About Strata

Strata is a tech-enabled real estate investment platform that allows investors to own and
sell fractions of pre- leased, Grade-A commercial properties such as office spaces,
warehouses, etc. Strata is backed by institutional investors like Kotak Investment Advisors,
Gruhas Proptech, Sabre Investments Elevation Capital, Mayfield and PropStack.

By fractionalizing Commercial Real Estate (CRE) and offering it on an easy-to-use online

platform, Strata aims to democratise CRE, making it accessible for a much larger investor
base. With its data driven asset selection, a single window platform to invest in assets across
the country Strata boasts of brings in transparency, and ease of liquidity to CRE investments.

Strata, since its inception, has been continuously striving towards creating a strong new
asset class of fractional ownership in India, thus democratising the high-end, limited access
CRE investment. Due to these efforts, Strata has successfully proven to win the confidence
of over one lakh users and 3000+ active investors. With approximately 25% of the NRI
investor base, Strata is helping encourage foreign investment in Indian real estate. Further,
majority of its investors, almost 45%, comprise CXOs and senior executives of large
organizations and around 20% of its investor are NRIs. The average age of investors in Strata
is 38-39 years, and consists of investors who have bought their own house and are looking
at more real estate exposure.

STRATA is aiming for assets under management of Rs 2,000 crore by the end of 2023-24,
aligning with forthcoming regulatory changes in the fractional ownership sector. “In its
efforts to encourage retail investment in Grade A, state of the art commercial properties in
India, Strata has launched multiple premium assets across Bengaluru, Chennai, Hosur,
Jaipur, Hyderabad, Pune, etc

Business Model

Traditionally, investing in real estate requires capital ranging from at least a few lakhs to a
few crores. But now, platforms like Strata have made it possible for retail investors to own
commercial real estate in smaller proportions. The business model starts with the fractional
ownership platform identifying an investable Grade A property like a commercial building or
a warehouse. The identified properties mostly have existing tenants locked on a long-term
contract, resulting in cash flow visibility. Now, since the price of owning such a property
would cost a few crores, this platform invites investors to pool money to finance the
acquisition of the asset. The minimum commitment for investors starts at Rs 25 lakh. After
pooling money from multiple investors, the platform creates a special purpose vehicle (SPV)
to acquire the property. And the investor becomes a shareholder in this company.

STRATA generally charge an annual asset management fee of about 1% and also take in a
share of the profits over a particular hurdle rate of 10%

From an investor’s perspective, like any real estate, the owner receives a monthly rental
income with built-in rent escalations. Additionally, the investor also benefits from these
properties’ price appreciation over the years.

Financial Analysis

 So, the fractional ownership promise to offer rental yields of 8-9%, which is higher
than traditional real estate’s 2-6% yields. However, if you deduct management fee,
operational expenses, TDS, now you are left with rental yield per month that is
roughly 6-7% per annum still better than residential yields of 2%-4%
 The deals at STRATA seem to promise IRR of 12-15% over a 5-year period. However
these returns are pre-tax, and are not inclusive of operational expenses. After
considering operational expenses, post tax (TDS etc.) these returns come down in
the range of 10%-11%. . These returns will further be affected if the capital gains tax
is introduced in the models which in STRATA models are assumed to be zero.
 It is also noted that with in the financial models of STRATA, that exit multiples also
included the rental payments but not only the capital appreciation. So as invested in
one of the properties the exit multiple is shown as 1.6x but when only the capital
appreciation is taken and likewise comparison is done, the exit multiple would be
1.2x indicating a substantial difference.
 For calculating the management fees, dubious mechanism has been used which
increased the share in profits to 4times the actual amount. If the proper discounting
cash-flows methodology could be used, the share in profits amount could be well
more rationalized and won’t hit the returns
 The Target IRR of 10% is used, which included rentals, interests etc. and the land
appreciation. However the appreciation of the property is considered at 5% which do
not cross the hurdle rate of 10%, which also raises questions on why management
fees is to be paid in this case.

As I do not have the access to annual financial statements of STRATA, I cannot make
any commentary on them.
Part-2- How Strata model can be used for 2gethr.

Let us first understand what exactly is Fractional ownership?

Fractional Ownership As A Strategic Approach

1. India's real estate market is known for its substantial variations in property prices,
especially in major cities. High-value properties in prime locations are often
financially out of reach for individual investors. Fractional ownership makes these
properties accessible by allowing investors to purchase a share of them.
2. Fractional ownership offers an opportunity for investors to diversify their real estate
portfolio without having to make a substantial financial commitment. This is
particularly appealing in a market as varied as India, where property prices can differ
significantly from one location to another.
3. Fractional ownership arrangements typically include professional property
management. This means investors can enjoy the benefits of property ownership
without being burdened with day-to-day management responsibilities.
4. Sharing the financial burden with co-owners spreads the risk associated with
property investment. It minimizes the exposure to market fluctuations and can
provide more financial stability.
5. Fractional ownership of commercial properties can emerge as an attractive option
for investors seeking both security and favourable returns which enables investors to
purchase a small portion of a real estate asset.
With yields ranging from 8% to 12% and the Internal Rate of Return (IRR) varying
between 13% to 17%, incorporating higher rental yields and significant capital
appreciation and rent escalation clauses, fractional ownership presents a compelling
investment opportunity. Forward-thinking investors can take advantage of this
strategic opportunity to broaden their portfolios by accessing high-potential
commercial properties with relatively affordable ticket sizes.
6. Typically, fractional property investment platforms exclusively look for commercial
properties, residential land, holiday homes and value investment in real-estate
guaranteeing good returns. Rigorous due diligence processes, including assessments
of builder reputation, location of asset, and asset quality done by these platforms,
bolster the safety of value investments. Moreover, partnerships with top developers
and local brokers facilitate access to premier Grade A assets across major cities,
further enhancing investment appeal
 Challenges Associated with Fractional Ownership
1. Tenant defaults or users vacating during the lease can impact investors' rental yields.
Further, it can be tough to exit by selling your holdings in the secondary market
during an economic downturn for real estate investments.
2. Differences in property management, usage or sale decisions among co-owners can
lead to costly and time-consuming disputes, possibly requiring legal intervention.
3. Unlike publicly traded stocks, real estate fractional ownership is less liquid, making it
potentially harder to sell your share in the property promptly.
4. Co-owners might have restricted authority over the property, as major decisions
often require unanimous agreement, potentially causing delays and disagreements.
5. Property values are subject to market conditions, potentially leading to depreciation
or difficulties in selling your share.
6. Depending on the management setup, there's a risk of inadequate property
management or conflicts of interest within the managing party.

