MUMBAI: Despite the availability of more rationally priced options, investing in commercial real estate is most definitely not child’s play. It requires forethought, research and planning:
• Investors need to establish the soundness of the location and its demand/supply dynamics. If they do not engage in sufficient research, they may end up buying into micro markets which have or will have high vacancies.
• They need to ensure that the economy, job market, future infrastructure development and population growth in the market is healthy
• They need to check the developer credentials, access to public transport and quality of property management in the project
• They need a knowledgeable real estate agent and a lawyer who can give them sound advice
• If they are investing in a retail store, they need to consider the frontage, foot-fall and the dynamics of the adjoining catchment
• Entrepreneurs who wish to buy commercial real estate for self-use should ensure that the amenities in the project match their business needs
If an investor is looking at an income producing office asset, he should look at:
• The break-up of cash flows
• The vacancy factor
• Expenses such as maintenance, property tax and building insurance
• Lease term, lock-in period and expiry dates
• Long term capital appreciation potential
• Refurbishment, refinancing and repositioning potential
The rental yield for commercial property is usually 9-11 per cent. In contrast, the yield for residential property is much lower at 2-3.5 per cent. The demand for office space in India is likely to stand at around 200 million square feet over the next five years. Post the GFC, the prices in markets like Mumbai have dropped around 35-40 per cent and have bottomed out in most micro-markets, offering investors a good opportunity to buy into commercial real estate.
India’s macroeconomic growth story makes for a compelling reason to get one’s own paragraph into it somewhere. Chosen prudently, office real estate can let you do that in indelible ink. Last year, the demand for office space across India was 26 million square feet and this year it is expected to be 28 million square feet. The possibility of diversifying one’s portfolio, the sheer pride of ownership and the benefits of long leases that typify commercial tenants are other reasons to look at commercial real estate investing.
Remember, you do not only make a profit on the sale of appreciated commercial property – the rental cash flows of a well-located office or shop space are also considerable. Unlike in residential property, the income that can be generated from commercial property is what determines its value. In other words, the capitalization rate is actually the measure of the demand for the property. For those who do their homework well, investing in commercial property is a high-adrenaline and high-returns game.