 "India's construction market to be third largest in the world by 2025")
Real estate has always been a part of high net worth individuals' (HNIs') investment portfolios. With the relaxation in norms with regard to size of commercial spaces such as special economic zones (SEZs), longer-term investors and a real estate regulatory body, things are really improving for HNIs who want to invest in the commercial realty space.
"Investment is picking up as yield on the commercial side is three to four times that of residential. You can get anywhere between 8 and 10 per cent for commercial real estate, against two per cent for residential space in the location," says Prateek Pant, co-founder and head of products and solutions, Sanctum Wealth Management.
But there are many new factors driving the commercial real estate market. Anuj Puri, chairman & country head, JLL India believes this is a good time to invest because of the potential of capital appreciation in the segment. A few years back, the yields on commercial real estate stood at 10-10.5 per cent, but now yields are on the decline. They stand at 9 per cent, thanks to rising prices.
And, there is no dearth of demand. A report by JLL India, released on August 31, indicates this. Out of the seven major office markets in India, cities like Bengaluru, Pune and Hyderabad are seeing very low vacancy levels at 3 per cent (all-time low), 6 per cent and 9 per cent respectively. Vacancy levels are higher in Chennai (12 per cent), Kolkata and Mumbai (19 per cent), and Delhi-NCR (32 per cent). The office space demand forecast for the calendar year 2016 ranges between 1.8 and 8.6 million square feet in these cities.
Another factor is the rise in the Private Equity (PE) interest. In the first half of 2016, PE inflows into office realty surpassed the annual investment of 2015. "Whether 2014 (when office space overtook residential as PE funds' favourite) will repeat again, still remains to be seen. However, the PE momentum seen in recent years in the office space looks set to continue,'' says another report.
Due to the rise in the number of start-ups, which are attracting massive investments from global as well as Indian firm, the demand for commercial real estate in the Tier-I and Tier-II cities has gone up. Then, the introduction of Real Estate Investment Trusts (Reits) which will help retail investors to enter the market. The main segment in demand are hospitality, warehousing and educational institutions.
Office property and retail space
"Office properties are definitely a favourite of HNIs and UHNIs (ultra high net worth individuals)," says Gaurav Kumar, managing director-capital markets India, CBRE, South Asia.
But, investors should look at several factors. One is locality - preference should be given to one which is approachable by all modes of transport. According to Puri, an investor should look at the industries in the area, their growth potential and check the location's social infrastructure such as restaurants, malls, shopping centres, etc. It is essential to understand if the location is well-planned or if it has grown with increased requirements and the kind of commercial space transactions that are happening in the identified location.
The advice, therefore, is: go for prime location even if you get better pricing at a peripheral location, as the chances of rent escalation is higher. The quality of the building is also very important. If it suffers from maintenance issues, you run the risk of vacancy levels going up, says Rajeev Bairathi, executive director & head of capital markets, Knight Frank (India). If you are opting for an under-construction property, check the builder's past projects. Other services such as air conditioning, power factor, water treatment plants and others should be taken into account while investing.
Quality of tenants is also important while looking at office property or retail space. For instance, rentals are typically lower for banks as compared to retail chains, as banks are associated with a stable source of income. So, investors can have a bank as a tenant for five to 10 years as against a store where brands change frequently and investors have to spend time finding a new tenant, says Pant.
Cost: Rs 5-10 crore. For a significant space, a realistic budget would be Rs 20 crore.
Hospitality
This is a good idea for investors who own land parcels. They can look at tying-up with operators for running a hospitality asset. The investment will depend on the brand you tie up with. "Investors tying-up for hospitality chains are doing it in the four-star segment, with 100-200 rooms and where the average room rents are between Rs 4,000 and Rs 5,000. There are brands like Marriot Courtyard, Fortune and Ginger which are not luxury or premium. Overall, the hospitality sector is seeing a revival and occupancy levels are rising, making this a good investment option," says Pant. You need track record of the hotel for at least four to five years. Check if the hotel has broken even. If not, what are the reasons.
Cost: Rs 50 lakh to Rs 2 crore per room, depending on the brand.
Educational institutions
There are pre-school chains or in new-age schools like international schools where one can invest with a group of investors. They are long-term contracts of 10-15 years. This is much like investing in hospitality. An investor mostly owns the asset like land or school premises, and does not own the operating company. So, only if the school has a certain number of students and generates a certain amount of fees will investors be able to make money. "You derive your revenues from what the operating company does from a business perspective," says Pant. Another advantage is that in most cities, according to zoning norms, land is dedicated for building educational institutions which is at substantial cheaper rates than what commercial properties in that area cost.
Cost: Rs 20-25 crore (per head).
Warehousing
This is an upcoming and a promising segment. With the goods and services tax (GST) being implemented, its potential will only increase. "But, currently 90 per cent of the warehouses are small with inefficient spaces. Only 5-10 per cent are modern logistics parks, which is where investors must look at. These are normally run by large corporates and occupied by multinational companies for their storage spaces. It is a promising area and we will see more of that development in the next few years much more than what is happening today," says Bairathi.
Your view should be based around the underlying area and whether it is in a warehousing hub or not. This will ensure other logistical support like connectivity to roads, ports, etc. Some traditional warehouse hubs are Bhiwandi near Mumbai and Hosur in Tamil Nadu.
Cost: About Rs 40-50 crore.
