pass to get the long-term capital gain benefit.
00:36:14
Speaker
to start exiting these properties or start going into the market for at least offers for these properties. Yeah. Okay. So if you have capital gain after three years, then it's half the tax rate, right? 10% instead of 20%. No. So this is, this is, that probably for unlisted for, this is, I'm for listed, for unlisted, it's 20% after three years with the benefit of indexation. It was less than three years, it's short term capital gain, which would be equal to, you know, your, your slab rate, 30%.
00:36:44
Speaker
Okay. Okay. Okay. That's like regular income. Okay. Understood. Interesting. Okay. So how do you as a business make money? So we basically make a 1% yearly management fee, and then we make a carry at the time of exit. So we charge basically 15% over a 10% hurdle of IRR. That's how we make money.
00:37:13
Speaker
Okay. Understood. So if a property returns 20%, so that 20% 10% straighter we're given the remaining 10% or 15% of that, which is one and a half percent. So one and a half percent. Good. And so, so far you've seen carry only in that one transaction, uh, the eight year old, which got sold. Yes. Yeah. Yeah. Okay. How much did you earn in that?
00:37:41
Speaker
So as another 17 and a half percent property, at that point our carry structure was a different, but it would have been about a percent or so. Okay. Understood. And you've raised funds also, right? We've raised an angel round here. Okay. So what was the thesis you presented to the investor? Why did you decide to raise instead of just bootstrapping it?
00:38:08
Speaker
I think this is the kind of business that has a high operating leverage.
00:38:13
Speaker
Right? So what I mean by that is that you have a certain amount of, see, my main costs are just my team costs and my marketing costs. You need a very solid team, right? You need very good in sales, very good in marketing, very good in tech, and very good in real estate acquisitions, and very good in operations to make sure like, you know, the rentals are being dispersed. There's that managing so many private event entities.
00:38:39
Speaker
So you need a good, a very capable team to manage this, and then you need marketing to obviously, you know, get more investors. But the idea is that as your EUM scales, like say I'm at 260 now, I go to 1000. I don't need to forex my team size or to go from 1000 to 10,000. I don't need to 10X my team size. So my fixed costs will remain the same. But my revenue is going to move proportionately to my EUM.
00:39:09
Speaker
The question becomes that, at what point is your fixed cost and your revenue break-even? And that happens when we are about 1000 crore. So, we'll only require funds to reach 1000 crore. After that, the business that we've done and the further business that we're doing on a monthly basis, revenues will fund the cost.
00:39:37
Speaker
So that's kind of the reason of raising funds. We can't be bootstrapped if you want to provide a certain level of service and quality to the investors. At the same time, it's not like an Ola, Uber model where you need to spend unlimited amounts on marketing or a customer acquisition. It's not a burn model in that sense.
00:40:00
Speaker
So we don't have boatloads of capital either. So that's kind of the way we look at things. Okay. Okay. By when do you think you'll hit a thousand crores AUM? We have to reach it by the end of this year.
00:40:15
Speaker
You're saying you'll do three times what you've done till date? Absolutely. You've done about 250, so you'll do three times that, then this year. 100%. Yes, yes. There's no question, right? I mean, even if you look at, I don't know your parallels, but if I'm not mistaken, I think DMART, I don't remember the numbers, I don't know what they're saying, but DMART I think took
00:40:40
Speaker
three years or five years to get its first three stores or four stores, and then they grew exponentially. You have to get your business model right before growing aggressively. So now we've gotten everything right. We know what kind of properties investors want. We have a good enough team that's now sourcing enough assets to make the right proposal and offer and get the right properties across the country.
00:41:04
Speaker
We've built up our sales team to a level that can do that velocity of business. We have sales training in place so that new people who come in know what to say to investors. We have our CRM in place so that we can track how efficiently and quickly we are sending. We've tweaked our marketing campaigns so that we know that we are marketing and getting customer acquisition at a certain level.
