Investing In Commercial Real Estate
January 2018

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Despite the macroeconomic disruptions, the commercial real estate market in India remained robust in 2017. According to a report titled ‘India Office Property Market Overview, Trends to watch for in 2018’ by Colliers International, last year witnessed a pan-India leasing volume of approximately 42.8 million sq. ft. (excluding renewals and pre-commitments), which is marginally up from the absorption level in 2016, which was approximately 41.6 million sq. ft. This makes it an appropriate time to invest in commercial real estate.

Tips For Investing In Commercial Real Estate

Diversification

The first rule of investment in commercial real estate is diversification. Rather than investing in a single property, which can be very risky if a tenant moves out, it makes better sense to invest in more properties. If the tenant moves out, the maintenance costs, property tax, etc. still need to be paid which can prove to be very costly. Thus, investing in more than one property reduces risk and makes for a better investment decision.

Location

The returns on commercial properties come from rental income as well as capital appreciation. If the property is located in a place where vacancy is less than five percent, it shows that supply is in check and thus, rents will remain stable or shoot up. A property located at a prime location is more likely to see capital appreciation as well.

Tier-2 & Tier-3 Cities

Due to cheaper resources, many technology and e-commerce companies are exploring expansion in tier-2 and tier-3 cities. Under the “Smart City” initiative, the governments in many states are offering numerous fiscal and non-fiscal incentives and building infrastructure projects, such as airports and railways. All this makes it highly profitable to invest in commercial real estate in tier-2 and tier-3 cities.

Quality

High-quality buildings, especially those that are LEED gold or platinum certified get higher rents and better quality tenants. Such properties, without a doubt, will get higher capital appreciation as multinationals and big corporates are ready to pay premium for them.

Quality of Tenants

Quality tenants attract other quality tenants! Multinationals are much more likely to invest/rent a commercial property in which other big corporates have already placed their trust. Quality tenants are willing to pay a premium for a good property, resulting in higher rent. Getting the rent on time, higher security deposits and an appreciation in the value of the property are some of the other benefits of having quality tenants on board.

Rent

If the in-place rent of the property is the same as its market rent, there is very less likelihood of the tenants moving out to cheaper avenues available elsewhere. It also shows that a given property is priced appropriately and not over-rented. Investing in such a property will yield good returns in the future as you are paying an appropriate price for the same.

Demand vs Supply

Choose a commercial property in a location where the annual supply of properties for the upcoming two to three years will not exceed the expected demand as such locations will see an escalation in rents and property prices. When the supply is higher, tenants are in a better position to renegotiate, resulting in lower rents.

Interior Fit-outs

Go in for properties where the tenants have done the fit-outs themselves as such tenants would stay longer in order to recover the costs they incurred. Properties where developers do the fit- outs, include the cost for the same in the monthly rental, which turns out to be very nominal. Doing the fit-outs themselves costs more and hence the tenant will not move out easily.

Co-working Office Spaces

Properties which can be redesigned into collaborative workspaces that meet the needs of smaller tenants will see huge demand in the coming years. Invest in properties where floors can be subdivided into multiple office spaces.

Security Deposit

The security deposits for commercial properties vary anywhere between ten to twelve months’ rent. Avoid investing in properties where security deposit is lesser, as it could be that the tenants are there only for the short-term and are looking to move out soon.

While investing in commercial real estate, checking into the lease structure is important too, besides the criteria listed above. Invest in a property where there is a lock-in period during which a tenant cannot leave. And lastly, think long-term. Give the investment time to show the results that you expect!