Is it a good time to invest in the commercial real estate sector?
On the flip side, the Commercial Real Estate (CRE) economy has done well in recent years, and experts believe that despite the Covid-19 setback, the sector is likely to recover early and be a good investment option in the long term could prove term.
Commercial real estate encompasses various segments including office, warehouse, data center, etc. Office is the largest segment of commercial real estate and is rated based on location and amenities, with grade A being the highest premium. It has done well in recent years as Class A offices have achieved a net absorption of 46.5 million square feet (square feet).
Growth engine
“CRE has been the growth engine for India’s real estate for the past two years, adding high quality assets, vast global capital, value creation and greater retail involvement in the sector. It has also encouraged global majors to set up offices in India, “said Amit Goenka, executive director and general manager of Nisus Finance.
The rental yield on commercial property was better than that of residential property.
“Residential rental returns are 2-3% after maintenance and property taxes are paid, while commercial property investors get a net return of 7-8%,” said Raja Seetharaman, co-founder, Propstack, a commercial property research company.
The office segment has been a favorite with institutional investors. Despite the pandemic, investments of $ 3.1 billion were made in the office segment in 2020, compared to investments of $ 2.8 billion in 2019, according to a report by JLL on India Real Estate Outlook, A. Growth Cycle, showing.
Road to recovery
Covid-19 has slowed the growth path of commercial real estate. However, as vaccination has begun and economies around the world open up, the effects of working from home (WFH) are unlikely to be as severe as previously expected, industry experts say. The drop in demand due to WFH guidelines being passed by some companies is expected to be replaced by increased demand from sectors such as information technology, e-commerce and healthcare.
In the December quarter, there was a recovery in demand for office space.
“Net absorption (physically occupied minus free space) increased 52% in the fourth quarter of fiscal year 20, while new business increased 39% compared to the previous quarter,” said a JLL report.
One of the risks of investing in commercial real estate is the vacancy risk, which means office space remains vacant. However, despite the pandemic, vacancy in grade A offices remained limited.
“The vacancy rate in class A office space in India has been below the 15% mark since 2017. Even in a year ravaged by pandemics, vacancies rose slightly and are expected to remain within range in 2021,” the JLL report said .
In 2021, experts assume that the new office requirements will probably match the average values of previous years again. “New completions are expected to be 40 to 42 million square feet in 2021, while net absorption is expected to be 32 to 35 million square feet. This is close to the annual average of net absorption in 2016- rents in 32 to 33 million square feet in major markets are also expected to remain largely reach-bound, “said Samantak Das, chief economist and head of Research & REIS, JLL .
How to invest
Investing in real estate is always capital intensive, making it inaccessible to private investors. A direct investment in Class A offices can cost you in the millions of rupees.
If you buy property in poor quality offices, the risk of vacancy may be higher and you may not be able to get good rents either.
“Office properties in the right place and in the right project attract high-quality corporate tenants and can achieve very good rental returns over longer periods of time,” said Anuj Puri, Chairman of Anarock Property Consultants.
Real Estate Investment Trusts (Reits) are a great option for retail investors.
“Reits gives investors flexibility and exit options as they are tied to the market without the obligation to hold a physical asset,” said Viral Desai, national director, Occupier Services at Knight Frank India.
There is another option where some platforms offer fractional real estate investing. They collect money from investors and invest in office space. However, they are not fully regulated and you should do due diligence before investing through the platforms.
List of REITs
In the office segment, money flowed through Reits. Since 2019, three Reits, including Embassy Office Park, Mindspace Business Park and Brookfield, have been successfully listed in India.
These are investment vehicles that are structured like mutual funds and pool investors’ money and issue shares to them.
The minimum investment requirement in Reits is £50,000.
Reits in India are only allowed to invest in commercial real estate including Class A offices. You have to distribute 90% of the rental income as dividends. The dividend received is tax-free in the hands of the investors if a riding party opts for 30% instead of 22%.
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