Driven by IT/ITES sectors, the commercial space demand is soaring across major cities, writes SANYA AEREN
The positive sentiments for Commercial realty’s growth are reflected in the 5 percent increase in the net absorption of office space in the Delhi-NCR during the first quarter of FY 2021.
Cities such as Noida and Gurugram have contributed 55 percent and 38 percent of net absorption of office space and the second half of 2021 looks promising for commercial real estate with a focus on reasonable prices for sustainable business operations.
As per a real estate study carried out recently, India’s Flexible office stock is expected to grow 15 percent year-on-year. Driven by IT/ITES sectors, the commercial space demand is soaring across major cities.
If you are looking to invest in commercial property, understanding the pros and cons is essential.
The Plus side
High returns: Indians always have a soft spot for investment particularly when it comes to gold and real estate. Commercial properties offer lucrative rental returns over a period. As the residential market is likely to pick up pace overtime, office properties are high in demand with offices opening across the country. The estimated return from investing in commercial properties is around 8 to 10% as compared to investment in residential properties where the estimated return is 3% to 4%.
Growth in demand: WFH may not be the new normal especially due to inconsistent internet speeds, smaller homes and people preferring the office environment.
With the emergence of new businesses, the demand for commercial properties is on the rise as according to the Central Registration Centre around 16000 new companies have been registered since the lockdown. Major IT companies and corporates are looking to set up office spaces in the country, a recent example is Barclay, opening its second largest office in Pune.
Steady cash flow payments: The lease period for commercial properties stretches between 2-10 years. A long lease period offers steady cash flow in the form of regular rentals, and you don’t need to look to lease out your space every couple of months thereby preventing any erratic cash-flows.
Ease of maintenance: While residential properties may require you to spend frequent cash for the upkeep, commercial properties focus on amenities to enhance work capabilities hence lesser attractive amenities are required leading to reduced maintenance costs.
Benefit in the form of Triple-net lease: This form of lease agreement makes the lessee or the tenant liable to pay all property expenses including payment of taxes and maintenance. This reduces the headache of frequently dealing with any recurring expenditure.
Managing a commercial investment: If you are the owner of a residential property, you’ll be able to manage easily as compared to a commercial building. In case of commercial property, you are dealing with CAM costs and multiple leases.
Expert help required: It may happen that you won’t be able handle all maintenance issues and would need someone to deal with the emergencies and repairs involved. While this cost isn’t ideal, you’ll need to add it to the set of expenses involved while managing a commercial property.
Bigger investment: Acquiring a commercial property requires you to put up more capital as compared to a residential rental. Dealing with large capital expenditure comes with huge return risks and may not be your cup of tea.
Risks and Incidents: Properties intended for commercial use will have more public visitors inflicting damage in the form of damaging the property by spray paint, cars hitting the curb of the parking lot, fire, burst pipes, storms and explosions.
Finally, while it can be challenging for someone who lacks the capacity and expertise, there are plenty of benefits for those looking to earn a greater ROI in the commercial real estate sector.
Investing in commercial real estate is becoming less tedious with REITs and fractional ownership of property thereby creating an easier entry field into the real estate market. (The author is Chief Advisor, Marketing & Communications at Berkshire Hathaway HomeServices Orenda India)