Delhi-based couple Jyoti and Rishi Arora recently chose to invest in commercial property, attracted by higher rental yields and the prospects of capital appreciation. They selected a 250-square-foot office space priced at Rs 80 lakh. “After extensive research, we selected a project in Sector 140, Noida, developed by a reputable builder,” says Jyoti. The presence of major IT companies in the area has strengthened their confidence in this investment.
“You can get on a year to a year basis a return of approximate 12 to 35 percent depending on the location, prices and buying at the right time. Even in a place like Noida within 18 months, people have achieved almost hundred percent appreciation,” says Salil Kumar, Director Marketing & Business Management, CRC Group, which has its latest commercial project The Flagship in Noida Sector 140-A.
What is the minimum ticket size with which one can invest in commercial real estate? Is it possible for retail investors to invest in this asset class? “The minimum ticket size of investment is Rs 10 lakhs and yes retail investors can invest in SM REIT IPO,” says Umesh Sahai, CMD, EFC (India), who are in the business of managing commercial real estate and office leasing. Says Sahai- “This is one of the unique opportunities where investor is able to invest in a tangible plus ever appreciating asset (real estate) backed hybrid security and realise fixed returns as well benefits of stock appreciation. Under any circumstances, investment is secured as in worst case SMREIT can liquidate the real estate and repay investment made by investors. Investor can expect pre tax fixed returns of about 9% p.a. and yoy appreciation in value of stocks linked to increase in value of real estate, which would be around 5%.”
Advantages of commercial real estate
Commercial property offers diversification beyond residential real estate. If occupancy rates are strong, it can deliver higher returns than residential rental assets. “Typical lease terms in commercial real estate are long-term, unlike the one-year rental agreements common in residential properties, thereby ensuring stable returns,” says Vimal Nadar, senior director (Research), Colliers India. He adds that commercial real estate or acquiring an office asset is relatively expensive and includes complexities related to funding, approvals, construction and leasing as well as facility management. REITs and SM-REITs however facilitate retail investor participation in commercial properties with relatively small amounts of investment, wherein investors benefit from both capital appreciation and dividend income. While the minimum subscription value is INR 10 lakh for SM-REIT IPOs, initial lot value can range between INR 10-15,000 for REITs. After initial listing, the retail investor can invest in both REITs and SM-REITs at market rates. Moreover, SEBI’s recent regulatory push in safeguarding investor rights by advocacy of SM-REITs can increasingly treamline web-based fractional ownership platforms, bring them under regulatory ambit and bolster retail investor participation. Leading fractional ownership platforms typically have a minimum investment amount of INR 20-25 lakhs in case of commercial properties.”
Often the commercial real estate is expensive and retail investors may not be able to invest in Grade A projects due to the high-ticket size requirement. According to Bappaditya Basu, Chief Business Officer – ANAROCK Commercial, “For retail investors who cannot afford spaces in Grade A projects, investing in Grade B office spaces can be a suitable option. Such properties are not only more affordable but can, if chosen well, even provide higher returns. However, they tend to see slower capital appreciation and attract lower quality tenants and may involve higher maintenance costs. To mitigate these risks, it is important to evaluate everything – the developer’s brand standing, credibility, the quality of the catchment and the type of tenants it attracts, etc. Choose a property in an area with strong infrastructure, good connectivity and potential for growth. Other factors that can help in getting stable returns include assessing rental demand and including potential maintenance costs. Evaluating resale value is important for liquidity.” The minimum investment horizon for commercial real estate is 5-7 years, which allows time for appreciation in property value, stable rental income and recovery of initial costs. Annual rental yields may be 5-9%, with slightly higher potential in emerging areas, but with greater risk. Annual capital appreciation of 5-8% over this period is reasonable if the property and area are well chosen. Under favourable conditions, combined returns, including rental yields and appreciation, can average out at 8-10% under optimal conditions. One needs to remain invested long enough to take advantage of demand growth, infrastructure development, and to secure reliable tenants who provide a steady income.
Some developers have good schemes. Says CRC group’s Salil Kumar, “We at CRC have evolved some good scheme where you can buy small spaces and get very appropriate and reasonable returns from the day 1 from your investments. We lease the property on your behalf and you get returns from the good brands whether retails are good brand from the office space. And you get simply hassle free returns from the day 1 and the ticket size ranges 50 lakh onwards. And from these regular returns, you can, may can get your house on rent or you may use this money for your children education or leisure activities effectively.”
After your one home is ready, you must go for commercial- advises Smita Patil, MD SSPL Group Pune who is also President of NAREDCO Mahi, NAREDCO Women Wing for empowering Women Entrepreneurs and encouraging participation of women in the Real Estate Sector. Patil says that in her own commercial real estate projects, there are any number of options for the retail investor. They can invest in
small offices (built for doctors, advocates) or go for fractional ownership where many people combine their investment by forming an LLP (Limited Liability Partnership)- say for a property worth Rs 1 crore, four people can contribute Rs 25 lakhs each. The annual ROI on commercial on rental basis is 5-7 percent.
From a retail investor point of view, prevalent fractional ownership platforms in commercial real estate provide lesser discretion of choosing the end-user or occupant as compared to residential real estate usage. Moreover, geographical and sectoral (Technology, BFSI, Eng & Mftg occupier etc.) diversification of underlying assets in REITs/SM-REITs is performed at sponsor or investment manager level and retail investor does not have much flexibility in asset selection at the granular level.”
What are the disadvantages of investing in commercial real estate? Says Manoj Dallal, Shivsan Buildwell Pvt. Ltd, commercial real estate broker, “High initial investment, management issues like lease agreements, property maintenance costs are the flipside of investment in commercial real estate for the retail user. In some cases we have to wait for the right time to sell our property. So one must run some checks before investing in commercial real estate such as location analysis, legal document analysis, property brand and also think clearly about entry and exit option.Common mistakes that investors make when investing in commercial real estate are underestimating maintenance costs, not understanding lease agreements and terms and ignoring location trends.”
