How Elevation Capital-backed proptech startup Strata is changing the commercial real-estate investment game
Real estate investment, particularly commercial real estate (CRE), has always been considered a game of big players. With passive income generation and long-term capital growth, it offers portfolio diversification and 3X superior yield compared to residential investments. However, the huge ticket size restricts the sector to institutional investors and HNIs.
Sudarshan Lodha, an experienced legal counsel in the real estate industry, and Priyanka Rathore, a real-estate and financial analyst, aim to change the game here with their proptech platform.
Launched in May 2019, Strata is built to create new investment opportunities in the premium commercial property space for aspirational middle-class Indians.
“Every year 84 percent (approximately $22 billion) of retail investments in real estate end up in residential; of these, more than 42 percent (approximately $10 billion) were for investments and 58 percent were for end-use. Strata aims to convert these retail investors to CRE by addressing the hurdles and giving investors a much better ROI over their investments by fractionalising CRE,” Sudarshan said.
For real estate neophytes, fractional ownership allows customers to own a fraction of Grade-A real-estate assets and benefit from the share of income, and any appreciation in the value of the asset.
The journey so far
Sudarshan hails from an entrepreneurial family that has been into financing and financing products for decades now. He is also an experienced legal counsel in the real estate industry, which gives him a clear idea about the big opportunity at the intersection of commercial real estate and finance.
He met his co-founder, Priyanka, through a common friend. “She was working as an analyst with WeWork then and was a bit reluctant about the idea. However, she left when WeWork was coming up with an IPO and joined me,” Sudarshan reminisced.
In March 2020, Strata raised $1.5 million funding in a seed round led by SAIF Partners (now Elevation Capital) and Mayfield India. With 10,000+ registered users, the startup is operational in Chennai, Bengaluru, and Mumbai.
In less than two years, Strata has funded multiple assets amounting to an AUM of Rs 270 crore. The company is supported 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 time, the startup executed deals worth Rs 140 crore only in warehousing. Strata raised funds for a consortium of three Grade-A warehousing asset opportunities. Strata Avigna Warehousing I & II situated in Hosur received 100 percent commitment from investors within just 42 days of its launch, while the pharma warehousing asset in Bengaluru was closed within just seven days.
“Ten percent of our investor base comprises NRIs. Our investor base is otherwise diversified across HNIs, family offices, top management from Fortune 500 companies, and retail and institutional investors among others,” he said.
Channelising opportunities and fighting the gaps
Sudarshan said assets such as warehousing, logistics, and data centres, which could never be considered as an investment opportunity despite offering excellent returns in the range of 8-14 percent, are now available to retail investors.
Lack of adequate data, information gaps, and lack of transparency has long plagued the real estate industry. “We at Strata are looking to bridge all these gaps under one roof utilising our data analytic capabilities,” he added.
Investment in CRE is not just restricted to choosing the right asset, but involves multiple factors such as purchase price, maintenance costs, potential repairs, holding costs etc. Leases and rental agreements need to be structured in a way that attracts tenants, provides flexibility, reduces vacancies, and limits liability exposure.
At Strata, all administrative tasks related to tenant and asset management are completely executed by the team. Management of records, constant communication with tenants, mediating on disputes, if any, among others carry huge responsibility in managing a property that is solely taken care of by Strata.
The company also offers access to detailed reporting and fair pricing declared upfront.
“Our investors get ready access to ‘Investor Dashboard’ that tracks their investments and earnings in real time. It also gives access to live commercial real estate data to decide on future investments and better understanding of CRE scenario,” he added.
How does it work?
Finding the right commercial property to invest in takes time, resources, and ample expertise.
Sudarshan said their team goes through a stringent process of property screening using data analytics, due diligence, and creating Special Purpose Vehicles (SPVs) to ensure the least involvement of Strata in the management or decision making of the SPVs.
Through private placement, each investor is allotted unlisted securities in form of convertible debentures, making them the shareholders of the SPV, and in turn fractional owners of the pre-leased commercial asset.
Once the investment is completed, investors are basically the owners of the property and have all decision-making rights over the property as well as the SPV. Strata undertakes accounting, reporting, compliances, and asset management services for the SPVs.
The convertible debentures will have a coupon rate proportionate to the rentals received on the asset. The rentals earned from the property are paid out by the SPV as interest on debentures to the investors. The same will be dematerialised and shared with investors in DEMAT account or a physical copy of the securities will be shared with investors and originals shall be maintained by its 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 via its dedicated secondary window.
Strata levies two types of charges. One is the one-time asset acquisition charge that ranges between 1-3 percent. For the comprehensive value-added services across the life cycle of the asset, it charges an annual maintenance fee (one percent of total investment).
“We also charge a performance fee, which is only applicable if the capital appreciation made by an investor on liquidation of their holding goes beyond a pre-fixed hurdle rate declared upfront,” Sudarshan said.
Competition and the road ahead
Of late, the CRE segment has seen players like hBits, DEFINITE, and Fracsn, who are making a mark in the fractional real-estate domain. With the ongoing pandemic not likely to end anytime soon, it is expected that more players will join the bandwagon to tap the demand for commercial properties.
However, Sudarshan said Strata’s tech-enabled approach and exclusive partnership with a market leader such as Propstack enables them to offer their investors the best-in-class asset opportunities.
“This gives us an industry advantage, standing apart from any other player eyeing the same sector,” he added.
Sudarshan shared some key trends observed based on Strata’s data, which will lead growth in the CRE investment. These are:
- With the fractional CRE model, investor base has expanded by almost 195X, which means that this cohort now accounts for approximately 1.5 million investors in India alone.
- This model offers a rental yield ranging from 9-12 percent.
- Increasing investor confidence will pave way for growth.
“The first asset launched by Strata in May 2020 worth Rs 54 crore in Tamil Nadu took 45 days to be funded completely. However, the latest asset worth Rs 33 crore in Mumbai in March 2021 took just 48 hours to be funded completely,” he added.
Going ahead, Strata aims to raise assets worth Rs 600 crore by the end of June 2021. The team aims to expand its footprint across the key metro markets of Mumbai, besides foraying into Delhi and Pune.
The proptech startup is eyeing a host of asset classes such as industrial assets, office spaces, warehouses, data centres, among others. “We will also be open to sale and leasing back kind of deals.”