According to the patterns that have recently emerged in the Indian real estate market, residential homes do not often provide the same financial benefit as CRE (Commercial Real Estate). But how?
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In terms of generating cash flow, investing in residential and industrial real estate follow commercial real estate investments.
However, despite popular belief, it is more complex than it may seem because the taxes, regulations, and laws imposed on commercial real estate property are significantly more stringent than those imposed on residential properties.
A person needs to undertake a substantial financial commitment filled with uncertainty to clear the path for investing in CRE. Therefore, any commercial property investment should be made only after carefully considering the risks involved.
More specifically, it is important to know the concept of commercial real estate, why it could be a great investment substitute for residential real estate, how to construct a commercial lease and the various forms of commercial properties.
What is Commercial Real Estate?
Property used only for economic or business activities is “commercial real estate.” The CRE market is extremely varied and extensive, encompassing everything from a single store to sprawling multi-level shopping malls.
Hotels, shopping centres, resorts, hospitals, dining establishments, and office buildings are all examples of commercial real estate.
To learn more about commercial real estate, consider the following:
- Investors worldwide can use REITs (Publicly Traded Real Estate Investment Trusts) as a platform to make indirect investments in commercial properties.
- Commercial property investment needs a larger financial outlay than buying a home. There is greater potential for gain as well as greater potential for loss in this industry.
- Potential rental income and capital appreciation are attractive features of investing in commercial real estate.
What are the Basics of Commercial Real Estate?
Commercial real estate, as the name suggests, is the type of property put to economic use. For example, a multi-unit commercial, residential building to house tenants has also been considered a commercial property used for commercial activity on the landlord’s part.
Read: Commercial Property Investment in Bangalore: A Guide for Investors
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The list of commercial buildings is divided into four primary categories since various kinds of properties are utilised for various kinds of business activities:
1. An office
Workplace necessities such as cubicles, meeting rooms, a reception area, and a kitchen can all be found in a typical office structure. In addition, office leases are often for multiple years because only some businesses want to uproot their entire staff regularly.
2. Retail
The term “retail” can refer to a wide variety of facilities, from small strip malls in residential neighbourhoods to enormous shopping and entertainment complexes. However, office space costs tend to be lower per square foot than retail space, because foot traffic is the most important factor for businesses that rent or purchase a retail space. Like office spaces, most commercial leases for retail units are long-term commitments of 5-10 years.
Most retail properties will have one or more “anchor tenants,” or well-known companies that occupy the most prominent locations on the lot and typically pay the highest rent. These “anchors” are typically the stores with the most recognisable brand names and are accountable for attracting the greatest number of customers.
3. Industrial
Typically situated in less densely populated locations and often near important transportation hubs, industrial buildings house many tenants’ manufacturing and processing needs. In addition, the low-rise structures can be coordinated into industrial parks.
4. Multifamily
Multifamily refers to residences with many units, sometimes called flats, together within one building or complex. But aren’t apartment complexes residential? The answer is yes, but there is one exception: they must have fewer than five units. Properties with five or more apartments are classified as commercial real estate.
Read: Detailed Article on All the Aspects of GST on Flat Purchase
Multifamily structures, also known as apartment complexes, can be broken down even further in terms of their locality and size:
- Garden Structure: No more than four stories
- Mid-Rise Structure: Five-to-seven-story structures
- High-Rise Structure: Seven or More Stories
As a result of frequent relocations among its tenants, multifamily leases tend to be short-term. This particular kind of property is regarded as one of the more reliable choices available for commercial investment.
What is a Commercial Lease?
The term ‘commercial leasing’ refers to a lease agreement for a commercial property on which a company would carry out its daily operations. These leases contain various one-of-a-kind provisions, including responsibilities tied to the property’s maintenance.
A commercial lease typically contains more terms and restrictions than a residential lease, making it more difficult to understand. Furthermore, individuals, sole proprietorships, corporations, and HUFs are all eligible to lease commercial property.
How to Manage a Commercial Property?
Commercial real estate with tenants requires ongoing management on the property owner’s part. Therefore, a commercial property management company can be useful for property owners who need assistance with tenant acquisition and retention, lease and financing administration, and marketing and upkeep planning.
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Managing office buildings, industrial complexes, and retail properties is a complex balancing act involving a profusion of information, transactional details, and rules, making the expertise of a commercial real estate management business invaluable.
For added assistance, use commercial real estate management software of high quality. It will be responsible for keeping track of details, freeing up mental space for you to concentrate on more important matters.
Landlords frequently face a balancing act between increasing rents and reducing vacancies and renter turnover. For example, if a restaurant were to move into a building that had previously housed an art studio, the landlord would have to make renovations to accommodate the new tenant’s needs, which could add to a significant expense.
Regular upgrades to your building may seem pricey, but they can positively affect your bottom line. Commercial tenants today are pickier than ever, and if you want to rent your space, you’ll need to make some upgrades to compete. However, updates can include minor reconstruction.
Low-cost but high-impact renovations include new lighting, smoke alarms, and other electrical devices like ceiling fans, photocopiers, and televisions for common areas.
Keeping the renter’s content is challenging for landlords, but even little improvements can pay dividends. Integrating upgrades into a property’s maintenance plan is a wonderful way to stay on top of them and keep track of progress.
Read: How to Check Eligibility & Apply Online for YSR Housing Scheme?
