by Mr. Ramesh Nair, Jones Lang LaSalle India
Buying an office or /
retail space is a huge investment, which is why commercial real estate
has been traditionally seen as an asset class that only institutional investors
or / heavyweight HNIs could invest in.
That, however, is changing. Many retail investors are
now getting into the office real estate game.
For a perspective of the opportunities in Indian
commercial real estate, consider this - Manhattan in New York City has 45 Crore
square feet of Grade A stock, while London has 20 Crore square feet.
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| Ramesh Nair, JLL India |
In comparison, India’s collective office space stock
accounts for only 37.50 crore square feet. This showcases the long-term
potential for office space at all levels in India.
Very few of the world’s commercial real estate markets
have undergone such a dramatic &
rapid change in such a short span of time as India’s has.
The next few years will see a quantum spurt in the
services and knowledge sector, opening up tremendous opportunities for the
retail investor.
INVESTMENT ROUTES..
There are three (3) ways to invest in commercial real
estate - directly buy office space from a developer / promoter, buy shares of a
commercial developer from the stock market, or / invest in a real estate fund
focused on commercial real estate.
As the quantum of investment is usually huge, the
prospective buyer needs to take more informed decisions. Another option, which
is investing in Real Estate Investment Trusts (REITs), is expected to be opened
up shortly by the central government.
REITs are pooled investment entities where the corpus is
invested primarily in completed, income yielding real estate assets and
distribute a major part of the revenue/income generated among their investors.
Many developers / promoters, especially in cities like
Mumbai, are today offering smaller units of space (as small as 500 square
feet to 1,000 square feet) in Grade A
buildings given the higher vacancy & pressure on pricing. This is in sharp
contrast to the scenario a few years back, where only much larger units were
available - making it tough for a small investor to invest in office real
estate.
Investors considering retail space can now consider a
multitude of affordable options in free-standing high street outlets or shops
in malls.
The advantages of smaller units are two fold:
* * It is easier to find tenants for them
*
* The premises can also be used for business by their
owners if they happen to be of an entrepreneurial bent of mind
Today, even professionals such as doctors, auditors,
stock brokers & lawyers are buying
commercial properties for investment and self-use. Of course, HNIs also
continue to plug huge amounts of money into high-ticket commercial properties
in the quest for yield.
Private bankers and wealth management firms confirm that
their clients have actively started investing in commercial properties after
staying away in 2009 and 2010.
These investors have bought into commercial properties
because they seek assets that can protect their portfolios from inflation and
stock market volatility.
On their side, banks are willing to lend up to 50 % to
60 % of the LTV to buy commercial properties, subject to the borrower’s
adequate net worth and established ability to repay.
The investor should focus on a few carefully selected
markets with a diverse economic base, deep pool of tenants and tenants who like
quality buildings. While looking at under construction projects, the investor
should look at developers who have a track record of delivering high quality
projects on schedule.
WHAT TO LOOK FOR..
Despite the availability of more rationally priced
options, investing in commercial real estate is most definitely not child’s
play. It requires forethought, research and planning:
* * Investors
need to establish the soundness of the location & its demand / supply
dynamics. If they do not engage in sufficient research, they may end up buying
into micro markets which have or / will have high vacancies.
·* * They need to
ensure that the economy, job market, future infrastructure development
& population growth in the market is
healthy
* * They need to
check the developer credentials, access to public transport and quality of
property management in the project
* * They need a
knowledgeable real estate agent and a lawyer who can give them sound advice
* * If they are
investing in a retail store, they need to consider the frontage, foot-fall and
the dynamics of the adjoining catchment
* * Entrepreneurs
who wish to buy commercial real estate for self-use should ensure that the
amenities in the project that match their business needs
If an investor is looking at an income producing office
asset, he should look at:
* * The
break-up of cash flows
* * The
vacancy factor
* * Expenses
such as maintenance, property tax and building insurance
* * Lease term,
lock-in period and expiry dates
* * Long term
capital appreciation potential
* *
Refurbishment, refinancing & repositioning potential
WHY INVEST?
The rental yield for commercial property is usually 9 %
to11 %.
In contrast, the yield for residential property is much
lower at 2% to 3.5 %.
The demand for office space in India is likely to stand
at about 20 crore square feet over the next five (5) years. Post the GFC, the
prices in markets like Mumbai have dropped nearly 35 % to 40 % and have
bottomed out in most micro-markets, offering investors a good opportunity to
buy into commercial real estate.
India’s macroeconomic growth story makes for a rather
compelling reason to get one’s own paragraph into it somewhere. Chosen
prudently, and office real estate can let you do that in indelible ink. Last
year, the demand for office space across India was 2.60 Crore square feet and
this year is expected to see demand of 2.80 Crore square feet.
The possibility of diversifying one’s portfolio, the
sheer pride of ownership & the
benefits of the longer leases that typify commercial tenants are other reasons
to look at commercial real estate investing.
Remember, you do
not only make a profit on the sale of appreciated commercial property - the
rental cash flows of a well - located office or / shop space are considerable.
Unlike in residential property, the income that can be
generated from commercial property is what determines its value.
In other words, the capitalization rate is actually the
measure of the demand for the property. For those who do their homework well,
investing in commercial property is a high-adrenaline & high-returns game
that residential real estate investment cannot hold a candle to…
About
the author..
Mr. Ramesh Nair
is COO (Business) at Jones Lang LaSalle India
For
Media Contact:
Mr. Arun Chitnis
Head – Corporate Communications & Media Relations,
Jones Lang LaSalle India
Level 6, Amar Avinash Corporate Plaza
Bund Garden Road, Pune - 411 001.
Tel: 020 3093 0441 Fax: : 020 4019 6101
Mob: +91 9657129999
Blog: www.joneslanglasalleblog.com/realestatecompass
Website: www.joneslanglasalle.co.in
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