The commercial Real estate which comprises Retail and office space is having a much better rate of return as compared to residential and industrial real estate, especially in India, Commercial Real estate Can generate a return in the range of 8.5% to 9.5% and which is almost 3 times better than the residential real estate and 1.5 to 2 times better than the Industrial. Even if compared to other asset classes in India commercial real estate can generate better returns than FD, Corporate FD other Debt instruments.
Another advantage of investment in Commercial Real estate is to get monthly rentals and capital appreciation which no other asset class can have. For example, if we compare commercial real estate with Fixed Deposit and Mutual funds.
|
Asset
Class |
Monthly
Returns |
Capital
appreciation |
Monthly
Rent & Capital Appreciation |
Monthly
Return calculate on Per-anunual Basis |
Capital
Appreciation |
|
Fixed
Deposit |
NO |
Yes |
NO |
NIL |
6%
to 7% |
|
Mutual
Funds |
NO |
Yes |
NO |
NIL |
10
to 12% |
|
Commercial
Real estate |
Yes |
Yes |
Yes |
8.5%
to 9.5% |
4%
to 5% |
Low Investment:
Commercial real estate especially in Office space, Investment can be started as low as Rs. 5Lakh which is very low as compared to residential and industrial real estate.
Scientific Valuation:
In Commercial real estate, It's easy to calculate the market value while buying or selling unlike residential property in India which moreover selling or buying on emotions rather than on some mathematical formula, valuation of commercial property is derived in a more objective /mathematical way and can be depended upon two more factors, tenant profile, and leasing tenure.
Formula to Calculate Capital value Or the market value of commercial property
Current Market Value = Net Operating Income / Capitalization Rate
Professional Tenant:
It's easy to manage and negotiate with a Professional tenant rather than individuals and because Commercial real estate generally uses for 12 hours a day that's the reason their long-term maintenance is also minimum and less frequent.
Long term Lease agreements:
Lease terms start from 3 years to 18 years and because commercial real estate both commercial retail and office space occupied by retail brands, corporate and professional management companies do not want to change their address frequently.
Fixed increment in the lease:
one of the best parts with commercial real estate is that it has a prefixed term that lease tenure is in 3 years mode where after every three years lease will be increased by 15% to 18% which actually impacts the market value of the property and turn out to be 5% to 6% increment each year.
Limited Availability of Grade - A, office space:
The limited supply of Grade A Office as compare to total supply. the demand of Grade A office will be on the peak after pandemic because occupiers are looking for high-quality office which has a more digital presence and healthy workspace.
Investment confidence intact for commercial and office space:
 |
| Source: https://www.ashraygroup.com/investing-in-commercial-property.html |
Even in these tough times, commercial real estate looks bright spot for FII (Foreign Institutional Investors), in 2020 alone FII pumped around Rs. 28,145 Crore, In one of the largest real estate deal Canadian investment firm “Brookfield Asset management” took an 18% stake in Bengaluru based RMZ-corp for about USD2 billion (INR14,000 crores). Despite technology companies in India continuing to work remotely, markets like Bengaluru and Hyderabad are continuing to witness inquiries from technology companies looking to set up their global in-house centers. However, as investment firms are now finding quality assets hard to come by, they are undertaking development risks. There another real estate deal where Blackstone Group has concluded its 12,745/ crore acquisition of realty developer Prestige Group’s commercial portfolio, including offices, retail malls, and hotel assets, said three people with direct knowledge of the matter.
REIT :
As REIT (Real estate investment trust) is a very new concept in India compared to developed economies where REIT was introduced in 1960, India's REIT market is entering in prolonged growth with more REIT’s Forcast to be listed in 2021 and beyond.
Portfolio deals during the last quarter led to total investments of USD 5bn during 2020, marginally lower than the previous year. Approximately 60% of the total inflow in real estate by Financial institutional in India is in Commercial office space total inflow is around 3,102 USD million.
And the biggest gainer of increasing REIT is Commercial real estate because REIT is investing heavily in Commercial real estate as Real Estate is the second-largest employer and its contribution to Indian GDP is expected to reach 13% by 2025. This makes it a high-priority sector and the current government continues to bring in major reforms to make it more accessible and attractive for foreign investors. SEBI (Securities and Exchange Board of India) - the governing body for REIT has already come out with a series of amendments favoring the investor community last year. Further to strengthen investor interest in REITs.
REIT worthy assets/Stocks across other major Indian cities
|
City |
In mn
Sq ft) |
In% |
Value
USD bn |
Value
INR cr |
|
Delhi
NCR |
48.3 |
17% |
6.48 |
47,304 |
|
Mumbai |
36.9 |
13% |
6.84 |
49,932 |
|
Chennai |
36.9 |
13% |
4.68 |
34,164 |
|
Hyderabad |
36.9 |
13% |
3.24 |
23,652 |
|
Pune |
31.2 |
11% |
3.24 |
23,652 |
Commercial office space outlook:
Though demand in 2020 because of Covid and lockdown was sluggish, pickup in last quarter of 2020 and we expect a pickup in demand in 2021 and in next 4 year, from 2021 to 2025 expect growth in Office demand would be 2.85 crores sq feet in next 4 year .and the main contributor of demand in next four year will be IT/ITeS, Manufacturing / Industrial, E-Commerce, BFSI, Co-working, Telecom, Healthcare-Biotech, Real Estate, Construction & Other industries, Consultancy Business, Miscellaneous, We Expect net absorption to remain largely stable over 2021 as occupiers in India are still evaluating growth plans, We believe that demand will mainly be derived from technology companies, engineering, and manufacturing sector.
We are expecting demand for small offices will grow significantly due to corporate and big occupiers like IT/ITEs and ECom company will start de-densified and split-up offices in different locations and due to the rise of startup/ entrepreneurship after this pandemic over.
Focus on Sustainability and Wellness: company are increasingly demanding high-quality office which should ready for the sustainable environment through high tech digital solution, occupies is more focusing on health and safety of their employees
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