00:41:34
Speaker
It's very easy to burn marketing and spend more than the investor's going to give you. We didn't want to do that. We wanted to have a marketing campaign tweet. So now all of that is just a question of, instead of spending X on marketing, spending 5x on marketing and just getting 5x the number of investors, but the cost is still profitable. Our website is completely built up with all the features that investors want.
00:41:59
Speaker
So, and the team is in place, right? Last year we focused on bringing up and getting a lot of senior people onto our team to take charge of these functional areas. So we have a CTO on board. CTO is, you know, IIT Bombay dropout because he started something, worked at companies like FarmEasy, Topper.
00:42:20
Speaker
We have a CFO who is heading global sales for Nomura. He's my co-founder now as well. So he's a chartered accountant. I'm about 30 years in banking. We have a head of sales who's worked at companies like Citi, HSBC and Sandals on the real estate side. So we have the senior team now in place to accelerate and reach those targets.
00:42:43
Speaker
So I guess the difference would be, you know, in a traditional startup model, one would tweak everything, you know, and then raise their series A or series B to accelerate growth. We've tweaked everything and then gotten senior people on board to accelerate growth. Because for us, it's human capital, not monetary capital. Right. Very interesting.
00:43:08
Speaker
Do you also need to do property management or is that an outsourced function? In terms of property management, there are two parts to property management. One is vicinity management and one is lease management.
00:43:21
Speaker
So facility management would be managing the elevators, managing the housekeeping staff, the security systems. So right now we've taken office units within buildings. So that's managed by the society as an agency. Even when we take full buildings, we'll just outsource that and we'll just oversee it. So that's whenever we're really going to get into facility management.
00:43:46
Speaker
Lease management is definitely a core competency of ours and it's very important. That's why we had 100% collection and rent during COVID. If and when the tenant is releasing the property, negotiating with the tenant, you know, that in fact is a differentiator between us and other players. And so we definitely do do that. And it's a very important factor to do because ultimately what determines your return is that contract between your tenant and the property. That's what determines your returns.
00:44:16
Speaker
Lease management is essentially a legal function like be a team of lawyers who do that.
00:44:22
Speaker
No, it's not just a legal function. It's a real estate function in a way, specific real estate function, right? So lease management involves obviously there's operation, which is connection and rental, invoicing, which is very basic. If and when the rent is delayed for whatever reason, escalating it to the right channels, talking to the right person, understanding why it's delayed and sorting that issue out. So that's a very kind of, it's not legal, it's a commercial angle to it.
00:44:49
Speaker
If and when the tenant is leaving, you know, first understanding why they are leaving, trying to retain them at a price that works for you. It's not at a price that works for you. Understanding the market, you know, understanding that, okay, I will be able to fetch X rupees rental in this property from a good tenant within say three months.
00:45:11
Speaker
So having that connect with HR heads, admin heads, or a lot of these MNCs, having connects with your brokers, your JLLs, Cushmans, who are predominantly paying this office-broking market. Then after that, negotiating with that tenant, both in terms of pricing and in terms of agreementation, all that, the legal function is one part of it. There is a good amount of legal involvement, but it's what you do with that legal effectively and that market knowledge.
00:45:39
Speaker
That's where the management comes in. Is it more important for you to have a marketing muscle, like acquiring customers, or to have property acquisition muscle, like acquiring good properties?
00:45:57
Speaker
So I would say from day zero to where we are today, acquiring customers was important. But I think going forward, you know, as the market is maturing, people are learning about it, people are getting interested in this, then it's going to become property acquisition and property management. You know, as the industry sales, you need to have good products to give to your investors and make them good returns. Which is why we, you know, if you compare that AUM to a couple of other players, it is lower, but because we've been very selective in the kind of property we got given to our platform.
00:46:26
Speaker
Because like you said earlier in the conversation, ultimately the differentiator between the players will not be your AUM, will be your what returns of your priority or investors. That's what ultimately people will look at. Okay. Interesting. How do you build property acquisition muscle? Is it just through connections with brokers?
