Residential real estate has always been an attractive investment. Reason is obvious enough - the sense of security it provides. But of late, there has been another reason - the unprecedented rise in residential prices over the last few years.
However, over the last few quarters, the rise has abated, even reversed in some areas, after people became cautious about investing at such high prices. Does this mean residential real estate is suddenly not a good investment option?
No, but this holds true only for a short term. Now for the investors looking for some return, commercial property looks attractive.
The commercial office space is gaining momentum as companies are looking to consolidate or expand due to improving business sentiment. Strong demand from the e-commerce segment, followed by the IT /ITeS sector, has resulted in high absorption levels in quality office and commercial properties. An investor can easily expect an annual return of 6 -10 % with an additional benefit of capital appreciation.
Further this asset class can be categorised as (A) Retail spaces and (B) Office spaces. The ROI further will depend on the mirco market and asset category.
Once you have decided to invest in this asset class, following parameters need to be analysed before taking the final plunge:
Micro markets: It is crucial to understand which micro markets at least offer if not promise stable returns on investments. For example MG Road in Gurgaon has emerged as a very stable office market because of the following reasons
- Accessibility through Metro
- Easy connectivity from NH8
- Proximity to Delhi
- A good mix of residential and retail in the vicinity
All these factors lead to easy availability of tenants and shorter vacancy period.
Quality of building: Apart from prevailing rentals in a micro market, quality of the building becomes an important aspect to be considered too. It includes maintenance standards, amenities, landscaping etc. As a general trend tenants will always be willing to pay a premium on a good quality building.
Lease period: It is wise to check the lease deed of the existing tenant with the seller before the investment. Things to look for, in a lease deed should be
- Whether the building is registered as per local state laws
- Lock in period
- Notice period
- Rental security deposit
Tenant profile: It is important to check the profile of the company and its ability to pay rentals. As a thumb rule, invest in companies whose business you can understand. Just like a stock market where an investor will invest in sectors which he or she understands best.
Title documents: Do a proper legal due diligence of the property, check for any liens, encumbrances or any legal disputes on the property. This can be simplified by taking services of legal professionals.
The future holds bright for this asset class, attracting interest of NRIs looking for investment options because of rupee touching an all-time low against the dollar. Further with REIT getting its due in Budget 2016, with the abolishment of the Dividend Distribution Tax that was holding back asset owners. There will be no road block in launching REIT schemes any time now.
About the author
Sahil Sethi works with Colliers India as Manager, Office Services. He has 7+ years of experience handling occupier services with corporate and retail sectors being the highlight. Clients appreciate his expert help in project marketing, relocation and expansion strategies, lease negotiation and fit-out planning. Add to it his focused market knowledge!