Commercial Property: An emerging asset class for investors

December 14, 2020 1:25 PM

The rental yield from commercial properties is anywhere between 5% and 12% whereas in case of residential properties, it is currently at 2%-4%.

The projects near international airports attract high leasing activities and provide unprecedented investment benefits.

The need to get good returns in the short and long term has made the investors with real estate knowhow to divert their attention towards commercial real estate, which has become more attractive now. If the location is good, then the property attracts good rentals over a longer period of time. The rental yield from commercial properties is anywhere between 5 and 12% whereas in case of residential properties, it is currently at 2%-4%. Even the capital appreciation of commercial properties in right locations is far better than the capital appreciation of residential properties.

As of now, the demand for good commercial property, which can yield good rental returns, is on the rise because of the coming up of REIT and increasing requirement from new employment generation options. When it comes to commercial real estate investment opportunities, the best proposition is in vibrant zones where physical and social infrastructure is superior to other areas. The projects near international airports attract high leasing activities and provide unprecedented investment benefits.

With REIT, the commercial space has the upper hand; the likely trend will be further liquidity infusion in commercial property, and developers will come up with more projects in this segment. Earlier commercial spaces were in major cities of India, but now Grade A spaces are coming up in tier II and tier III cities also. Many SEZs and IT parks have come up in these cities. Then we have logistic parks, and industrial parks in these cities as these areas support effective transport. In fact, all the areas in smaller cities falling on industrial corridors have witnessed growth. Also, the IT/ITeS sector and InfoTech companies are looking to rationalise their spending and hence moving to smaller cities as real estate is becoming expensive in major cities. This development has led to the development of such commercial assets in these cities, and the trend is likely to pick up the pace in the future.

Due to the investment potential of commercial spaces, developers are also responding to the demand, which will automatically generate demand for residential around these projects. So, this symbiosis of commercial and residential bodes very well for the real estate market.

Earlier, return on investment in the residential sector was good depending on the choice of location and builder’s brand. The ROI was high due to capital appreciation, which was better than the low rental yield. However, the scenario has changed as capital and rental yield are not as high as they used to be. A stagnant scenario has emerged in this segment, and this led the investors to look at the commercial segment. As of now, office properties are yielding returns to investors that are higher than the returns that residential properties once yielded.

A shift in focus of NRIs and HNIs towards the commercial real estate has also led to this upsurge in interest. In Chandigarh, for instance, commercial is becoming popular with the advent of the IT/ITEs sector, rapidly developing infrastructure, and world-class education and medical facilities. A few prominent upcoming investment locations in Tricity are Airport road Mohali, Zirakpur, and New Chandigarh. We can foresee a demand for suitable quality office spaces in the future as well. Many big firms will likely end their long-term leases to reduce operating costs and move to tier II cities. If this happens, more commercial spaces will enter the market in these areas.

(By Vimal Monga, Vice President of Sales & Leasing (commercial), TDI Infratech Ltd)

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