00:46:49
Speaker
connections with brokers, connections with developers who are selling properties. So that's number one. Once you have the connection, also it's responding very quickly to the offer because what people don't like is they send you an offer and you don't say anything. Either responding yes, no, if no, what are the reasons?
00:47:13
Speaker
This is constant communication. Once you respond quickly, if it's a no, there might actually be a solution, you know, and then having a very solution-oriented approach. Like, for example, you know, we gave a very basic example. We gave a no because there was no lock-in. You know, we want a lock-in from the tenant.
00:47:33
Speaker
The guy, the center was like, okay, let me negotiate with the tenant. Let me figure out if I can get a longer lock-in. We did that and then we took the property onto the table, right? So we constant connect, basically executing on the basics very well, having an organization where you can execute on the basics very well. But that in itself, getting the basics right is something that is not that easy and not a lot of companies do that very well.
00:47:58
Speaker
So having that execution capability to be on top of it. Then it's also understanding the market in terms of what is the right price to pay for the property. So we look at each and every sale transaction and each and every leave-in license transaction that happened in the recent past to ensure that we are paying below market capital value and rental. Looking at other clauses of the leave-in license agreement, having that historical experience.
00:48:25
Speaker
So what can go wrong? So what clauses in the leave-in? Because now we are not signing a new agreement with the 10th. You're just taking the agreement that was already signed by the prior owner over, right? So you can't really change too many terms. So understanding that what is a must-have and a non-Yoshua and what you can live with, especially as you scale, as you want to get more properties,
00:48:48
Speaker
One, we have to increase our sourcing. So we are sourcing about 2,000 to 3,000 crore properties per month.
00:48:59
Speaker
Yes. Yeah. How do you filter down? How do you negotiate for so many properties? You know, those are the facets that come into play. And then there's also the, while the lawyers do play a role in the title report, there's other parts of due diligence as well, right? There's your technical due diligence, making sure all the approvals are in place, making the building is up to standard. There's the commercial due diligence of the tenant. Does the tenant have the credit worthiness to the pay to study the balance sheet of the tenant?
00:49:28
Speaker
Sometimes tenants might have a good brand name, but still not be credit worthy. So those kinds of assets come into play as well in terms of property acquisition.
00:49:38
Speaker
Okay. Interesting. So who looks after a property acquisition? Like you have a CTO who looks at tech, you have a CFO who looks at compliance, finance, accounts. Yeah. Who does? So we have someone senior on the real estate side who's come from, you know, your IPC world, Kushman, your Kushman CBRE, but that's where I myself personally get involved.
00:50:00
Speaker
CTO, it can be a conversation, you know, a few times a week. I mean, we speak more, but just like I'm part of the negotiation meetings with the seller of the asset. I guess like, I mean, that's my... Yeah, exactly. It's the most important function. Yeah, everything else you can tweak and improve. This one wants to list a property, then, you know, your investor's hard-earned money is going there. So I would say that's why I'm personally involved.
00:50:29
Speaker
Okay. So you are doing HNI sales, right? Somebody investing 25 lakhs is essentially an HNI. Can you share how to do HNI sales? How did you crack it? What works? What are your acquisition channels? You also mentioned you have other channels besides digital. So just help me understand how you crack HNI sales.
00:50:56
Speaker
I think there's two parts to it. One is the ecosystem you build and other is the actual sales, this thing.
00:51:07
Speaker
which is why I think initially was so challenging because I could be as good as I wanted in sales. If the ecosystem is not there, you're not going to be able to sell. Because I mean, the brand of the company is not there. You're not going to be able to sell. You're saying the proposition needs to be compelling before you... No, not the proposition. No, not the proposition. The proposition, I mean, I'm not even mentioning that that has to be compelling anyway. That goes without saying. It's the trust in the brand. When I started first,
00:51:37
Speaker
Like I said, no one knew about us. Who are you? Why do I give you 25 lakh? So now, and what we did in the journey, right? We started working with the best partners, right? So, work with Deloitte and PwC industry, structuring, shardle in terms of legal, jailer in terms of valuation. Once we started closing properties, we started getting customer testimonials, you know, putting them on the website or that time, even connecting investors to existing customers.
