Best Time to Invest in Commercial Property

Published: November 16, 2009

Sunil Sharma was a very successful IT professional in the US where he had been working for over a decade. However, he has returned to India and is currently engaged in developing an advanced IT-ready commercial space with all concepts of sustainable building packed into the Advant Navis Business Park in Delhi NCR (Noida-Greater Noida Expressway). Contrary to current perceptions, he has been able to sell three floors of 30,000 sq ft each, within the last two months. He managed to do this simply because he read the writing on the wall — which was that the current round of buyers of commercial property are individuals keen to invest between Rs 50 lakh and Rs 1 crore in commercial property.

Sharma is not alone in wooing the individual buyer to purchase commercial property for the returns that they offer. Today, with a rental potential of Rs 45 per sq foot in the area, Sharma is confidently offering a return of 10-11% to the consumer. This is in addition to the increase in capital values for a premium A-Grade building such as theirs. Eventually, he hopes to give his investors up to 13-14% return. This, however, is estimated and not assured.

For the consumer, the sizes of units offered are between 1,000 and 3,000 sq ft at a competitive price of Rs 4,750 per sq ft. The consumer does not have to undertake the hassle of wooing tenants and negotiating rental values with them. If the unit size is less than 3,000 sq ft, Advant will consolidate the space for tenants. The investor simply has to sit back and receive the rental cheques month-on-month from Advant. It also helps that being a premium green building, the capital value appreciation will be higher than that of average buildings.

Compare this with a similar case of the consumer putting the same amount of money into a residential property. He will not be able to get rental returns over 4-5% and all benefits hinge upon the capital appreciation of the property.

Says Pawan Swamy, managing director, west India, Jones Lang LaSalle Meghraj, “It may not be immediately apparent, but this is the best time to invest in well-researched commercial real estate opportunities. There is, in fact, an increase in investors looking for such opportunities, since the prices are now near the bottom. Long-term investment will ensure that investors can reap the benefits when the office market shapes up for real in 2-3 years.”

In the short term, the cities that will lead in terms of opportunities are Mumbai and Delhi, followed by Bangalore and Chennai, according to JLLM. And is a lock-in advisable? “Generally, a lock-in is advisable from an investment point of view, since this ensures that the satisfactorily negotiated price remains at that level. However, this strategy can go wrong if the market starts moving upward. If the lock-in period is too long, the investor may miss the rise. The best way to go is to opt for a balanced lock-in period, and not to stretch it too long,” adds Swamy.

The global financial turmoil has indeed meant that prices for commercial properties have come down considerably. Moreover, the bank interest rates on financing such properties have also come down, making it extremely attractive for those looking to invest in this segment. Says R K Mittal, chairman and MD, CHD Developers, “Those who buy such properties for their own business use will benefit the most. Investors might also benefit from their investments through rental income provided they are not expecting unrealistic gains in the short term.”

The investor can either remain with properties if the values are rising or alternatively exit when the assured return period ends and then further reinvest that money into new development which again would offer assured returns. Today all major developers have adopted the small investor as a regular finance medium.

Explains property investment adviser Ashok Kumar, “This is probably the best time for a small investor to put money into commercial property. For the developer the large numbers of individual consumers who want to invest in commercial property translates into finances at 10-11% pay-out, as opposed to the formal finance which would be available at much higher rates of interest. In addition, the terms of sale often dictate that the small consumer has a notional part of the property but for all practical purposes the floor-plate size is not compromised and the leasing rights remains with the builders. This also means that the builder has not compromised the value of that property to large MNC tenants who do not want to negotiate with multiple landlords.”

At the end of the day the consumer has to look for the best medium to invest in to multiply the benefits of his investment. As Vijay Wadhwa, chairman, Vijay Associates-Wadhwa Developers, in Mumbai, which is developing the premium commercial property — Platina at Bandra Kurla Complex says, “The assured return of 10-11% will last for the duration of the commitment. The actual value of the investment comes from the long-term viability, which rests on good location, construction quality and foolproof research on consumer requirements and development of the same.”

Source: The Economic Times

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