Commercial Property

According to real estate experts, it’s good times to make an investment in the commercial property as companies are expanding their business with an aim to improve their business sentiment. If you are looking for regular cash flow with higher return and rental, so investment in commercial property is better than residential property.

As per experts, now commercial real estate space is witnessing a revival with little high demand at the time when real estate developers are not building commercial space from last four to five years due to global financial crisis and now its expected that soon existing stock will get consumed. And in simple words we can say that it’s the main reason why real estate developers and commercial property owners are receiving higher rental yields and now people are looking it as good investment option. Indian economy is growing with growth rate of 7.3 percent, apart from that inflation has been reined in with the gradual growth in manufacturing sector. However; with all these kinds of growth commercial office spaces are also gaining momentum because companies are looking for expansion due to improved business sentiments. These days big e-commerce such as; Snapdeal, Amazon and Flipkart are looking for commercial spaces to set up their warehouses, followed by IT-enabled services and the information technology sector as well as financial services and insurance (BFSI) segments and banking sector and they all are resulting in high absorption levels in commercial properties and quality office spaces.

It is expected that in near future the industries such as; engineering, pharmaceuticals and manufacturing will provide further impetus to the real estate market. According to Amit Bhatia of Assets and Business Banking in Deutsche Bank India, “Its best time in India to invest in the commercial properties as it is giving low capital values with high rental yields. However; there are many micro markets where price of commercial properties are still low than the residential property and commercial properties are offering double the rental yields”. The more he added that Grade-A properties including offices, retails or other spaces at high street are also are bound to deliver capital appreciation and higher rentals. However; for commercial properties the capital appreciation is low due to many speculative buying in residential property. On the other hand office spaces are more driven by end users whereas; commercial space might not be as easy to sell as residential spaces are and its also easy to find tenants for offices spaces in comparison of residential.

Why it’s best time to invest in commercial property:

From investment point of view the difference between commercial and residential property is that in commercial real estate you will get more rental in comparison of residential property, but when it comes to sale property, so its pretty easy to sale residential property, but its tuff to sale commercial property, as per the statement of Viral Desai, National Director at Knight Frank India. The more he added that in past few years, residential real estate market has seen more appreciation, but now its on peak and about to get over. However; it is expected that in near future office spaces are continues to give better rental yields. In residential property the annual rental yields are about 2 percent, but when it comes to office space annual rental yields are about 8 to 11 percent. Offices spaces are offering good opportunity for investors as tenants are looking for good quality lock-in of leases spaces.

Income from commercial property:

It is suggested to invest in the property which is on the lease already because it will provide you regular cash flow, as per the statement of Desai. In normal cases, people prefer to go for the rental agreements of two to five years, if the space is for office and during that duration the tenants are locked in for that period. So if you are about to invest Rs 5 to 6 crore in an office space, so you can expect to get Rs 50 to 60 lakh as annual rental income. Apart from that you should also check that which kind of company has leased out the property and for what kind of business, for example if banks or some other brands has leased out that property, so you can expect that they will continue for next 15 to 20 years at least because they will avoid to change their address. If you are planning to buy property no multiple owners and large part of property is with real estate developers, so property maintenance will not be big challenge. As per the statement of Sanjay Dutt, Managing Director of Cushman & Wakefield, “The top three cities which have saw good supply and demand in the period of January to September 2015 were Pune, Delhi-NCR and Bengaluru. However; till now they have collectively contributed 77 percent to incremental supply and 65 percent to commercial absorption and on the same time you can expect annual rental yields of 11 to 12 percent for Bengaluru, whereas; in Delhi and Pune you can expect annual rental yields of 7 to 9 percent.

Why should you leverage the opportunity?

We all know that unit size of commercial real estate is larger than the residential and due to that investors need to invest much larger amount in commercial property. And apart from that they will get no tax incentive for investing in commercial real estate, as they are used to get for homes. If you are thinking that price of property is too high and you will be not able to manage it, so you can take loan for the property against rental income.