00:52:06
Speaker
busy in some way or the other creating trust that you are a credible player.
00:52:13
Speaker
So even before the person talks to you, if they Google you and do a little bit of research, they have said that you're not a fly-by-night operator. I'm talking about the zero-to-one journey. You're not just someone who's there to make a quick buck, and there are enough stories like that in the country. In fact, there are so many frauds in the country as well. So who do you trust? There are two levels of trust. One is integrity trust.
00:52:40
Speaker
Right? He's the guy, he's the guy who's a thief. And number two is the capability trust. Is the guy capable to deliver on what he's saying? And you know, first obviously solve the first one and then solve the capability trust.
00:52:53
Speaker
So, which is why the first part of the journey is extremely difficult, right? Six months to close the first property. Now we have 260 crore in EUM. So, being part of industry groups, just being out there speaking to people creates that comfort.
00:53:10
Speaker
now showcasing where our properties are at, mark to market valuation, how our investors have performed. So all that obviously is part of the brand and ecosystem creation. Even showing the walking to investors in terms of what kind of analysis we do in terms of property acquisition, really be completely transparent that this is how we analyze properties. This is the number of properties we looked at. This is why we rejected these properties and we took this property.
00:53:35
Speaker
This is to build the capability trust by showing your process of how you do it. Yeah, correct. Exactly. So that helps build the brand. Then in terms of actual sales to an investor, right? And I see this coming from the part that the first, I don't know, 50 customers, I've personally sold, right? Because that's what you do as a founder.
00:53:56
Speaker
And there it's not too different from what people would say, but at least from my experience is you keep your first pitch short. Sometimes people tend to drag on. So five to seven minutes, sell your proposition. In this case, we're also sending the property. So sell in the first five to seven minutes and then just listen. Just listen and answer questions and also don't hard sell.
00:54:26
Speaker
Because someone would always be like, why are you hard selling? And sometimes it's relationship building. We've had investors, and my salesperson himself has told me that investor that he's spoken to one of our earlier salesperson. He spoke to two years ago and now he's investing, right? So just some people will be ready to invest initially, some people will not. So your skill set is not to hard sell. Your skill set is to do your role of selling.
00:54:53
Speaker
And then if you're not getting that sale, then you have to expand and speak to more people. You don't hard sell the same person. Instead of talking to 10 people in a day, you talk to 50 people in a day. It'll just increase the size of the funnel. That would be, you know, that's what my learning is. Because I think hard sell people get pushed back. And you also tend to make promises that you're making the promise to sell, not the promise that you can actually keep.
00:55:21
Speaker
So we never want to over-promise. Very interesting. And how do you increase the funnel? We increase the funnel through two ways, primarily. Now three ways initially is two ways. One is you spend more on digital marketing and you get more leads. And then you try and increase, reduce your cost per lead.
00:55:41
Speaker
through various means. That's one way to increase the funnel. Other is, which is a more cost-effective way, is to call ISAs and there are lists of ISAs available for, you know, very low cost. I mean, even someone's starting out. And IFP is an independent financial advisor. Yeah. So either you use your network. Yeah, or like somebody who's a mutual fund distributor or any such kind.
00:56:10
Speaker
For us, IFAs are real estate brokers also. So either you use your network, but if you're starting out on your own, you just have to cold call. And there in a way, it's fine to cold call, but it's also business, right? For them, it's new business. And a lot of these, a lot of IFAs, we're like, no, it doesn't make sense for me. And the IFAs who didn't make sense for two years ago, who are now distributing for us, right? As a scale as a build.
