Investment routes There are three ways to invest in commercial real estate – directly buy office space from a developer, 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, is expected to be opened up shortly by the 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, especially in cities such as Mumbai, are today offering smaller units of space (as small as 500-1000 square feet) in Grade A buildings given the higher vacancy and 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 like doctors, auditors, stock brokers and 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 50-60% 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.
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