by SHOBHIT
MALETA , Knight Frank India
lists down the main
reasons that make investing funds in commercial properties a smart option
Indian developers are
providing the latest technological advancements to ensure that the buildings
today are green & secure, with ambience and facilities that match
international standards.
Automatic valet parking,
e-glass, water harvesting, zero disposal with sewage treatment plants, access
control, intelligent building management systems, under-body car scanners
& intelligent elevator technologies,
are some of the world-class features that are provided by developers in new
commercial office space projects today.
GREAT TENANTS..
The occupiers of
these buildings are a veritable whos-who of Fortune 500 & BT 300 companies.
Facebook, Google,
Fedex, Goldman Sachs & Deutsche
Bank, were some of the corporates who took up office space on rent in 2012.
Typically, banks are
considered to be the best tenants but large conglomerates such as Tata and
Mahindra are coveted clients.
Why Firstly,they pay
the rent on time as they are cash rich and secondly, these companies bring with
them superior standards of corporate governance & compliance, thus,
ensuring process-driven smooth payment flows.
GREAT LOCATIONS..
The locations of these
buildings are in the prime Central Business Districts (CBD) of major
metros,e.g. Bandra Kurla Complex (BKC) in Mumbai, Sector 18 in Noida, Hinjewadi
in Pune, Gachibowli in Hyderabad, Salt Lake in Kolkata, Whitefield in
Bangalore, and Gurgaon & Noida in the
NCR.
Locations such as BKC
are still attracting investments from the government, with a beautification
project & the monorail proposed for
it. With the government working to provide superior infrastructure in locations
such GIFT City Ahmedabad, Gachibowli and Noida, a virtuous growth cycle has
been initiated. This is because the government itself can occupy large
buildings with multiple departments &
ministries. Additionally, a large number of government owned companies
and PSUs may be directed by the government to occupy in these locations.
STABLE PREDICTABLE
INCOME..
Another good aspect
of commercial property leases is that the tenure is long, typically three (3)
years and in multiples of three (3) years with monthly or / quarterly payments
and deposits ranging from 6 months to 12 months.
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| SHOBHIT MALETA , Knight Frank India |
The tenant invests
alongside the investor in the property & at times, spends good money in the
upkeep of the building amenities &
landscaping to meet global standards.The tenant invests in the property
by doing the fit-outs, which could cost anywhere between Rs. 1,500 to Rs. 4,000
per square feet based on corporate guidelines.
This makes the tenant
sticky, as he has a financial disincentive to terminate the agreement, apart
from the lease contract termination clauses.
HIGH YIELDS..
According to a recent
study, India has the highest yields (rent / capital value) only second to
Manila, which are almost 50% higher than Europe or USA. This can be better
appreciated as the quality of the tenants (Fortune 500 MNCs) & quality of
buildings (energy efficient, glass & aluminium ) is the same.
Contrast this to
residential yields which are around that of commercial yields in India. The
case for commercial property becomes stronger as one can earn up to four (4)
times more with the same initial investment. Another benefit of locking in high
yield is that as interest rates fall, investors can earn a spread between the
yield & the interest rate charged to the investors, should they take a loan
to finance the acquisition.
TAX EFFICIENT
STRUCTURES..
There are multiple
tax efficient structures available to hold commercial property investments,
ranging from trusts, private limited companies and the recent LLP formats.
These structures can impact taxation levels, quantum, incidence & estate
planning, and investors should take help from experts to arrive at the optimum
structure for their objectives. The tax and legal structures do not address one
inherent risk in commercial property: concentration risk, which is further dissected
into financial concentration and geographical concentration. This risk exists
as normally desirable tenants sucha as banks / MNCs do not occupy spaces
below 5,000-10,000 square feet,
thus,forcing an individual to invest upwards of Rs. 5 crores in one single
property.
EXIT OPTIONS...
Truth be told, exit
options are limited. My advice is simple: make it small. It is advisable to
bifurcate the space one is purchasing into multiple units. This may be done
building-wise,floor-wise or unit-wise.
Never buy large
assets, anything above Rs. 25 crores as one single unit, as the large amount of
investment by prospective buyers will reduce the actual number of buyers.
About the author
The writer SHOBHIT
MALETA is
director-portfolio advisory services, Knight Frank India
Shobhit Maleta
Director & Chief Investment Officer - Portfolio Advisory Services at Knight Frank India
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