00:56:35
Speaker
So it's just, you know, it's not rocket science. But I think where people lag behind is sometimes people want the quick and easy solution and not willing to put in the hard work required, right? I mean, if someone makes 50 IFA calls a day and someone has 100, naturally the person who's making 100 and pitch being the same, actually the person going to be 100 is going to yield more results.
00:57:01
Speaker
What is cheaper for you? Acquisition through IFA or acquisition through digital? It's kind of the same, right? Because acquisition through IFA is ultimately due to calling the IFA, meeting the IFA is free. In fact, it is just your time. But ultimately, when the IFA gets the customer, then I have to pay a fee to the IFA.
00:57:23
Speaker
You pay a fixed amount or a commission on amount? No, it's a commission. A few basis points. No, it's more than January. January is 2-3%.
00:57:38
Speaker
How do you afford to, because you're charging 1% annually on what an investor is putting in. So you're paying out of for. No, so, so 1% we charge is our, our, our profit, but we also, there's a price upfront, which is the acquisition fee of 3% from the investor that we pass on to our IFA. Okay. Okay. Okay. So there's a entry, entry load. There's an entry. Yeah. But that's not, as in we don't make that, we pass that on. Yeah. Okay. Okay. Okay.
00:58:08
Speaker
So both are same, like in both cases it's about 2-3% of the amount invested that your cost of acquisition. And will this go down at scale?
00:58:21
Speaker
The IFA probably will not, because that is the human being, he wants his commission. But yes. The difference, no, sorry, I will say that even with the human being wanting his commission, as the product gets more established in the market, the sales become easier, the time taken to sell becomes easier, right? So if the guy took say one hour to sell, and now he's taking 30 minutes to sell, here, I'm just talking very theoretically, even the same time he can sell two customers. Yeah. He's measuring his time.
00:58:50
Speaker
per sale, right? So theoretically, it could go down, whether it will or not, we'll see, I think it will though. And the other thing is the ticket size also is coming down, right, with the new SEBI regulation. Okay, so let's talk about the new SEBI regulation, the MSM REIT. Tell me why is that about? How will it change the structure?
00:59:14
Speaker
So like I mentioned, this has semi-staken note of this industry growing. And they've taken a very positive view. We met them in 2000, like last year, and they wanted to formalize it. So it's a different structure. In the sense, it's a trust structure. And you as an investor will own units of the trust, but different units will represent different STVs. So you can pick and choose which asset you want to invest in. It's going to be listed.
00:59:43
Speaker
So the tradeability of your share becomes even easier. The minimum ticket size is 10 lakh. And what's managed is you can take properties between 25 crore to 500 crore for each STV that you're listing. There are obviously other nuances. They have certain experience criteria for the manager, manager being a platform like us, certain network criteria, a certain amount that one must invest in the property as the manager.
01:00:13
Speaker
So all those parameters also, there are certain disclosure requirements. There's a half-year evaluation requirement. And given that it's regulated by semi, we believe a lot more people will get comfort in investing in this asset class.
01:00:30
Speaker
But this would increase your cost of doing business. It sounds like it, purely because of compliance costs increasing. And you would probably need to raise more funds if there's a network criteria. See, net worth we need to raise, and that's just to keep a network. But in terms of other ones, cost of business, we're pretty much doing what they are mandating anyway. Instead of following one structure, we're following another structure.
01:00:52
Speaker
When he is getting valuation reports, when he is disclosing more than what Sevi has mandated, he has a net worth of comment. For that, we need to raise points. Okay. Interesting. Amazing. Cool. Any words of advice to young aspiring founders on how to scale and build?
01:01:15
Speaker
I think I'm maybe repeating myself a little bit, but I think grit and perseverance is underrated. When I was naive and I thought that I'd fill in the property in 15 days.
01:01:31
Speaker
took me, you know, six or months to fill in the property. If I thought from a very theoretical perspective, I would have thought what's going to change, right? What I'm doing the first 30 days, why does it change the next 30 days? And then you just quit. But sometimes you just have to have faith, faith in yourself, faith in the idea, and then keep moving forward.