For Non Resident Indians (NRIs) looking at investing in Indian property today, the task is challenging. On one hand, with the rupee touching all time lows against the dollar, it appears to be a great time to remit funds to India for investment. However, on the other hand, with India’s growth story looking bleak, the prospect for high returns seems an uphill task. For Non Resident Indians with big budgets and who have the appetite for some serious real estate investing, here’s an option you might want to consider.
If you are keenly looking at investing in property in India, consider commercial spaces. “Today, NRI’s are buying commercial properties for investment. Of course, HNIs also continue to plough 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. The possibility of diversifying your portfolio, the sheer pride of ownership and the benefits of the longer leases that typify commercial tenants are the other reasons why an investor should look at commercial real estate investing” says Ramesh Nair, COO – Operations, Jones Lang La Salle.So if you are looking at commercial property, here are some tips that might help you.
Location
“Investors need to establish the soundness of the location and 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,” Nair says. NRIs must ensure that the economy, job market and population growth in the market is healthy.
“Today Bangalore and Mumbai offer the best investment opportunities for commercial,” he adds.
Type of property
There are different kinds of commercial properties that are available. The popular ones are retail and office spaces. “Till a few years ago, only large units were available in both, making it difficult for a small investor to invest. However, there has been a change and smaller spaces are becoming available,” says Pankaj Kapoor, Founder and Managing Director at Liases Foras Real Estate Rating & Research Pvt Ltd.
“Many developers, especially in cities such as Mumbai, are today offering smaller units of space (as small as 500-1,500 square feet) in Grade A buildings. Investors looking at retail space can now consider a multitude of affordable options in free-standing high street outlets or shops in malls,” Nair says.
In fact, if you are looking at buying retail space, Nair says it is advisable to look at high street rather than a mall as a strata sold mall is a recipe for disaster. In a strata sale model, shops in a mall are pre-sold to individual investors. The developer thus restricts himself to selling a store as a unit and investor can hunt for a tenant. The problem arises because the model has no control over trade and tenant mix and there is no cohesiveness to the mall to attract customers.
Out lay and expected returns
Experts suggest that the minimum budget you should have in mind for a commercial investment is Rs 3-4 crore.
Kapoor pegs the rental yield from commercial properties at 12%. Rental yield is nothing but the annual rent divided by the property value. “Often, buyers tend to ignore rental yield and instead focus only on capital appreciation. However, rental yield is a very important parameter as it represents productivity of the price. When you buy a commercial property, make sure that you can get a rental yield of at least 11-12%. An yield of less than that means the property is overvalued,” Kapoor explains.
According to Nair you can expect returns of 10-11% per annum from commercial investment. “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 with a residential property, the income that can be generated from commercial property is what determines its value. In other words, the capitalisation 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 and high-returns game,” he says.
Due diligence
Like any other property purchase, commercial real estate investing too calls for a fair share of due diligence.
Check the developer credentials, potential for infrastructure development, access to public transport and quality of property management in the project. If you are investing in a retail store, consider the frontage, foot-fall and the dynamics of the adjoining catchment
“If you are an investor looking at an income producing office asset, 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, and refurbishment, refinancing and repositioning potential,” Nair adds.
Source: Economic Times