Real estate investments for non-resident Indians (NRIs) have traditionally been synonymous with residential properties. However, this group is now looking at investing in the commercial property space to diversify their portfolios and also yield higher returns.
A Jones Lang LaSalle India study points out that 2013 will see a larger-than-usual number of NRI investors in the commercial space primarily because of the prevailing exchange rate benefits.
India’s service sector, led by IT, will keep growing at a fast pace, fuelling demand for quality office space. Commercial property investments offer a stable source of income.
The rental yield in commercial properties is usually between 8 and 14 per cent, while the yield for residential properties is only 3-4 per cent. The annual capital appreciation in commercial properties is also high, standing at 8-12 per cent. Hence an investor can get a high annual appreciation in addition to monthly rental income.
“The rental yield for commercial property has kept pace with the capital appreciation, but that is not the case with residential properties,” says an HDFC Realty spokesperson. “Residential rentals have remained stagnant, compared to the capital appreciation.”
Santosh Tandel, Regional Head — Middle East and North Africa, Indiabulls Real Estate, echoes this sentiment. “At the recently concluded Indian Property Show in Dubai, we had numerous queries from potential investors about the segment.
“It always gives a decent rental income. In the second quarter of 2013, we are also going to roll out some commercial projects in the retail space of Panvel, Mumbai,” he says.
The capital values in commercial real estate are still 15-25 per cent below their 2007-08 peak levels, while the capital values in the residential sector had crossed their past peak by the end of 2011. This is also driving NRIs to invest in the commercial space, says Sahel Pramendra, Managing Director — Markets and Head — Solution Development, Jones Lang LaSalle India.
Cash investors can typically look at between 5 and 10 per cent year-on-year growth of their properties, says Sunil Jaiswal, a Dubai-based property expert and CEO of Sumansa Exhibitions, organisers of the Indian Property Show in Dubai. “However, by taking advantage of an off-plan property with a low down payment, a favourable payment plan, and with a quick exit after completion of the property, return on investment can be as high as 30-40 per cent,” he adds.
Retail units and office space are the most popular categories when it comes to investments in the commercial properties sector. Mumbai, Bengaluru and the Delhi National Capital Region (NCR) are the top investment destinations. Other prominent cities that offer good quality, investment-grade office space are Chennai, Hyderabad, Pune and Kolkata.
“While Mumbai witnesses a considerable number of commercial corporate property transactions for their own occupancy needs, the demand in Delhi NCR is primarily driven by high-net-worth individuals (HNWIs) and institutional investors,” says Pramendra.
Compared to residential properties, as the quantum of investment in commercial properties is often higher because of the size of the units, investors need to enter the market with a budget of at least Rs50 million (Dh3.33 million). Property experts also point out that they should stay invested for a minimum of four to five years to see good returns.
Following estimates by Jones Lang LaSalle India, in Mumbai, the capital value of office space currently ranges from Rs25,000-35,000 per square foot in Bandra Kurla Complex and Rs5,000-6,000 per square foot in Thane. In Delhi NCR, office space can be purchased at R26,000-33,000 per square foot on Barakhamba Road and at Rs6,500-8,000 per square foot on Sohna Road, Gurgaon.
“Location is a key consideration for buying any property. But, for a commercial property it is very important, because if the property is in a good location, it will always be attractive to potential tenants,” says the HDFC Realty spokesperson.
“Developer credibility and track record, accessibility, allowable uses and adequate parking also need to be considered.”
Property consultants are upbeat about the long-term prospects for the commercial property segment in India. “India’s service sector, led by information technology, will keep growing at a fast pace, fuelling demand for quality office space. Commercial property investments offer a stable source of income and their popularity will grow further as investors look at diversifying their investment portfolios,” says Pramendra.
In terms of supply, economic data provider Credit Rating and Information Services of India (CRISIL Research), expects around 229 million square feet of office space of the total supply of 607 million square feet planned in ten major cities (Mumbai, NCR, Bengaluru, Kolkata, Chennai, Hyderabad, Pune, Ahmedabad, Chandigarh and Kochi) to come up by 2014.
“India is one of the fastest-growing economies of Asia and the third-largest economy in the world in terms of purchasing power,” says the spokesperson of HDFC Realty. “As the economy continues to grow, the demand for office space is also expected to rise.
“In addition, with multinational companies coming to India and the purchasing power of Indian consumers, specially middle class, also increasing, there will be more demand for retail spaces in malls, multiplexes, and showrooms.”
Property expert Sunil Jaiswal, CEO of Sumansa Exhibitions, offers his investment tips
Why: The investor must understand his/her motives and ensure that any property purchase is in line with his/her own goals and objectives. Understanding one’s risk appetite is also important.
A property that yields 12 per cent provides much less risk than off-plan capital growth investments.
Research: A choice of one is not a choice — investors must do tremendous amount of research to ascertain the best deal for them. My ratio is — look at hundred, and you may end up with one. Research includes the developer, location, demand, competition, comparable study and the like.
Action: At some point you have to bite the bullet and take action and make
For commercial property, an investor must use the services of a qualified advocate or lawyer to check the paperwork, not only for the purchase but also for drawing up contracts.