Commercial real estate investing may not be as difficult as it appears if some of the important aspects are taken care of. There is a possibility of earning more than debt instruments if the principles of long-term investments are followed. Here are those points which every aspiring real estate investor should factor in before making the big decision.
1. Location & connectivity
Looking for locations with less than five per cent vacancy can help keep supply dynamics in check. That shows that there is no excess supply and that the property will have a higher chance of buying and renting. The limited level of supply would automatically lead to capital appreciation and higher rents – the two prime sources of generating revenues from commercial property investing. The location of the project should be accessible by public transportation. Having a property at a location having proximity to a metro station and a bus stop would be an added advantage.
2. Background check of the Developer
Before investing in any real estate project, an investor should always check the background of the developer. Make sure that the developer has built projects in the past successfully and try to visit those projects. That will give you an insight of his experience and expertise.
3. Quality check
Much like what is seen fetches the most customers, the buildings that are spoken of as better with quality services and rents will be rented first. The investor stands to gain in terms of faster capital appreciation, better tenant retention and higher rents. Buildings with LEED gold or platinum ratings, more elevators, higher ceiling heights, better views and nicer looking lobbies have more rental value. One can look for multinational tenants who look for quality and are even ready to pay premium for that. It is also good to keep in mind that such properties are more liquid and quickly saleable.
4. Analysing demand versus supply dynamics
Investor needs to analyse the area before deciding to buy a commercial property. Every city has its own micro-market such as Mumbai has BKC, Parel and Nariman Point while Bengaluru has Electronic City, ORR and Whitefield. Each of these has their own stock and upcoming supply. If the annual supply over the next couple of years exceeds the previous demand, then the rents would come down. The higher supply would affect both old and new buildings. While tenants in the old buildings will renegotiate rents and clauses, the new buildings will have lower rents.
5. Diversification of investment
Having a diversified portfolio of investments reduces risks. Investors should be mindful of locking all their savings into one property that may stop yielding rental revenue once a tenant vacates. If your corpus allows, diversify your investments across different properties so that even if one of your assets does not generate desired returns, you have other properties to make up for it.
(By Ashish Bhutani, CEO, Bhutani Group)