Investment in office spaces: Diversifying real estate portfolio
Nov 26, 2013
Source : The Times of India


DELHI: Investment in offices is a great way to earn high rental income and profit from capital appreciation. Office space and retail are the two key components of commercial real estate.

In an environment where the stock market is known more for unpredictable movement than for decent returns, investing in real estate is considered safer. Residential is ranked the safest, due to friendly market dynamics (demand-supply condition). But it gives a small rental (2-5% value of the house per year) and good capital appreciation (mostly in double digits).

However, people having significant amount of experience in the residential investment should also consider investing in office spaces as it diversifies the portfolio. Here, the rental income is 7-10 per cent of the property’s value per year, many times more than a house. But capital appreciation depends upon the timing of investment and position of the economy.

But why should one invest in property? Real estate investments in India have given superior returns than other assets such as equity and debt over the last five years. In comparison to an asset such as equity, which is dependent upon several factors related to the underlying business like profitability, leverage and corporate governance, real estate investment is based on the underlying asset.

Investment management is different for offices than houses. Firstly, the investment prospect has to be much longer. Secondly, there is not enough scope for flipping these properties. Office units are larger than residential spaces. This means bigger investment.

With an investment of around Rs 10-50 crore, you can expect a rental yield of 9-10 per cent per year. A larger investment (more than Rs 50 crore) can give you the leverage to earn a greater rental yield.

Nowadays, investment in office space is possible even if your budget is not big. Delhi-NCR in particular, has seen a sharp rise in the demand for smaller offices over the last few years. Herein, Noida Expressway has been the hub for commercial projects and office spaces. The highway that connects the capital with Noida and Greater Noida has been the prime choice for investors. Krasa Group, a major realty player in NCR is coming up with a commercial project in Sector 140, Noida which is providing a blend of office and commercial space, a shopping mall, recreational facilities, etc. Arvind Singh, CMD, Krasa Group says, “Investing in office and commercial spaces have always been much more rewarding than residential properties. The return gets multiplied if the location and facilities are up to the mark. The kind of demand this market has been witnessing for office spaces, it is the best time and best deal to put your money in these projects.”

Unlike houses, there are first-time buyers even in office spaces. The demand for offices depends entirely upon the performance of the local industry. Each place has its own key economic players and potential tenants. Before investing, one must understand their requirements. For example, if IT companies rule the roost in your city, you would be better off with an office that can accommodate a good workforce that is typical of such companies.

As in the case of residential properties, one can also invest in a commercial property at an under-construction stage or find a pre-leased and ready office. The latter will save you the trouble of finding a tenant.

Cosmic Group, one of the prominent players of commercial real estate in Delhi-NCR has been delivering and coming up with its commercial project, providing seven star luxurious facilities and located in one of the most prime locations of Noida. Sushant Muttreja, CMD, Cosmic Group says, “It is always advised to invest in office or commercial spaces as the rental value is way higher than in residential. Even the capital appreciation is better. The only thing to be kept in mind should be the time of investment. Properties in construction phase are the safest deals as tenant tension is not there”.

In strata selling, the developer sells in smaller units and not large blocks. Though, office units typically require big investments as they are easier to manage. Reason for this is that a big amount can be invested in one huge property instead of multiple units (which will be the case in residential properties, where the ticket size is low).

On the flipside, one might face trouble in leasing the office when a tenant moves out. As a result, the property may stay vacant longer than a residential property.

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