Income-Generating Commercial Real Estate: An Investment Asset Class

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The commercial real estate market in India is an umbrella term for real property, which is utilized to generate profits for the owner. Commercial real estate examples include warehouses, apartment buildings, malls, hotels, medical centers, industrial property, and office buildings. Unlike residential real estate which is employed for personal use by the owner, commercial real estate is employed for generating cash flow. Commercial real estate investment in India has historically, awarded thousands of investors to reap attractive returns, as an alternative asset. However, many investors are still unknown to the workings of commercial real estate and its benefits as an investment vehicle.

The commercial real investment market in India, as an alternative asset class, also gives an investor the ability to diversify his or her portfolio. A smart and educated investment in commercial real estate can provide a path for an investor to diversify his/her/their portfolio by including, broader and local economies. This is possible in the case of commercial real estate investment in India since the success of a specific commercial real estate asset is related to local market dynamics.

Some of the upcoming markets for considering commercial estate as an investment asset, are Delhi NCR, Mumbai, and Bengaluru. Commercial real estate investment Delhi NCR is gaining prominence and is expected to yield attractive risk-adjusted returns for investors over the next few years. Commercial real estate investment in Delhi NCR, Mumbai, and Bengaluru is expected to witness a significant rise over the next decade. Small investors are gradually becoming aware of the benefits of investing in commercial property and are considering commercial estate as an investment asset. A steady approach with a thorough study of the market can assist in reaping attractive returns soon.

Factors to consider while considering real estate as an investment

Numerous factors need to be studied while considering real estate as an investment. Some of these factors are as follows:

• The location of the property and its survey — When it comes to commercial real estate investment in India it is all about the place. Several considerations come into play when it comes to the purchasing of commercial lands, such as infrastructure projects currently under construction in the region, distance to neighboring towns, public transport, and road accessibility.
• Evaluating the financial condition of the tenants — There are a variety of considerations one should pay attention to when investing in a building with existing tenants. The tenants’ revenues on a weekly, monthly, or annual basis can prove as a key parameter, as they provide a more reliable reflection of the investment’s profitability.
• Documentation — An overall document review is important because it will assist in getting a better understanding of the legal work the investor should take care of. This includes papers (in the case of resale property) related to transfer of ownership and mortgage.
• Market Dynamics — Studying the dynamics of the property form that one is choosing is essential. When looking at investing in retail, consideration should be given to the short-term and long-term effects of customer demand and e-commerce on the tenant. Looking at workplaces, one should understand how developments such as telecommuting and co-working might affect office space demand. The investment in commercial real estate property should ideally be carried out in an environment of low interest rates since this would support the demand for both borrowing and property.

Pros of commercial real estate investment in India

• Potential of generating high income
• Higher equity potential — increase in cash flow via leveraging
• The high number of tenants — low risk
• Advantage of security
• High appreciation value

Why commercial real estate investment is better than residential real estate investment?

The value of an investment in commercial property is easy to increase.

The market value of a residential property is measured using the average value of similar properties in the vicinity. This study can be based on primary characteristics such as the number of bathrooms, bedrooms, and so forth. So, to sum it up, a two-bathroom and two-bedroom house with state of the art appliances, has the same value as that of a two-bathroom and two-bedroom property with basic amenities, in the same block.

A more precise approach is used to value commercial real estate. The local factor surely takes into consideration, however, the revenue generated by the property, forms the basis of its market value. So, an inexpensive strategic improvement of the property, which can assist in increasing the revenue generated by the property; can have a massive impact on the resale value of the property.

Commercial properties often come with longer lease terms

• As compared to residential leases, commercial leases are much longer. Commercial real estate leases are usually for a minimum of three years, and leases for 5 to 10 years are not unheard of. Whereas the residential leases are typically for 12 months or 1 year. Some of the benefits of having a long lease include:
• Lower turnover costs
• Lower vacancy rates
• High assurance of receiving a reliable cash flow

However, there can a downside to long-term leases, if in case a property owner is not pleased with a tenant. The owner in this case can simply ask the tenant to leave by choosing not to renew a short-term lease.

Final thoughts

Unlike publicly-traded securities and the involved volatility of public investments, direct investment in commercial real estate can provide steady cash flow in the form of rental income. Having real estate in one’s investment portfolio can have advantages such as portfolio diversification, long-term appreciation, and a new cash flow.

Commercial real estate is often considered to be a scarce resource and is a hard asset. It has an intrinsic value associated with it, which appreciates over a certain period. The cost associated with commercial real estate has caused it to be limited to institutional investors. However, with the advent of the technology age of the 21st century, numerous platforms have made this investment easier for small investors as well. It is, however, advised to read the policy documents carefully before deciding on an investment, to understand the benefits of your investment thoroughly.