Conclusion
Fractional ownership holds enormous potential for the Indian real estate market. As the
concept gains more recognition and regulatory clarity, it is expected to become more
mainstream. Investors will have the chance to diversify their real estate portfolios, access
high-value properties and enjoy professional management services.
Also, Fractional ownership presents a compelling investment avenue for both seasoned
investors seeking portfolio diversification and newcomers looking to break into the
commercial real estate market and value assets in real-estate. This offers diversification
benefits, wealth accumulation potential, and resilience against market fluctuations.
Moreover, real-estate market is all set to essentially experience a boost as more and more
companies adjust to hybrid work arrangements, highlighting the significance of adaptable
office environments, i.e. ultimately fuelling this segment of real estate in the near future.

How 2gether can take advantage of fractional ownership and use it as a business
proposition

Fractional ownership models can be effectively utilized by companies building co-working

office spaces to finance, manage, and scale their operations. Here's how:

1. Access to Capital: Fractional ownership allows companies to raise capital from

multiple investors, each owning a fraction of the co-working space. This can provide
the necessary funds for acquiring or developing the property, as well as for on-going
operational expenses and expansion.

2. Lower Entry Barrier: Fractional ownership enables investors to participate in larger

real estate projects with less upfront investments. This can reduce initial inertia of
 investing in multiple spaces at different locations. As the ask for investment reduces
the organisation can have multiple projects at different sites without having wait to
years before investing for the next projects

3. Diversified Investor Base: By offering fractional ownership, companies can attract a

diverse range of investors, including individual investors, institutional investors, and
real estate funds. This diversified investor base can provide stability and resilience to
the project's financial structure.

4. Lower Risk Exposure: Sharing ownership with multiple investors can help mitigate
the risk associated with a single investor bearing the full burden of the investment. If
one investor faces financial difficulties or wants to divest, the impact on the project
is spread across multiple stakeholders.

5. Shared Operational Responsibilities and costs associated with them: Fractional

ownership encourages shared responsibilities among investors, including property
management, tenant acquisition, and facility maintenance. This can alleviate the
operational burden on the company building the co-working space and ensure that
responsibilities are distributed among stakeholders.

6. Alignment of Interests: When investors have a stake in the success of the co-
working space, their interests are aligned with the company's goals. This alignment
can foster collaboration and commitment among stakeholders, leading to better
decision-making and project outcomes.

7. Scalability and Growth: Fractional ownership models can facilitate the scalability
and growth of co-working spaces by enabling companies to raise additional capital
from existing and new investors. This capital can be reinvested in expanding existing
locations, acquiring new properties, or enhancing amenities and services.

8. Access to Prime Locations: Investing in co-office spaces through fractional

ownership can provide access to prime locations that may otherwise be financially
out of reach or quite expensive for investors. This can lead to potentially higher
returns due to the desirability of these locations.

9. Risk Mitigation: By spreading investment across multiple properties or projects,

fractional ownership can help mitigate the risk associated with real estate investing.
As the upfront investment reduces dramatically, the company can have investments
across multiple properties, so even if one property underperforms, the impact on
the overall investment portfolio may be reduced.

10. Low Gestation periods: As the initial investment is less, payback period also reduces
dramatically

11. Diversified portfolio- In case if the projects are at multiple sites, multiple
geographies, if one property is not performing well, it will not affect the entire
portfolio.
Overall, fractional ownership models offer companies building co-working office spaces a
flexible and efficient way to finance, manage, and grow their operations while sharing risks
and rewards with a diverse group of investors. However, it's important to carefully structure
their fractional ownership arrangements and communicate effectively with investors to
ensure transparency and alignment of interests

Structuring and Positioning

Different structures can be created for attracting the investment

1. Pure equity structures like the existing one used by STRATA

2. Pure fixed income structures which focuses on the capital preservation, and no
upside in the capital invested

3. Or the combination of above two where mix of Debt and Equity could be structured

4. Sidepocketing can also be explored as option in structuring the portfolio

5. Multiple properties can be combined together after 4-5 years of operations when all
the fractional ownership is redeemed, to raise funds freshly for other projects

6. This fractional ownership should be projected as an alternate investment source ,

not as competition to equity markets, MFs etc. but as an alternate vehicle which
could also give handsome returns.

It is also important to be fair, and transparent to the investors. We should tell them what
kind of yields returns could be attributed to them post-tax and considering after all the
associated costs. Unlike strata, the focus should be on using best industry practises like
discounting cashflows etc for calculating the management fees, other fees, returns, profits
etc. If we do this we can guarantee good returns in the range of 12%-15% to the investors.