Things to know to generate best return from a Commercial Property Investment.

By Abhay Shah, Realty Quarter

Real estate investment, particularly in residential properties, is very popular with investors. However, there are far more benefits and opportunities available for investment in commercial spaces than residential properties.

Commercial properties rental yields:

Commercial and residential properties characteristics are dynamically very distinct. Investors usually trade a commercial property on a return basis.

An investor seeks a commercial property rent by at least 7 to 8%, claims Nitesh Punjabi, associate director, capital markets and investment services, Colliers International India. “In addition, investing in a commercial property is not simple to leverage. The only leverage accessible is a loan against property, that is more costly than a home loan,” added Punjabi. Residential investments generally generate 2-4% rental yields. An investor in this asset class wishes to achieve excellent yields by strong capital appreciation. Home loans for residential properties are also readily available at interest rates from 9 to 10%.

Important factors to be examined before buying commercial property:

According to experts, an investor must focus on an already leased commercial property. Unleased commercial property will not generate any return and will, in fact, be a cash drain since the investor must pay maintenance and property taxes, without any cash inflow from the asset.

“Commercial real estate investments may vary from Rs 30 lakhs to hundreds of crores. The location has to be such that there is a need for office space or retail, in the micro-market where the development is being undertaken. If the demand is low, the offices will remain vacant,” says Gera Development’s MD, Rohit Gera.

An investor can also select a ready but not rented property. While such a property could be offered for a discount, the investor would be in a risk of leasing the property. An under-construction commercial property should be the last option. If an investor selects such an asset, he must ensure that the property is purchased at a significant discount compared to the leased property.

Commercial Property Capital Appreciation:

Punjabi points out that rents usually rise with an increase in capital values in office space. When the price of the property rises, the rent also raises automatically creating value for the investor. “Investors should concentrate more on long-term lease appreciation than on short-term capital appreciation, in order to generate long-term value in a property. Whereas the appreciation of short-term capital may seem very attractive, most profits are usually wasted in capital gains and other taxes.”

Tips to get the best commercial property for investment.

• The investment should, preferably, cater to the requirements of mid to large size corporate occupiers.
• Investors, who can buy space of over 10,000 sq ft, should focus on CBD/SBD markets of all cities.
• The building should be in a well-established micro-market, wherein, there is reasonable office demand, as well as transport and social infrastructure.
• The investor should target a net yield of eight to nine per cent, on his investment.
• To improve yield, the investor can also make use of financial instruments such as lease rent discounting.
• Avoid high leverage when the asset is vacant, as it could be risky.