As companies look at expanding operations following improved business sentiment, this is a good time for investors, both high net-worth individuals (HNIs) in India and non-resident Indians (NRIs) to park their money in commercial real estate.
While this segment is seeing a revival in demand due to improving macro-economic scenario in India, supply is yet to catch up, thus offering a potential for high rental yields, more superior than those in residential property.
The Indian economy is poised for growth, at an estimated 7.3 per cent. This, coupled with improving inflation figures and gradual growth in manufacturing sector, is leading to growing momentum in commercial office space as companies are consolidating or expanding.
Strong demand is being generated by the eCommerce sector, along with information technology (IT/ITeS), as well as banking and financial services (BFSI). These have fuelled demand for quality office and commercial properties, with capital values and rental yields holding firm against sturdy demand. Other contributing sectors such as manufacturing, engineering and pharmaceuticals are also expected to provide an impetus to commercial real estate.
Companies operating in the commercial real estate space have identified this potential and are providing tailored offerings to first time and seasoned investors.
“This is certainly a good time for HNIs, retails investors as well as NRIs to look at commercial properties. With low capital values and high rental yields on offer in most micro markets, and prices in some even lower than residential offerings, this is the segment to invest in right now. Grade-A properties in different commercial formats such as offices, retail or high street options can be chosen and are bound to provide good capital appreciation and high rentals”, says Ajay Rakheja, CEO & Co-Founder, CREindia, an online portal for commercial real estate that is organizing a special event CRE Bazaar, which will showcase commercial properties available for rent and sale with attractive offers for a limited period. This 4 day event is unveiling the Delhi/NCR edition soon.
“Our USP of the fest lies with our plan to showcase only ready to move-in or 70 per cent completed commercial properties, with the added advantage of attractive discounts for limited time period”, says Rakheja.
Demand Factors and Expected Returns
Three cities that witnessed good supply and demand in 2015 were Delhi-NCR, Bengaluru and Pune, collectively contributing to nearly 77 per cent incremental supply and 65 per cent absorption. Expected rental yields for Delhi-NCR and Pune are around 7 to 9 per cent, while for Bangalore, it could be as high as 10 to 11 percent. Commercial properties are still available at valuations that are attractive, when compared to the 2007 peaks and investors can expect 7 to 10 per cent yields in this segment, which can even go as high as 14 per cent annually.
While demand from companies is expected to grow, there is increasing demand from food and beverage segments, as well we high-end fashion brands. Since there is marginal addition of new space within this segment, the yields are expected to remain high.
“To determine the potential income opportunities from a commercial project, it is best to undertake a valuation exercise at the short-listing stage. It allows decision-making related to transactions, property restructuring, insurance, mortgage, among others. Our CREValuation product provides reports in this respect to assist both seller and buyer to receive a fair valuation of the property”, said Rakheja.
While shortlisting commercial properties for investment, it is advisable to look at properties that are already leased out and it assures cash flows. With rental agreements signed for 3 to 5 years in an office space, tenants are typically locked in for that period and incidences of vacating before the term agreements are rare.
Another aspect to consider is the type of company and business that has leased out the property. For instance, banks and high-end brands taking up space for a particular address for their business are less likely to change offices too frequently. Companies that are more dependent on where their employees
The type of company that has leased out the property and the kind of business is also important. For instance, if it is a bank or a brand where the office address matters, the chances of them moving out too quickly would be less.
Buildings with multiple owners may present more of a risk than a building where a large part is still owned by the developer. In such cases maintenance does not pose a challenge.
Those investing to eventually lease out the space should also take into consideration the infrastructure of the space. Other important factors are location, amenities, transport and housing available in the vicinity, occupancy rates of the property, as well as the neighbourhood of the project.
Investors should also consider the experience of the developer in building the commercial space and then maintaining it, along with whether REITs or private equity firms have invested in the property. These are good indications of the potential of the project and its marketability.
Growing Interest from HNI and NRI Investors
With commercial markets riding on high demand and lower supply in most micro-markets, there is growing interest from high net worth individuals. Also, with favourable rupee movements against the dollar, Non-resident Indians (NRIs) are returning to the commercial real estate market, to cash in on the opportunities in Delhi NCR and other markets.
Expanding businesses and the emergence of India as an attractive offshore destination is leading to a growth of interest from both HNIs and NRIs. A favourable demographic, increasing purchasing power, combined with government incentives that are looking to attract foreign investors make this the best time to invest in the country’s commercial real estate market.
(With inputs from Ajay Rakheja, Co-founder & CEO, CREINDIA.com)