Commercial Real Estate: A Hope for Real Estate Revival in India

Residential Real Estate is passing through a downtrend for the last almost 3 years with minimal signs of revival in near future. It is Commercial Property Market which offers a ray of hope. Unlike residential property market, commercial offers opportunity to have a respectable rental returns. To top it is the scope of a decent price appreciation in selected cities. The demand is primarily coming from two sources:

    

    -    HNIs.

-    Realty Funds that deal with only commercial properties.

A big example of this is global equity firm Blackstone Group, which invested $3 billion into commercial Real Estate in India in the last few years. Other investors also, who went away from this market are now re-looking at it. Canada Pension Plan Investment Board, recently tied up with the Shapoorji Pallonji Group to purchase commercial assets in India. 

Real Estate brokers are already seeing a surge in inquiries. Most of them say this increase in interest towards Commercial Real Estate in India has come after almost five years. Rentals had become stagnant due to a lack of interest in office spaces and there was hardly any appreciation. But with renewed demand, both rentals and capital values are showing upward trend. This has led to a rise in investor interest.

To understand this trend, let’s go back to the period between 2003 to 2008. Property prices across India were rising with every passing day; developers were seeing appreciation like never before. In 2008, the collapse of Lehman Brothers caused a collapse, and prices tumbled. But in 2009 prices of Residential Property started rising again, but commercial real estate remained stagnant. The prices of commercial properties in many cities have now touched 2008 levels. But this relatively low capital value, due to lower rates of commercial property has resulted in higher rental yields. Commercial properties get between 8 to 10% rental returns in many cases.

Adding to this is appreciation in capital values. REITS will further boost this sector. One concern for Realty Funds is the lack of good commercial projects. Companies like DLF, which have a large number of commercial leased assets, have made it clear that they are not for sale. There is a big inconsistency in quality of construction in commercial properties. As a result, when an A-Grade property comes up for sale, there are scores of investors vying for it.

HNIs, sometimes compromise on quality and buy either floors or office spaces in commercial properties. Investors usually prefer to buy property that is most likely to emerge as business hubs in next 5-10 years. For instance, in Mumbai, in initial days Bandra-Kurla Complex (BKC) was highly in demand. 

There is, however, no solution visible to scarcity of A-Grade properties. Developers didn’t find it worth to make new office spaces, which in turn, lead to a shortage in the market. There was a reason for this reluctance, they were badly affected by the lack of demand in past, and had stopped focusing on commercial market. Another factor affecting growth of Commercial Real Estate is that developers start recovering their investments only once property is leased out. Residential properties are kind of Self-financing as builders raise money from buyers in installments over the period because of CLP (Construction Linked Payment Plan).

Generally the debt in any developer’s balance sheet is due to the commercial projects they are working on. But currently everything points to commercial properties being a better bet than residential projects.

To learn different aspects of Real Estate Industry come to RMS. For details visit www.rmsschool.com