Commercial property: Opening up to retail investors

Dec 07 2013, 10:08 IST
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India’s collective office space stock accounts for only 375 million square feet. India’s collective office space stock accounts for only 375 million square feet.
SummaryMany retail investors are now getting into the office real estate game.

developers who have a track record of delivering high quality projects on schedule.

WHAT TO LOOK FOR

Despite the availability of more rationally priced options, investing in commercial realty 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. Otherwise, they may end up buying into micro markets which have or will have high vacancies.

* They need to factor in the economy, job market, future infrastructure development and population growth in the market.

* They need to check developer credentials, access to public transport and quality of property management.

* They need the services of a knowledgeable real estate agent and a lawyer.

* If they are investing in a retail store, they need to consider the frontage, foot-fall and the dynamics of the adjoining catchment.

For an income producing office asset, one should look at:

* The break-up of cash flows, and the vacancy factor.

* Expenses such as maintenance, property tax and building insurance.

* Lease term, lock-in period and expiry dates.

* Long term capital appreciation, refurbishment, and repositioning potential.

LOOKING AT YIELDS

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 square feet over the next five years. Post the global financial crisis, prices in markets like Mumbai have dropped around 35-40 per per cent and have bottomed out in most micro-markets, offering investors a good opportunity.

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.

The author is COO – Business, Jones Lang LaSalle India

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