Should you invest in office space instead of a house?
Sep 02, 2013
Source : The Economic Times


BANGALORE: Prakash Nahata is happy with the decision he took in 1992. Instead of investing in a house, this owner of a property advisory firm bought a plot at Jai Nagar, Bangalore, where he later developed an office complex. "Office space gives you a rental return of 7-8%. If you factor in the 30% standard deduction, your return is even higher. The rental income increases by 5-6.5% annually, and the property's value also appreciates over the years," he says.
In these troubled times, when the fear of unepmpolment looms large, it is imperative to have alternative sources of income. Says S G Raja Sekharan, a Bangalore-based wealth man agement expert: "I have seen directorlevel people facing cash-flow difficulties after being laid off. They had property, but were unable to liquidate it in a downturn." Investing in office space, he suggests, is well-suited for developing a passive, as opposed to employment-gen erated or active, income stream.

The advantages

The biggest advantage of investing in office space is the higher rental return compared with that for residential property, which is a paltry 1.5-2.5%. Besides, the property continues to appreciate, though the rate of appreciation is not as high as for a residential property.

Another benefit is that if you are bitten by the entrepreneurial bug, an office property can help make a smooth transition. If you decide to start a business or consultancy when you are in your 40s or 50s, the switch will be easier if you can avoid the burden of monthly rentals.


Should you invest in office space instead of a house?

Disadvantages & risks

The foremost risk of investing in an office space is that it may remain vacant for lack of tenants. Meanwhile, you will have to continue spending on maintenance. According to Samir Jasuja, founder & CEO, PropEquity, "The rental income from office space is tied to the economic cycle. If a building was prepared for IT-ITES clients, and this particular industry is caught in a slowdown, you may find occupiers hard to come by. You may also have to compromise on rent. Besides, raising the rent when the lease is up for renewal may be difficult."

Most residential properties are purchased with the help of a bank loan, but if you want to buy an office property, you may find it tough to persuade a bank to grant you one. "Banks don't lend unless the property is tenanted or you have another property that you can mortgage," says Sajid, manager at Bangalore-based Silverline Realty.

Invest according to risk appetite

You can invest in an office property at any of the following stages: when the building is under construction; when construction is over but the property is vacant; or when the building is ready and occupied.

The advantage of buying a property that is under construction is that the purchase price is low. Investing at this stage could fetch you the highest price appreciation. However, the risks are also the highest at this stage. The developer may not complete the project on time, hence your returns may start coming in from a date later than you anticipated.


There is also a question mark on the quality of the product that will be delivered. To mitigate these risks, opt for a reputed developer.

If you invest when the building is ready but vacant, you run the risk of delay in finding a tenant.

When you do find a tenant, the rent he is willing to pay may be lower than your expectations. If you invest when the building is occupied, your risks are the lowest, but you are likley to enjoy minimal capital appreciation.

Investors with the highest risk appetite should enter at the first stage, and those with the lowest, at the third. According to Rajeev Bairathi, executive director, Knight Frank India, "If you are investing for rental yield, do so in an occupied property, but if you are investing for capital gain, go for a greenfield project." Conservative investors should also opt for an occupied property. "With the economy facing a slowdown, the rate of leasing has declined," says Bairathi.

Exercise due diligence

As with all real estate transactions, give primacy to location. "Look at the key economic drivers in that location. Also watch out for the supply when your building is ready," says Anshuman Magazine, chairman and MD, CB Richard Ellis, South Asia. If there is a glut, it will affect both your ability to find tenants and the rent you earn.

While investing in suburbs, avoid remote locations that lack good connectivity to a highway. The surrounding infrastructure, such as internal roads in the locality, must also be in good shape.

Next, consider the quality of the building. There may be only a couple of reputed developers developing office property in the area you have zeroed in on. As Magazine says: "At any given point, there are only limited choices available."

Make enquiries in the locality about the rental return you are likely to earn from the building. If the tenant leaves, how difficult will it be to find another? In the case of an already occupied property, make sure that the tenant has a business that is profitable and growing. This will help avoid the risk of the property falling vacant at an early stage. Also go through the lease agreement. If required, have it vetted by a lawyer. At the very least, it should have a lock-in period.

Finally, make sure that both the ownership papers and the approvals from the area's development authorities are in place before you decide to make a purchase.


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