With the decline of the third wave of the coronavirus (Covid-19) pandemic, the near-term outlook for commercial real estate should improve. The long-term prospects of this segment are tied to the pace of economic growth. Since India is one of the fastest growing economies in the world, commercial real estate also offers good long-term prospects.

Improved outlook




Work from home (WFH) had blighted prospects for commercial real estate as businesses shed rented space to cut rental costs. “The uncertainty that the office as an asset class has witnessed since the onset of Covid is now diminishing, with companies inviting their employees back to the office,” says Vishal Ahuja, head of private wealth group, India, JLL.

India’s position in the global economy is expected to strengthen in the future. “India’s value in the global market has steadily increased. From being an outsourcing destination, it has transformed into a research and development center for global companies. It is also a critical consumer market for products and services,” says Viral Desai, Executive Director, Transactions, Knight Frank India.

According to JLL, India’s office sector saw net uptake of 11.56 million sq.ft in October-December 2021, the highest in the past eight quarters, and up 86% quarter-on-quarter . Net absorption increased by 26% year-on-year for the six-month period from July to December 2021.

It’s time to come in

Experts believe that now is the right time to invest in commercial real estate. “The FMH had created uncertainty in the minds of investors. However, companies are now considering a hybrid work environment, which means the office is an integral part of their plans. This has led to a boost in investor confidence,” says Ahuja.

Anuj Puri, Chairman of ANAROCK Group agrees. “The market looks definitely bullish, with rental activity picking up steam in the top seven cities in 2021. While many offices have already opened, many more are expected to open sooner or later. So now is a good time to invest in commercial real estate,” he says.

A well-located Class A office space can generate an annual rental yield of 7.5-10%. In addition, there is a possibility of capital appreciation.

Returns for this asset class also tend to be stable.

Places to bet

Investors can look to any of the country’s busy business and corporate hubs. “Bengaluru continues to see strong demand not only from the IT/ITeS sector, but also from start-ups. Outer Ring Road, Electronic City and Whitefield are some of the prime locations in this city. In Hyderabad, HITECH city and Gachibowli are the favourites. In Gurugram, these are MG Road, Sohna Road and DLF IT parks. In Chennai, it’s mostly OMR. In the Mumbai Metropolitan Region (MMR), the BKC area and Worli are prime destinations,” says Puri.

Ahuja adds, “Besides Mumbai and Pune in the west, Bengaluru and Hyderabad in the south and NCR in the north, Kolkata and Chennai are also gaining momentum with investors looking at opportunities in these cities.” He adds that micro-markets that are experiencing strong infrastructure development in the surrounding area have interesting prospects.

Main factors to consider

To earn attractive returns, investors must select property carefully. “Location, occupant profile and entry and exit prices should be the key considerations. The property should be located in a high demand location and should have a stable occupant profile,” says Desai.

Proper due diligence is essential. “Make sure the title deed is clean and there are no uncertainties in the documentation process. If the project is under construction, it must be registered with RERA,” Ahuja explains. also stresses the need to verify the quality of tenants.“A good tenant profile ensures stable returns,” he adds.

Sometimes getting out of a commercial real estate investment can be a challenge. According to Desai, “REITs are therefore a good option for investing in commercial real estate. All the REITs available in India belong to companies with strong portfolios,” says Desai.

Advantages and disadvantages of investing in commercial real estate

Benefits

  • Rental yield can range from 7.5-10% in commercial real estate, compared to 2-3.5% in residential space
  • Long-term leases generate predictable cash flows

The inconvenients

  • Demand is affected by the economic slowdown
  • If a tenant leaves, it leads to uncertainty as to when rental flows will start again
  • High down payment required
  • Investing at high prices leads to poor rental yield