Climbing the commercial property ladder

The investment-grade office market in India has become one of the fastest-growing real estate investment sectors in the world. With more than 265-million square feet of operational space in 2010 — and this number is slated to almost double by 2015 — it offers immense potential for investors to maximise their returns from commercial real estate in the years to come.

While the initial focus of development was on the Tier I cities of Mumbai, NCR-Delhi and Bengaluru, office markets in Tier II cities such as Chennai, Pune, Hyderabad, Kolkata and Kochi have also developed significantly over the past few years.

"Favourable policies by the central and state governments encouraged the development of IT infrastructure and business parks, contributing to the growth of commercial realty stock in these cities," says Ramesh Nair, Managing Director of Jones Lang LaSalle India. He adds that even as the Tier II cities are moving towards maturity, the focus is gradually shifting to replicate a similar growth story in Tier III cities, which offer untapped potential in terms of human resources, lower costs and improving infrastructure, in turn offering newer investment avenues for investors.

Never mind the slowdown in the residential sector in the past few months, Mumbai is still among the most sought-after commercial destinations for corporate houses and new business outfits setting shop in the country. According to a recent research report by realty consultancy Cushman and Wakefield, Mumbai is the sixth most expensive location for office space in the world, and with the net new demand for office space in the commercial capital of the country on a steady rise, both property prices and rentals are likely to remain firm in the long term.

While residential properties have seen a sharp appreciation over the past few years and an equally sharp downturn in the past few months, prices of commercial properties have increased at a relatively lower rate, offering investors better potential for appreciation in the future.

While Nariman Point and Churchgate are still the most preferred destinations for foreign firmsand consultancies setting shop in India, companies that require larger spaces are identifying officesin the mill land havens of Parel, Elphinstone and Lower Parel.

"An increasing number of corporate houses are moving offices to the suburbs. After Nariman Point and Cuffe Parade hogged the limelight for years, suburban locations such as Andheri-Kurla, Goregaon-Malad and Navi Mumbai are fast emerging as the new business districts for commercial activity," says S.G Maheshwari of Maheshwari and Maheshwari, a leading brokerage firm in Mumbai, while indicating a similar trend in New Delhi, with new offices coming up in emerging areas such as Gurgaon and Noida.

While deals at the high end of the market mostly involve institutional players, individual investors are also increasingly making their presence felt in the middle and lower segment of the commercial realty market. From working executives buying small offices to fuel that dream of turning entrepreneur to investors buying shops to augment their monthly incomes with the shop rent, retail investors are increasingly buying into the benefits of commercial real estate.

"As the trend of high-rises and apartments is catching on in and around Kochi, the demand for commercial spaces attached to these residential complexes is also picking up," says Saji Mohan, a Kochi-based realty consultant, adding that Thiruvananthapuram is also fast emerging as a local IT hub and attracting huge investments from both institutional as well as individual investors.

The proportion of commercial sales vis-à-vis residential would have been much higher, had financial institutions not been reluctant to give loans for commercial deals.

"But people who have the funding are waking to the benefits of investing in commercial real estate," says Mohan.
 

OFFICE REAL ESTATE

Why invest in commercial realty?

Post the global financial crisis in 2008, the prices across mostmarkets in India dropped around 35 to 40 per cent and have nowbottomed out in most markets, offering investors a good opportunityto buy into commercial real estate.

"The rental yield for commercial property is usually 9 to 12 per cent per annum. In contrast, the yield for residential property is much lowerat 3 to 4 per cent," says Ramesh Nair of Jones Lang LaSalle India,adding that the demand for commercial spaces in India is likely to stand at around 200 million square feet over the next five years and chosen prudently, office real estate can yield fantastic returns on investment.

"The possibility of diversifying one's portfolio, the sheer pride of ownership and the benefits of the longer leases that typify commercial tenants are other reasons to look at commercial real estate investing," advises Nair. Not only are the rental cash flows of a well-located office or shop space considerable, you also make good profit on the sale ofappreciated commercial property.

— A.R.