How can You Make Money with Commercial Investment?
One way to protect your portfolio from the ups and downs of the stock market is to purchase commercial real estate. Investors can profit from the sale of their properties and the rents they collect from tenants.
Commercial buildings, such as stores, have larger returns on investment. Thus, investors may want to explore purchasing them (ROI). Shop ownership also allows the investor to launch their own business, if not immediately, at some point in the future.
According to the numbers provided by AIPL (Advance India Projects Limited), commercial rental yields are greater than single-family homes. A residential property may yield a return of 1% to 2.5% per year, while retail space in a shopping mall may yield 6% to 8% per year.
Before investing, however, one must consider the full picture, including the price of the property, taxes, zoning regulations, rental property ordinances, and the store’s future rental income. Mistakes in any of these areas could have serious consequences.
Direct Commercial investment
In the case of direct investment, the investor takes full legal title tothe property. A person can make a substantial profit with enough capital and expertise in the commercial property market.
The trade-off for the potential for high returns is usually a higher level of uncertainty. Since CRE investing necessitates a sizable initial outlay of funds, it presents an opportunity for substantial wealth creation. The more money you put into investments; the more money will come out.
In addition, keep in mind that all investment involves some degree of market risk.
To maximise returns, investors should look for real estate in locations with low CRE supply and high demand. The rental income from such buildings is generally higher. The vitality of the regional economy is a key factor in establishing the CRE.
Indirect Commercial Investment
Alternatively, investors may participate in the commercial real estate market passively by purchasing market securities such as ETFs (Exchange-Traded Funds) or REITs (Real Estate Investment Trusts) that invest in stocks connected to commercial property or by acquiring businesses or investing in entities that specifically serve the commercial property market, such as real estate brokerage firms or banks.
What are the Benefits and Drawbacks of CRE Investing?
Some of the benefits and drawbacks of investing in commercial real estate are listed below.
Benefits of Investing in Commercial Real Estate
- Security-Income from commercial real estate investments is typically rather high. Comparatively, residential rental yields are only about 1-2% of property value or about a third of the income CRE properties offer (9-12%).
- Uniformity-Having a proven business plan increases the likelihood that CRE renters will pay on time. Because of this, I can count on professional conduct.
- Helpful for Longer Tenure Commitments-Leasing a commercial property typically has a longer term, perhaps from one to two decades. Those who have invested in commercial real estate may rest assured that their income will be reliable and consistent thanks to this.
- Relative Cost of Purchase-When compared to residential residences, the long-term returns on an investment in a commercial building are far higher. Furthermore, investing in high-end real estate through financial ownership or REITs (Real Estate Investment Trusts) can yield desirable returns on modest outlays of capital.
Drawbacks of Investing in Commercial Real Estate
- Maintenance of Premises-Unlike with fixed deposits or other low-risk investments, commercial real estate investing does not allow you to just put money in and forget about it. Additional resources are needed to guarantee effective property management.
- Beginning Capital Expenditure-CRE can pave the way, but it requires a large outlay of capital at the outset. For example, legal fees are included since they are more difficult to predict and have a smaller potential return on investment.
- Extremely High Capital Expenditure Needed-CRE investing needs to be within reach for small-cap investors due to the prohibitive minimum investment of between INR 25 and 20 crores.
- Careful Property Selection-Investing a lot of money into a property, therefore ensuring it’s the right kind of property, is crucial. To avoid a major financial disaster, it is essential to conduct thorough research on the area in which the property is located and learn about the investing market.
The Indian real estate market has seen a pattern of residential homes not providing the same financial benefit as Commercial Real Estate.
This is due to stricter taxes, regulations, and laws imposed on CRE properties, divided into four primary categories: office, retail, industrial, and commercial lease.
Management of CRE properties can be handled by commercial real estate management companies or high-quality software. Investors can make money with direct CRE investments or indirectly by purchasing market securities such as ETFs and REITs.
NoBroker helps commercial real estate owners to sell their buildings. The company has a team of real estate professionals who are all experienced in the field. In addition, the company offers free consultation and free market analysis.
FAQs
1. What kind of commercial property is the most lucrative?
Properties with the most renters often have the biggest potential return on investment. These commercial real estate assets may consist of multifamily developments, dorms for students, offices, self-storage facilities, and buildings with mixed uses.
2. Is commercial real estate a successful investment opportunity?
Industry experts said that investors should consider investing in commercial assets such as store ROI due to their higher investment returns. Commercial spaces have a larger return on investment than residential spaces.
3. How can I invest in Indian commercial real estate?
A commercial real estate investment can be made in three main ways. The first option is to purchase an office space straight from a developer. Second, purchase stock on the stock market from an investor to act as a commercial developer, or you can participate in a real estate fund that forecasts commercial real estate.
4. Who in India is the wealthiest real estate investor?
One of India’s wealthiest and most well-known real estate tycoons is the property magnate Vikas Oberoi. According to the Grohe-Hurun India Real Estate List 2021, he has an overall net worth of INR 22,780 crore. He has worked hard to establish the Oberoi Realty company he took over from his father, Ranvir Oberoi.
5. Can I invest in a commercial property in India for Rs. 10,000?
Since the 2014 REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) Regulations were updated by the SEBI (Securities Exchange Board of India), you can now begin investing in real estate with as little as Rs 10,000.
