When speaking of investments, the normal things that come to mind are saving, money, stocks, mutual funds, and the like. But what about real estate? Is commercial real estate any kind of viable option? Why is it that when speaking about a rental property, one encounters a lot of raised eyebrows? Buying rental property is not all that difficult or complicated. When done with enough research and foresight, commercial real estate investment in India could be the key to a great financial future for you.
Real Estate – Commercial and Residential
For most people, real estate just means buildings where people stay or work at. It is much more than that. Broadly, real estate can be divided into commercial and residential types. It is important to understand how these two are different from each other. That will help you make a better decision on your investment portfolio as well. In the simplest terms, residential real estate involves houses, flats, villas, condos, cottages, and the like. Even cordoned societies belong to the category. These are places people live in. Commercial real estate involves places of work, shopping, entertainment, leisure, et al.
Now that the basic difference is known, let us dive a bit deeper. Commercial real estate has stricter terms of lease and tenant agreement. It includes details of maintenance, upkeep, power consumption, terms like carpet area, built-up area, and the like. Such finer details are not present in agreements or lease terms for residential real estate. For properties that are rented out, commercial real estates have a lease period of 5 years or more. Residential real estate normally has a 1-year agreement term. Else the rental agreements are normally valid for a year.
Prospects of Real Estate in Investment Portfolios
Is buying a property a better option than just investing in one? When buying a property to rent out, you expose yourself to a few extra risks. Owning a property, commercial, or residential, comes with its maintenance and upkeep problems. Based on the popularity of the area, you might be stuck with a building or a space that costs more than it earns. You can buy commercial or residential real estate or can invest in them. Both can earn you returns but know which is better for you.
Commercial vs. Residential Real Estate
Residential real estate is comparatively easier to buy or build. That might sound lucrative at first. Most residential properties operate on a rental model, while only a few do so on a lease model. Thus, with a month or so of the notice period, it is easy for tenants to switch residences. If you are looking for stable returns, that is not good for you. Till you get another tenant, your rentals take a hit.
Commercial real estate in India operates on lease terms. These terms can be from 5 years to 15 years long. The lock-in period (the commercial version of a notice period) can be anywhere from 2-10 years. So, even if your tenant wants to move out, you still have a lot of time to look for a new one. During the time, your returns keep coming in. This makes investing in commercial real estate safer. Investing in commercial real estate through fractional ownership or REITs is the best way.
Investing in Commercial Real Estate
Commercial real estate is a great way of ensuring a healthy investment portfolio. The primary benefits that CRE offer as compared to other popular forms of investment are –
- Stable asset class – long lease and lock-in periods (h3)
- Shielded from market volatility (h3)
- Regular uninterrupted returns (h3)
- Low-risk (h3)
- No unnecessary overheads (h3)
These are just a few of the advantages of CRE. To know how they positively impact your investment portfolio, read on.
Why Choose CRE as an Investment Option
From an investment perspective, the more stable the asset class, the safer it is for people to invest in it. Tenants stay for longer periods and returns are smooth. Real estate can be a volatile market. However, CRE stays shielded from most random changes in the market due to its lease terms. Warehouses, lots, parking spaces, and industrial workspaces will always be in demand. That itself assures the growth of this investment opportunity.
Even if considering the legal safety of the proposition, commercial assets are undertaken by established companies. They are not registered or maintained by individuals. The accountability and safety of the prospect are further assured through rock-solid diligence and financial analysis that goes into the process. Fractional ownership involves the creation of holding companies that handle each asset. REITs operate on CRE much in the same way as mutual funds. Fractional ownership is better in this aspect since you own a portion of the asset legally.
Things to Keep in Mind regarding Commercial Real Estate
Whether you plan to buy or invest in commercial property, there are three key points to remember before making any decision
- The location
- The growth prospects
- The lease terms offered to the client
Know that office spaces, warehouses and empty lots are always going to fare better when compared to buildings like malls, shopping arcades, and movie theaters. The section of society that creates wealth will always be the first focus for businesses and companies. So, when deciding to move into CRE investment, try to look for need rather than want-based businesses.
As a thumb rule, you can look at Maslow’s Need Hierarchy. Food processing, agriculture, pharmaceuticals, and energy generation companies will gain priority. Look for investment opportunities where these companies are involved as tenants. Service providers become the next facilitators of these companies. Your next priority should be looking for companies that are involved as facilitators. A bright example is e-commerce companies and telecom. Connectivity and serviceability are always important in society. Software is still a great business. Look for CRE where major multinational or Indian companies are taking up residence or building a new base. You will never go wrong with those decisions.
Probably the last focus of your investment portfolio should be malls, cinema theaters, and the like. These businesses are profitable and will generate a lot of revenue for sure. But they are not necessities. In the face of any problems or crises, these businesses will be the first to take a major hit. It makes more sense to steer away from them as investment options as much as you can. Probably the only exception among such places are wellness centers and large resorts, but the investment prospect is still at a disadvantage when compared to others mentioned above.
Focusing on the work that generates more revenue and drives the economy of the nation will always land you in a better deal. Most of the time, focusing on the metros and larger cities for investment or rental purposes is always a good choice. Commercial centers and industrial hubs in smaller cities and towns can also be prime locations from an investment perspective. If you want to keep a tab on the best assets with the most lucrative investment opportunities, you might want to follow www.strataprop.com.