Checklist before buying commercial property:

1. It’s recommended to check the background and experience of real estate developer in commercial property.
2. If there are any existing tenants, so better to consult with them and its suggested to check that what kind of companies have leased out the space and the business the tenants are into

• Check the infrastructure, society, location as well as surrounding area.

1. If you are taking loan or borrowing money, so never keep your property vacant for long periods.
2. If buying resale property, so prefer to buy leased out property.

Image Credits : DNA

Now the overseas firms such as; APG, a Dutch Pension Fund Manager and Warburg Pincus, a US Buyout Group are looking for an opportunity to invest in the Indian warehouses with a hope to cash the demand for efficient and modern storage space as in past few years Indian has recorded great book in online shopping.

Godowns vs Warehouses:

In present the country’s logistics and warehousing sector is stretched to $ 110 billion as more and more Indians are coming online for shopping and other activities. Existing spaces, which was famous with a name “Godowns”, a low rise sheds with poor infrastructure and ventilation to ward off heat and dust are too old and out of dated for the retail giant such as; Amazon.com and its core rival Flipkart or Snapdeal. According to experts retailers never prefer to use these Godowns because on these places goods frequently get spoil or soiled. Apart from that now e-tailers are looking for the way to move their goods swiftly with minimal damage and due to that they demands for climate control, levelled loading bays, fire sprinkler systems and paved roads to warehouses. If you have existing warehouse, so after adding these facilities you can lift the rents by up to 20 percent, as per the statement of the JLL, a real estate firm.

Growth in e-commerce sector:

According to Ben Salmon, Head of Singapore-Based Assetz Property Group, “We have got many people around us who have bags of money, but not that much assets”. The more he added that Assetz Property Group has raised $ 50 million from Asian investors with an aim to buy warehouses on Indian soil. Meanwhile, e-commerce sector in India is booming and it is expected that by the end of 2025 the market will grow in terms of value of goods sold will be about by $ 220 billion and it is expected that for this years the value of goods sold will be $ 11 billion, as per the reports of Bank of America Merrill Lynch. Demand of these kinds of warehouses is good news for property developers in India as most of the real estate developers are doing business with high debt and struggling with sluggish residential sales. For the duration of 2009 to 2011, the office leasing was slower.

As per the estimates of JLL India, to satisfy the above requirements, the supply of modern warehouses in India can be get double by 2020 with 200 million square feet space, which will be fuelled by online retailers as they have already taken up 20 percent of the space in the first half of 2015. The more demand will push the rents which are about 156 rupees ($2.34) a square foot a year in some city outskirts, but this rent can go up by the 20 percent, as per analysts. Whereas; in present, the average annual returns In UK for industrial assets are expected to be 10 percent by next five years, as per the reports of Colliers International, a real estate firm.

Needed facilities in warehouses:

In New Delhi, there are many steel-framed, large and modern warehouses, which have ventilation as well as 24 hour security, but retailers and logistics firms are line up to serve the country’s capital. Amazon is one among other retailers, who want to own large, modern, white and red warehouse as Godowns are increasing their size from family garage to a basketball court. It is noted that Amazon India has leased more than 20 fulfillment warehouse centers where company is used to store goods and packs the orders from many different landlords. However; still company is looking for bigger, modern spaces with the average size of 200,000 square feet.

The e-commerce has attracted more than $ 1.5 billion through private equity funds since year 2011, as per the data of Venture Intelligence. Whereas; Embassy Group and Warburg are jointly planning to invest $ 250 million to lease, operate and build a portfolio of up to 20 million square feet of warehouses in next 5 to 7 years, as per the statement of Anshul Singhal, CEO of Joint Venture and Embassy Industrial Parks.

According to Sachin Doshi, Head of its private real estate investments in Asia Pacific, “APG is also looking for a local partner who can invest in the build logistics parks in India”. No doubt there are some basic challenges for investors who want to acquire land as ownership cannot be disputed. Major real estate developers like; Assetz is betting on buying larger existing warehouses in the market rather than building warehouses from the scratch. After previous investments, now Assetz is planning to raise $ 100 million to buy 10 million square feet of warehouses space.