There was a time when the residential real estate segment was ruling the roost. The return on investment was phenomenal be it the rental income or capital appreciation. More than rental, capital appreciation was making it a lucrative option for the investors. In fact, until 2006 or 2007, most of the projects were lapped up by the investors who formed around 60-65 per cent of the buyers. Gradually, the residential market became end-user friendly as returns from the same dwindled for investors. In the last few years, the scenario has changed as capital appreciation and rental yields are not that great anymore.
Stagnancy has emerged in the residential segment. Due to lack of confidence on timely delivery, simultaneous development of infrastructure in new emerging markets and availability of leverage at more optimum rate of interest on mortgage for encouraging home buyers to choose a buying of home over leasing, demand for residential overall in last few years had been all time low and this led the investors to look at the commercial segment. The commercial segment — industrial, retail and frontier segments such as co-living — is expected to develop further, Office space and retail assets have emerged winner as there is a constant demand for these spaces.
On the back of higher demand and higher income yield from commercial real estate compared to residential, monetisation of this asset class has interest from all segments may it be banks, private equity, family offices, HNI’s and now with REITs the demand shall sore further and will make commercial assets for times to come as a preferred investment opportunity by majority of investors from various groups.
If planned properly, availing a higher proportion of leverage from bank or financial institutions against rental yielding commercial real estate at optimum value and for longer duration makes this investment class even more workable and tax efficient hence is increasing the effective return on investments.
Several IT and ITeS companies are going for rationalisation of manpower and they are also likely to optimise their office real estate portfolios. These firms would consolidate offices across various locations and move to Tier II cities. This is opening up new avenues for investment in the commercial segment in Tier II cities.
The major shift in focus of NRIs and HNIs towards commercial real estate has also led to this upsurge in interest. 2018 witnessed a jump of 21 per cent in new commercial supply as compared to 2017.
Commercial office stock is likely to cross 600 million sq ft and office space leasing in major cities is expected to cross 100 million sq ft during 2018-20. Co-working spaces in major cities has seen a sharp increase as it reached around 3.44 million sq ft as compared to 1.11 million sq ft in 2017.
NRIs, especially the ones living in Gulf and the US are preceived as high potential clients. Earlier, they heavily invested in residential segment as it yielded good returns. But for the last couple of years, the trend has shifted to commercial segment. Higher scope of capital appreciation, long term stability of rental income, loan against rental yield on commercial assets owing to the increasing demand of Grade A offices, IT parks, logistics centres and now the formation of REIT has also pushed the case of commercial assets as a preferred investment choice. NCR is among the top destinations for NRIs that include Mumbai, Bengaluru, Hyderabad, Chennai and Pune.
A good commercial property yields around 6-10 per cent rental income. Overall return on investment including capital appreciation over a five-year investment horizon in commercial real estate investment could be 12 per cent per annum return. The upsurge in commercial office space started in 2017 and a further boost was provided this year with the REITs in sight. As more liquidity will come in commercial projects, developers will come up with more projects and help in smoother fund raising. In fact, Tier II and Tier III cities are witnessing a demand for commercial offices as prices in major cities are skyrocketing. Cities like Indore, Jaipur and Kochi are coming up as investment destinations promising good capital appreciation.
In the current scenario, we can foresee a demand for good quality commercial space in future as well. However, before investing, one should do a detailed market intelligence and comparison and then take the plunge.