Looking Beyond SIPs: Why HNIs Are Shifting Their Wealth To Commercial Real Estate

By Sher Singh Rathore

India has been experiencing remarkable growth in the figure of High-Net-Worth Individuals (HNIs). This growth of High-Net-Worth individuals reflects a shifting investment environment wherein HNIs are diversifying their portfolios to cover a combination of traditional and alternative investments. Since the investors require high returns, security, and capital appreciation, they are looking towards new asset classes and sectors that present exciting opportunities, like changing from Systematic Investment Plans (SIPs) of mutual funds towards investment in commercial real estate. Though SIPs have remained a top choice for long-term growth on account of being relatively less risky and easily available, the commercial real estate sector is now a more profitable and resilient alternative in today’s fluctuating economic situation.

The Rise of SIPs in HNI Portfolios

SIPs have been a favourite investment option for individuals who wish for wealth in the long term. Investing a fixed amount of money at frequent intervals in mutual funds, investors can benefit from compounding and regular investment plans, and SIPs are thus an ideal investment for those with a moderate risk profile. This is especially suitable for HNIs, who generally have a diversified portfolio and want stable returns over the long term.

Equity and debt mutual funds have yielded reasonable returns over the years, particularly in a booming economy. This has made SIPs a preferred choice among HNIs. They gave exposure to the financial markets at relatively low risk, particularly in the context of India’s booming middle-class economy, which has consistently resulted in a gradual increase in market capitalisation. However, with the changing financial scenario, a number of factors have led HNIs to re-evaluate the advantages of SIPs.

The Shift to Commercial Real Estate

Although SIPs are advantageous, commercial real estate is rapidly emerging as a viable alternative for HNIs in pursuit of stable growth with higher possible returns. A number of factors account for the shift:

• Increased Return on Investment

Over the past few years, returns on commercial property surpassed those of SIPs and other financial products. Although the stock market may be volatile, the commercial real estate segment has remained resilient. A large number of HNIs are attracted by the higher rental yields, which can be 6 per cent to 10 per cent per annum, as compared to the average performance from mutual funds which is relatively low, particularly during economic downturns.

In addition, commercial real estate value grows with time, adding more capital appreciation, compared to SIPs that mainly bring in returns through dividends and interest.

Another factor for which HNIs are opting for commercial real estate is the bouquet of tax benefits of owning property. In most places, owners of property can deduct mortgage interest, property taxes, and depreciation. These perks turn commercial real estate into not only a prudent investment option but also a tax-effective one.

For HNIs who want to maximise their wealth management, the tax benefits derived from commercial real estate are substantial, and hence it is an intelligent financial choice compared to SIPs that do not provide such benefits.

The Indian commercial real estate industry has been witnessing a drastic change. While the rise in e-commerce has generated humongous demand for warehouses and logistics space, growth in the corporate sector and urbanisation have fuelled demand for office space in top-tier metropolitan cities. These growth drivers have generated high-margin opportunities for commercial real estate investors.

Second, the emphasis placed by the government on building infrastructure in the form of smart cities, highways, and transit terminals has additionally promoted commercial property space. Consequently, HNIs are planning to cash in on this chance through the purchase of class-in-commingling business premises.

• Stable and Tangible Returns

While stock markets are often subject to volatility or the comparatively lower returns of fixed-income securities, commercial real estate presents more stable, long-term returns. Leased properties to corporations or businesses tend to generate a stable stream of income through rental fees. Moreover, the value of commercial properties increases over the years, giving investors a capital gain.

For HNIs, such predictability is a big draw compared to the volatility in mutual fund markets. Real estate investments are viewed as protection from market fluctuation, and therefore it is a more desirable option for those who seek stability.

With the evolving nature of investment, it is no surprise that more and more HNIs are switching over from SIPs to commercial real estate. The attraction is the stability, better returns, inflation cover, and diversification possibilities that real estate brings. Although SIPs remain a valuable tool for wealth generation, commercial property has proved a more attractive option for long-term stable growth-oriented investors.

For HNIs seeking to optimise their wealth and lock in their financial future, commercial real estate is a prized choice. With the commercial real estate sector in India expanding, HNIs are increasingly recognising its potential to deliver not only security, but also high returns, and thus a key component of a diversified investment strategy.

(The author is the founder of Bric-X)

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