Be it for end-use or purely investment, certain key factors need to be considered when it comes to investing in commercial real estate.
By Shaju Thomas
Buying real estate has always been and will continue to be a very big decision and,needless to say, quite a bit of ‘homework’ has to be done before signing on the dotted line. Investing in a commercial property works a bit different vis-a-vis residential considering factors such as sentiment, emotions and the like. Be it for end-use or purely investment, certain key factors need to be considered when it comes to investing in commercial real estate as given below:
1. Location: As cliched as it may sound, location continues to be a key criterion when it comes to zeroing in on a commercial property. In any city, there are the preferred and the ‘not-so-preferred’ micro markets when it comes to commercial leasing or purchase. Of course, location is dependent on multiple other factors such as accessibility, proximity to key hubs, proposed infrastructure developments, etc. and these should be carefully evaluated. If an existing micro market is beginning to show saturation, an ‘emerging’ corridor can very well be evaluated provided the infrastructure and other parameters support. This not only enables a good buy but can also assure capital appreciation in the long term.
2. Continual marketability: A good building in a great location would certainly see traction, thereby ensuring robust cash flows for the investor. However, the space should be able to withstand churn and continue to be ready for newer tenants and opportunities. This requires the building to show superior technical specifications and be as close as possible to the latest trends in design and structure – green building certifications would be an added advantage. If multi-tenanted, common area maintenance has to be ‘top notch’, professionally managed with accountable owners or associations. Corpus fund should be separately managed to handle exigencies or capital equipment replacement. The utilities should be environment- friendly and energy efficient. In addition, the common area maintenance and management should be thoroughly understood before putting pen to paper.
3. Market dynamics: At the end of the day, as this would be yet another number game, it would help to understand current trends, the specific market performance over the past three to five years, the expected forecast, tenant profile and vintage, rent rolls and any other data that would give clarity on the financials. If the property is a tenanted one, it is essential to understand the lease contract, especially details such as lease expiry, lock-in period, escalations, etc. A good real estate agent should be consulted for all of these so as to enable well-informed decision making.
4. Documentation: All title related documents, approvals, planning permit, taxes, utility bills, etc. should be thoroughly perused by a senior legal authority as part of due diligence. If the property is tenanted, a thorough understanding of the contract, especially lessor’s covenants /obligations should be undertaken. This would ensure there are no surprises in the future. It would be absolutely mandatory to check the presence of mortgages secured against the property.
5. Amenities: While a certain premium could be attributed to the presence of amenities in a building, its benefits tend to override the cost. Car parking stalls (which is no longer considered an amenity) should be in proportion with the quantum of space leased as per local laws and the buyer should try and procure more stalls (if possible) as this would be a big differentiator vis-à-vis comparable options. Presence of amenities, say a food court / essential retail in a large campus would certainly enhance marketability of the space, and it would be a good idea to invest in such options.
While investing in commercial real estate certainly enhances one’s overall investment portfolio, it must not be rushed into for fear of losing out on a ‘great offer’. A thorough market study taking into consideration the above-mentioned factors points along with the help of a professional real estate consultant should be done. Even if this process ends up consuming more time, it would be completely worth the while.
(The author is Director, Office Services, Colliers International India)