Dubai: For retail investors, choices in the commercial property sector are to some extent limited because a majority of the space is in large or mid-size projects. A few developers have now started building offices for sale, targeting end-user occupiers or investors.
Mumbai-based Lodha Group is one such developer, recently having built and sold two buildings on this model. The office sizes are relatively small, ranging from 500 square feet to 2,000 square feet. However, these office spaces are meant for high net worth investors.
"That size suits retail investors," said Ashutosh Limaye, head of Research and Real Estate Intelligence Service, Jones Lang LaSalle, India. "Rates would be different in different cities for obvious reasons. But in Mumbai, which is the costliest market, at CBD (Central Business District) locations the typical rate would be Rs25,000 (Dh1,832.66) per square foot. So, a 1,000 square foot office would mean Rs25 million. And 500 square feet would mean Rs12.5 million. In suburban locations the rates would be half, which actually gives opportunity to retail investors."
But suburban offices have a higher degree of risk than CBD ones.
"While it gives lots of options in low- or mid-entry size, at the same time it will mean that annual yield, or the return that investors would like to have, would be in excess of 13 or 14 per cent," Limaye said. "In the CBD they could be happy with nine or 10 per cent."
Independent of the deal size — small or large — rental rates as well as capital prices for commercial properties in India are at an all time low after a correction in 2008, according to Limaye.
"We have seen some signs of rents and capital prices increasing in some of the micro markets of top seven cities," he said. These cities are: Mumbai, Delhi along with its satellite towns, Bengaluru, Chennai, Hyderabad, Pune and Kolkata.
Meanwhile the capital price outlook for 2012 is one of caution.
"The top seven cities would move aligned with the inflation rate," Limaye said. "We may expect between five and 10 per cent rental increase in the 2012-2013 financial year." Rent and capital prices are expected to improve in the long run after the current phase of oversupply is absorbed.
No further fall
"We expect four to six quarters for this oversupply to get consumed," Limaye said. "We do certainly believe that rents as well as capital prices will not fall any further. So, from that perspective, it's a good time to buy because the developers are also under some stress."
Ground floors of mixed-use buildings — which usually house shops selling daily commodities — give decent returns depending on their location. But Limaye said lately many builders have tried to build shops on the ground floor irrespective of the location, leading to oversupply.
"It has to be an arterial or sub-arterial road with decent traffic to make that investment pay," he said.
Know you repayment capacity and read the fine print
For many NRIs, the way to invest in property starts with a loan. But prudence has to be exercised in determining the loan amount and the choice of bank to ensure there are no big surprises later.
Though one would prefer to get the maximum available loan, it should be within the cost range of the property, said Krishnan Ramachandran, chief executive of Barjeel Geojit Securities, Dubai.
"Ideally the loan should not exceed 75 to 80 per cent of the value of the property," he said, referring to the plight of many expatriate investors in the 2008-09 Dubai property bubble as an example of how excess leverage can demolish all financial planning and expectations.The interest rates offered by some banks and financial institutions in India are now at a peak level. The question is, would you borrow at these levels? At present floating interest rates range anywhere between 10.25 to 11.50 per cent a year for a 10 to 15-year home loan.
"Though there is a possibility of the rates coming down in the near term, the fact remains that the rate reductions will happen over the next one to three years and in a phased manner," Ramachandran said.
Anshuman Magazine, chairman of CB Richard Ellis India, said the wise thing to do is to talk to two or three banks and negotiate the best rate possible. For home loans it is important to read the fine print of the terms and conditions. Processing charges, mortgage modalities, loan prepayment conditions, commencement dates of EMIs, and loan draw down conditions should be evaluated, among other considerations.
Ask the loan officer to tell you everything you have to pay so that there are no hidden charges later, Magazine advised.
If there is a choice between a personal loan in the UAE and a house loan, Ramachandran is in favour of the house loan.
"It is certainly not advisable to borrow locally [a personal loan] and use that to repay home loans in India," he said. "First, the quantum of the personal loan may not be enough, and second, the rate differential is not very high to consider this arbitrage."
At best, it can work on a case to case basis, he added.