How income-generating commercial real estate is an investment asset class?

commercial real estate

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 warehouse, apartment buildings, malls, hotels, medical centres, industrial property, and office building. Unlike residential real estate employed for personal use by the owner, commercial real estate is employed to generate cash flow. Commercial real estate investment in India has historically awarded thousands of investors for reaping attractive returns, as an alternative asset. However, many investments are still unknown to the workings of commercial real estate and its benefits as an investment vehicle.

commercial property illustration
Commercial Properties

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 the commercial real estate can provide a path for an investor to diversify their portfolio by including, broader and local economies. This is possible in the case of commercial real estate investment in India since a specific commercial real estate asset’s success 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 Delhi NCR, Mumbai, and Bengaluru are expected to 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 in the near future.

Return on investment in commercial real estate
Increasing returns on investment in commercial real estate

Factors to consider while considering  real estate as an investment

There are numerous factors that 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 neighbouring 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 tenant’s 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 essential 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 the 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 a tenant. Looking at workplaces, one should understand how developments such as telecommuting and co-working might have an effect on office space demand. The investment in commercial real estate property should be ideally carried out in an environment of low interest rates since this would support the demand for both borrowing and property.

commercial office space transactions in India
Commercial office space transactions in India in 1st half of 2019
investment in real estate sector in India stats
Real Estate Sector expected growth in India

Pros of commercial real estate investment in India

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

Why commercial real estate investment is better than the 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 by means of the average cost of similar properties in the vicinity. This study can be based on primary characteristics such as the number of bathrooms, bedrooms, and so on 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 lease is usually for a minimum of three years, and leases for 5 to 10 years are not unheard of. Whereas the residential leased are typically for 12 months or one 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 be a downside to long-term leases, if in case a property owner is not pleased with a tenant. The owner, in this case, can ask the tenant to leave by choosing not to renew a short-term lease.

commercial vs residential real estate
Commercial Real Estate vs Residential Real Estate

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 net 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 specific span of time. 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, there are numerous platforms that have made this investment easier for small investors as well. It is, however, advised to read the policy document carefully before making a decision to invest, so as to understand the benefits of your investment thoroughly.

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