We have often heard that it’s imperative to scrutinize financial health, investment goals, risk-bearing capacity, and the timeline for generating profit before investing. Considering all these factors, and picking up the right investment opportunity at the right time needs more in-depth evaluation. Especially while investing in real estate, one needs to explore a multitude of investment options and then decide on one that fits well.

Commercial real estate has certainly gained traction in recent years. Pre-leased property investments have now become the most popular investment class in the commercial real estate sector. So, if you are looking for commercial property investment, you can consider this article as a handy guide to understanding the scope and investment procedure of these properties.

Table of contents-

A) Meaning of pre-leased properties

B) Benefits of pre-leased properties

C) Revealing some tricks to build leverage from pre-leased properties

D) Factors to analyse if you are investing in a right pre-leased property

What are pre-leased properties?

Pre-leased or pre-rented commercial properties are those which already have tenants in them and generate monthly rental income. These properties are generally occupied by small to big business owners, as tenants. Some pre-leased properties are also occupied by MNCs and renowned companies.

With high-quality tenants, pre-leased properties offer fixed income for investors, and they can exit the property with great capital appreciation. Nevertheless, capital growth would vary according to the market situation and holding period.

Why invest in a pre-leased property?

Pre-leased properties have a lot of benefits and capabilities to strengthen your wealth by giving you a steady income flow. Given below are some of the benefits of pre-leased properties. Let's have a look at them-

a) Instant cash flow: Unlike other properties, pre-leased property owners do not have to wait for availing the returns on the owned property. One can easily start earning through the rental income of the property from day 1 after the successful transfer of the lease deed. A lease deed is an agreement between an owner and a tenant that allows the tenant to use the property for doing business, without claiming ownership.

b) Rental hike: Rent increases with every lease renewal, hence you get a rental hike every year. Also, the annual rental yield of a pre-leased is 6%-8%

c) Stability: When the buyer gets the transfer of sales deed after purchasing the commercial pre-leased property, the right to receive regular monthly rental income is a part of the deed. Hence there is a surety of monthly income flow.

d) Lower risks: Pre-leased commercial properties bear very minimal or no risks because the lease tenure of these businesses that occupy the space is around 5-10 years of time. Hence, the property doesn’t get vacated soon, and if a tenant vacates the space before the lease term, he has to pay a heavy penalty. So you are barely at a loss!

e) Capital appreciation: Commercial pre-leased properties offer high capital appreciation due to the rich infrastructure and amenities that they offer. Also, pre-leased properties developed in prime locations assure significant appreciation value.

Before you invest, we would like to unveil some hidden benefits that you can leverage, by investing in the pre-leased commercial properties-

1) Loan benefits-

Commercial properties have many loan benefits(. But did you know that the pre-leased commercial property has a loan benefit too? It's called Lease rental discounting. LRD or Lease Rental Discounting is the loan taken against rental receipts of your commercial property. The loan EMIs are paid by the tenants through rental income of the commercial property without you having to pay it yourself. LEDs can be used to expand the business, buy assets be it personal or commercial, or invest in commercial/residential property through the loan amount.

How can LRD be advantageous?

1. Dual-use of the property- This loan allows you to maximise the use of the property

• To buy another asset through a loan amount

• A steady flow of rental income after the full repayment of the loan amount.

2. No holes in your pockets! - Not a single penny is spent from your personal income, the EMI goes from rental income which is however collateral to the loan.

3. No more over dues- As the bank allows rental inflow from high net worth tenants, such as MNCs and brands, there is stability in terms of regular rental payments. Hence there is a low risk of debt overdue.

4. Lower interest rates- LRD offers lower interest rates and long-term repayment tenure, which gives room to the borrowers to gradually pay the debt.

2) Tax benefits-

Indexation: You can increase the value of your initial investment through indexation. Let’s assume you invested 1Cr in the property and sell it after 5 years at 2.5Cr. Through indexation, you can increase the value of your initial investment by accounting for inflation.

Taking an inflation rate of 5% annually, your initial investment is now valued at 1.27Cr (5% annual increment on 1Cr for 5 years). Now your taxable income is 1.23Cr (2.5Cr minus 1.27 Cr) instead of 1.5Cr.

Under Section 80C of the ITA, you can deduct up to Rs. 1.5 lakhs from your total taxable income if you have made investments

3) Inflation hedge-

Prices rise as a result of rising inflation. Rising prices also include rising rents for commercial properties. Property rental rates increase while operating expenses stay relatively stable contributing to positive property values. Now, this can cause an increase in net operating income, which will appreciate property values further. As long as this value is more than the inflation rate, the investor’s investment will not be hampered if they are holding CRE.

Currently, there are many pre-leased properties available for sale. In India, we have around 550 million sq ft of Grade A office supply and more than 110 million sq ft of Grade A warehousing stock across the top cities. Investors can constantly search for pre-leased assets that have a broad potential for capital appreciation. But anyhow, property investments should always be detail oriented and have a strong backing of analysis and data.

We generally rely on these strong factors while assessing a property. You may want to have a look at these, so here you go!

a) Location - This is perhaps the most important factor determining the value of a real estate asset. Investing in a location should be based on accessibility and footfall and should serve the intended purpose. In the event that you want to sell your property, a prime location would always command a higher price and result in a quicker turnaround time. It will depend on its locality and the locality's appreciation of whether the asset's value will increase. The same applies to rental rates, which are always compared with similar premises nearby.

b) Lease duration- This is the crucial factor to consider after location. The longer the lease term, the better-assured returns and income flow on the property for the investors. For example, a property with a fresh lease will have a substantially higher asking price than one which is near the end of its lease term because it guarantees a long period of assured returns. This is because the rent increases every year as the lease deed gets renewed annually.

c) Rent Escalation- The escalation of rent refers to the periodic appreciation of the rental income. For instance, a tenant can ask for an escalation of 5% every year, or 15% every 3 years based on the negotiation. The higher the tenant agrees upon rent escalation, the more rental yield you get.

d) Lock-in period- Lock-in period is the time/duration a tenant will be occupying the premise. The long-term lock-in period ensures extended stable rental income. In cases where the tenant exits the property before the lease term, he/she has to either pay the penalty or give away the security deposit to the owner, as mentioned above.

e) Price per sq. Ft- Price per sq. ft. is the total asking price per sq. ft. of area. This could be over the carpet area or the built-up area. The locality’s price per sq. ft. determines the asking price. The property being considered can command a slight premium on account of a few perks or favourable terms, or a discount owing to certain negative factors.

f) Tenant quality- Before closing a deal, investors should assess the tenant's credit history and financial position. The purpose is to ensure that they pay rentals promptly.

With these factors in mind, now you can invest in commercial pre-leased properties efficiently. Though, there are many more things you need to consider, which is only possible with high end-technology. Proper background history checks, frequent visits to assess any faults, financial metrics and data are the factors that add to quality property investments. The best part is, that we provide this all to you!

Head to our pre-leased property page and start your investment journey with us!