Back to Office: Why you should invest in commercial real estate
Amidst the rising new trend of returning to office with optimism, there is a strong uptick in commercial real estate. Investing in Commercial Real Estate (CRE) assets has become more cost-effective and less time-consuming, thanks to the introduction of publicly-traded real estate investment trusts (REIT).
CRE can generate a consistent income flow in the form of rentals and is one of the best investments for passive income. However, investors should carefully examine their financial health, investing goals, risk-bearing ability, and profit-generating timeline. Following are some of the reasons why commercial real estate should be considered as an investment asset class.
Residential Vs. Commercial Real Estate
For those looking to invest in real estate, rental income is a critical factor to consider. Property investors are frequently perplexed as to whether investing in a residential or commercial property will yield a higher return. In comparison, commercial real estate outperforms residential real estate significantly. India is one of the few countries where commercial property is much cheaper than residential property in the same locality, providing various other benefits in return and appreciation. Such as greater rental yields on commercial spaces, which are almost 7-9 percent, or nearly four to five times more than residential property rentals, which are around 1-2 percent only. Investors can consider investing in pre-leased commercial properties – commercial spaces which are already rented out to and give investors the opportunity to earn rental from day 1.
Long Tenure & Stable Investment
Commercial assets, such as offices, shops, warehouses, and other commercial properties, are secure investments because they can generate recurring rental revenue. Commercial tenants typically have longer lease terms, providing investors with a more reliable and predictable stream of income. Office spaces generally tend to be good investments for at least four to five years. If the company does not have a head office or corporate office yet, in such cases, the lease tenure could go up to 10 years with the possibility of subsequent renewal at the tenant’s request. Pre-leased commercial properties being already rented to tenants reduces vacancy risk.
Generating Passive Income
It’s worth noting that large passive income from commercial properties, along with appreciation, can result in a total return of up to 15% per year, assuring a consistent cash flow for an investment. Commercial real estate investment is in high demand and provides a superior rental yield. This rental income is stable and you have complete control over selecting the right property based on your ROI expectations, making real estate an ideal passive income source.
Analysing Market Trends
By 2030, India’s real estate sector is predicted to have grown to a market value of US$ 1 trillion, up from US$ 200 billion in 2021, and contribute 13% of the country’s GDP. Retail, hospitality, and commercial real estate are all expanding rapidly, supplying India with much-needed infrastructure. With the introduction of Real Estate Investment Trusts (REITs) in India, commercial property investment is likely to increase.
The commercial sector has seen a massive turnaround as a result of the Central Government’s business-friendly initiatives, such as the Make in India scheme and the increasing influx of Foreign Direct Investment (FDI) following the implementation of RERA. It is encouraging to observe an improvement in the Indian economy, which has prompted businesses to increase their demand for commercial real estate and expand their operations.
Easy to Leverage
Lease rental discounting (LRD) allows property investors to use leverage to buy pre-leased/pre-rented commercial properties. LRD is a term loan given by banks using rental receipts as collateral and are usually available at interest rates of 7-9% per year. LRD’s also allow property investors to borrow up to 65-70% of the property value. The advantage is that the EMI for the loan is usually less than your monthly rental. As a result, a one-rupee investment can directly yield a four-rupee asset when the loan is paid off with no outflow from your pocket during the term of the loan. Lease rental discounting can also be used by rental property owners to provide with the much-needed liquidity that seems to be otherwise lacking in immovable assets.
Lock-in period for a commercial property may generally vary from three years to nine years, providing stability in your returns and protecting your investment from floundering. The tenants in CRE have mostly established businesses, hence it is easier to manage the tenants. The investor (landlord) and tenant have a more business-to-business connection, therefore interactions are more professional and courteous. As compared to renting out your residential property to a family or individuals where personal interaction is required.
Trend to Stay
While the pandemic is nearing an end, most businesses have reopened their doors and called staff back to work. In addition, most people are trying to return to work for a variety of reasons, including family sizes, smaller homes (in metropolitan cities), and unpredictable internet connections. Flexible work spaces have become a trustworthy option for employees and enterprises since they allow individual flexibility, and determine the future of the office in India in the years to come.
In summary, commercial properties should be considered as part of an individual’s investment portfolio to earn superior passive income and with the right use of leverage commercial property investment can be a great wealth building tool.
(By Kenish Shah, Co-Founder, PropReturns)
Disclaimer: This is the personal opinion of the author. Readers are advised to consult their financial planner before making any investment