When should you consider investing in commercial real estate?

When should you consider investing in commercial real estate?

Going commercial seems to be the best way out for several investors at the moment. Sounds surprising? As compared to residential property, there is a steady demand in the commercial segment which has led to an increase in prices and investors are ready to make an investment likewise. For retail investors, the primary factors for consideration for investment in this field should be an assessment of their risk appetite and the purpose of investment- whether it is meant to be long term, whether it is meant for rental returns or just meant for diversification.

A number of factors, like the location of the project, the micro market performance and the quality of the project, along with lock in periods in lease covenants should be considered a part of the process. It should also be checked whether the micro market is preferred by a diverse group of occupiers or whether only someone specific is showing interest. This is particularly important if the project is an upcoming one with no pre- lease activity.

Should you invest in commercial property?

So, one has to calculate keeping the risks taken and the returns in mind and for those who can afford it, a stable, income generating office asset should be opted for a regular income. Some risks can be taken on upcoming projects but small investors should ideally refrain from investing in small spaces in unorganized sector. The commercial market is currently showing promising signs and they have a strong demand as well.

Real estate as an asset class created some wealth but it comes with its own share of complexities in terms of higher ticket sizes, liquidity issues and also for transparency and maintenance. Also, compared to the residential market, which has been going through a slowdown through the last four years, the commercial sector has shown signs of better yields and the appreciation has also been steady. The buyers, on the other hand, need to have sufficient and strong finances, good market knowledge and a longer holding capacity as well.

Some options are definitely available in the form of shops, land parcels, office spaces and private equity funds and of course through REITs. The latter seems to be the best option for the retail investors as they address the challenge of transparency. It requires a higher ticket size to have one’s own shop, office or land and one should also have a clear outlook regarding the market in the future, which could be difficult to understand at a retail level. In this regard, keeping a few points in mind will definitely be of great help.

It is important to understand the overall allocation to physical assets as compared to financial assets. The former will have disadvantage of illiquidity and if the situation is conducive, one might not be forced into a distressed sale either to make ends meet. However, are the factors like non- occupancy taken into account? The rental returns are high when they come in but what if the tenant chooses to vacate the premises because he might have got a better premise somewhere else? Will you be able to find a new tenant just as quickly and on favorable terms? Even then, what if a new center comes up nearby which has all the new and modern facilities compared to yours and just takes away any tenants you might have?

What else to keep in mind

As mentioned earlier, compared to the residential segment, the commercial sector has indeed been performing well in most Indian cities in the last few couple of years and has become popular not just about the HNI investors but also among the retail investors and they are known to yield 8 to 10% in major Indian commercial markets, depending on the location, quality of the premises, demand and supply dynamics and others.

The good news is that the commercial market is expected to stay afloat comfortably with about 35 million sq feet of extra space to be in business in the next couple of years. For those looking for long term investment and those who have a knack of understanding the market dynamics for commercial real estate, this would be a good time to do the honors. It will be more advantageous than investing in residential properties, provided one can battle the small risks involved. Good quality assets in proper, upmarket locations have very few reasons to fail and will not be plagued with problems like construction delays, vacancy or the quality of tenants. If one can just wait out the period of construction and deal with the risks, the ultimate gains are very rewarding indeed.