NRI’s Guide to Investing in Mumbai’s Commercial Real Estate
Buying an office or retail space is a huge investment, which is why commercial real estate has been traditionally seen as an asset class that only institutional investors or heavyweight high net individuals could invest in. That, however is changing. Many retail investors are now getting into the office real estate game.
Developers, especially in cities such as Mumbai, are today, offering smaller units of space (as small as 500-1,000 sq ft) in Grade A buildings, given the higher vacancy and pressure on pricing. This is in sharp contrast to the scenario a few years back, where only much larger units were available – making it tough for a small investor to invest in office real estate. Investors considering retail space can now consider a multitude of affordable options, in free-standing high-street outlets or shops in malls.
Advantages of Smaller Units
It is easier to find tenants for them. The premises can also be used for business by their owners, if they happen to be of an entrepreneurial bent of mind. Today, even professionals like doctors, auditors, stock brokers and lawyers, are buying commercial properties for investment and self-use. Of course, high net individuals also continue to plug huge amounts of money into high-ticket commercial properties in the quest for yield.
Private bankers and wealth management firms confirm that their clients have actively started investing in commercial properties after staying away in 2009 and 2010. These investors have bought into commercial properties because they seek assets that can protect their portfolios from inflation and stock market volatility. On their side, banks are willing to lend up to 50-60 per cent of the loan to value to buy commercial properties, subject to the borrower’s adequate net worth and established ability to repay. The investor should focus on a few carefully selected markets with a diverse economic base, deep pool of tenants and tenants who like quality buildings. While looking at under construction projects, the investor should look at developers, who have a track record of delivering high quality projects on schedule.
What to look for when investing in commercial real estate?
Despite the availability of more rationally priced options, investing in commercial real estate is most definitely not child’s play. It requires forethought, research and planning: Investors need to establish the soundness of the location and its demand/supply dynamics. If they do not engage in sufficient research, they may end up buying into micro-markets which have or will have high vacancies.
They need to ensure that the economy, job market, future infrastructure development and population growth in the market is healthy. They need to check the developer credentials, access to public transport and quality of property management in the project. They need a knowledgeable real estate agent and a lawyer, who can give them sound advice. If they are investing in a retail store, they need to consider the frontage, footfall and the dynamics of the adjoining catchment. Entrepreneurs, who wish to buy commercial real estate for self-use, should ensure that the amenities in the project match their business needs.
In the case of income producing commercial real estate
If an investor is looking at an income producing office asset, he should look at the break-up of cash flows; The vacancy factor; Expenses, such as maintenance, property tax and building insurance; Lease term, lock-in period and expiry dates; Long term capital appreciation potential; Refurbishment, refinancing and re-positioning potential.
Why invest in commercial real estate?
The rental yield for commercial property is usually 9-11 per cent. In contrast, the yield for residential property is much lower at 2-3.5 per cent. The demand for office space in India is likely to stand at around 200 million sq ft, over the next five years. Post the GFC, the prices in markets like Mumbai have dropped around 35-40 per cent and have bottomed out in most micro-markets, offering investors a good opportunity to buy into commercial real estate.
India’s macroeconomic growth story makes for a rather compelling reason to get one’s own paragraph into it somewhere. Chosen prudently and office real estate can let you do that in indelible ink. Last year, the demand for office space across India was 26 million square feet and this year, it is expected to see a demand of 28 million square feet. 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.
Remember, you do not only make a profit on the sale of appreciated commercial property – the rental cash flows of a well-located office or shop space are considerable. Unlike in residential property, the income that can be generated from commercial property is what determines its value. In other words, the capitalization rate is actually the measure of the demand for the property. For those, who do their homework well, investing in commercial property is a high-adrenaline and high-returns game.