Why Invest In Commercial Real Estate?

Posted by Admin on May, 16, 2014

Commercial property investment has always been looked on as an asset class in which only ultra HNIs and institutional investors could participate. However, with a shift in time, this traditional concept is also undergoing changes. Many retail investors are now looking for investment opportunities in the office and retail sector of Indian real estate.

To understand the steady emergence of this market in India consider this: Manhattan, New York has 450 million square feet area dedicated to Grade A commercial stock, London has 200 million square feet of this stock, and India has a collective stock of 375 million square feet of commercial Grade A office complexes. This mass area dedicated to office space highlights the potential of the market in India.

India is one of those few countries whose market has undergone a dramatic shift in a short span of time which marks an upsurge of tremendous opportunities for the investors.

There are four ways in which a retail investor can park his money in the commercial sector.

  1. He can directly purchase the entire property from the builder group
  2. He can buy a considerable amount of shares from the stock market of the commercial developer
  3. He can invest in a fund focused on investing in real estate.
  4. He can invest in REIT (Real Estate Investment Trust). This is soon to become functional in India. It is a pooled investment firm where a corpus sum is invested in income yielding real estate assets and majority of the income is distributed among its investors.

However, as the investing amount is high, an investor should be thoroughly aware of the market conditions and make informed decisions.

Today many developers are offering smaller office space for investments in Grade A buildings to enhance the investment market. This is in stark contrast to the scenario a few decades back- when only larger units were available for investment purpose. Many investors who have the considerable means can invest in smaller units present in free-standing high street malls or commercial hubs. There are a number of advantages attached to such a transaction:

  1. It is easier to find tenants for these spaces.
  2. These premises can as well be used by the owners if they have entrepreneurial mindset.

In the present market, professionals like auditors, doctors, lawyers, stock brokers are renting/ buying commercial properties for self usage. Many bank officials and wealth management companies confirm that their clients are investing in commercial properties.

This investment was aimed at protecting the investors’ portfolio at times of stock market volatility and market inflation. The banks/ financial institutions are willing to issue 50-60% of the loan amount to the borrower to buy these depending on his ability to repay it.

Despite availability of numerous options in the market, investing in the commercial sector requires in depth knowledge-forethought, research, planning- and great intuition. Here are a few things to look for before opting for this transaction:

  1. Location and demand-supply dynamics- a sound analysis of the location must be done. If one does not engage in the required evaluation, he may just end up buying a property present in micro markets which have very less demand.
  2. Job market, population and economy should also be kept in mind. These increase only in an area where the demand is more.
  3. Quality of project management, developers’ credentials, potential infrastructural growth and transportability options should be taken to consideration.
  4. A good advisor such as a real estate agent with an in depth market knowledge or a lawyer can produce sound advice in this regard.
  5. For retail investments, additional features of frontage, foot traffic and dynamics of the nearby catchments should also be determined.
  6. People buying for end use should ensure the number of amenities provided and the attached facilities cater to their business requirements or not.

For leasing out of income producing office space the investor should also keep in mind:

  1. The vacancy factor
  2. Additional expenses related to maintenance, insurance and property tax
  3. Break up of cash flow
  4. Lease term, expiry of lease and lock in period
  5. Potential for capital appreciation
  6. Expenses and issues related to the refurbishment, repositioning and refinancing

Investment in commercial estate has become one of the most favored investing options for people with higher disposable income ratio. Why is it so?

  1. Return on investment in commercial property is 9-11%, whereas, the same in residential property amounts to 2-3.5%.
  2. Global financial crisis offers good opportunity to the investors to invest in commercial properties because as the economy recovers mass demand and consumption faces upsurge.
  3. India’s macroeconomic growth makes it a rather appealing prospect for the investors to participate in this zone.
  4. Unlike residential property the rental yield determines the value of a commercial property. Therefore, commercial properties do not only produce profit when sold at an escalated value but also generates considerable percentage of rental returns.

Thus commercial real estate offers the investors with a variety of opportunities to invest their sum value and gain life time profit from these.

Author - Sumita Roy



This entry was posted on May, 16, 2014 at 17 : 23 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response from your own site.

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