Being the top choice of savvy investors, India’s commercial real estate is expected to grow at a CAGR of around 18% between 2024 and 2030.
Besides, Indian real estate is expected to reach $1 trillion by 2030, with commercial real estate being a major contributor supporting the growth of the sector. Investors in the real estate sector have always considered commercial property investment a rewarding investment choice, that gives high ROI, capital appreciation, and passive income opportunities.
In this piece, we will cover all about Indian Commercial Real Estate Investments. Let’s get started!
What is commercial property investment?
Commercial properties are the ones that are used for business / non-residential purposes or income generation (by selling / leasing). Any investment in such properties with the intention of generating a cash flow is called commercial investment.
There are several ways in which one can invest in commercial real estate. The upcoming section talks about the same.
What are the types of commercial property investments?
As a CRE investor, there are a wide range of CRE options for you to invest in. We have listed them below:
Office Spaces: Properties designed for businesses to conduct daily operations, like, corporate offices and coworking spaces.
Retail Shop Spaces: Commercial spaces used for selling goods directly to consumers. Examples: Malls, standalone stores, etc.
Industrial Settings/Warehouses: Properties used for manufacturing, storing, and distributing goods. Example: Logistics centers, factories.
Hospitality Establishments: Real estate for accommodations, dining, or entertainment services. Examples: Hotels, resorts, and restaurants.
Mixed-Use Buildings: Properties that combine residential, commercial, or industrial uses in one structure. Example: Buildings with retail stores on the ground floor and apartments above.
Multifamily Buildings: Residential properties like apartment complexes are designed for multiple families or tenants.
Special Purpose: Unique properties built for a specific use like amusement parks and hospitals.
You may read more about these types in our blog: A quick guide to commercial real estate meaning and basics
Further, there are different ways to invest in commercial real estate in India. Here’s how can you invest in commercial real estate:
Direct Investment: This involves purchasing a commercial property outright, such as an office space, retail store, or warehouse. Investors generate income from renting the property and can also benefit from long-term capital appreciation. This method offers complete control but requires significant capital and property management responsibilities.
Real Estate Investment Trusts (REITs): REITs allow individuals to invest in large-scale, income-generating commercial properties without owning them directly. Investors buy shares in a REIT, which pools funds to buy and manage properties. REITs are publicly traded on stock exchanges and provide passive income through dividends.
Fractional Ownership: In this model, investors purchase a fraction or share of a commercial property. Fractional ownership lowers the capital requirement, making CRE investment more accessible to smaller investors. You can find various platforms managing these investments.
Private Equity Funds: Private equity real estate funds raise capital from multiple accredited investors to invest in commercial real estate. Managed by professionals, private equity funds focus on generating returns through property appreciation, rental income, and strategic value-added initiatives
Real Estate Crowdfunding: This investment method pools small amounts of capital from many investors through online platforms to fund property or development projects. When the property is sold, investors receive returns through rental income, interest, or profit-sharing.
Note: Before investing, research, consult with a financial advisor, and understand potential risks and rewards.
Is buying a commercial property a good investment?
Investing in CRE has both pros and cons. Here, you can read the pros and cons of Investing in a Commercial Property
Pros1. Stable source of high rental income: The average commercial property rental yield in India ranges from 8-11% vs residential properties, which yield a rental income between 1-2%, i.e. 4 times lesser yield. Depending on the area, the earning potential for investment in CRE is much more.
2. Long-term commitments: Commercial properties are usually leased for 10 to 20 years, with the possibility of subsequent renewal. Moreover, lease agreements come with a clause of yearly appreciation of the rental value. So, the owner of the commercial property has an assurance of regular and consistent returns.
3. Professional deals: Commercial real estate tenants are generally businesses with professional track records. Dealing with corporate tenants is always hassle-free and generally, there is no need to chase them for rent.
4. Appreciation value: As compared to other property types, CRE provides stellar appreciation over time. What’s more, if you invest in a premium commercial property through fractional ownership or REITs, it may provide higher returns with a much lower and pocket-friendly investment.
5. Free from market fluctuations: Income from traditional investment options tends to become positive or negative depending on fluctuations in the financial markets. On the other hand, investment in commercial real estate is not affected by the performance of any other source of investment, because it has no relation to any changes in the stock or bond markets.
6. Tangible asset: Real estate is considered a more physical and tangible asset because you can see it and touch it. Investors can visit a property to get more insights into its size, location, condition, appearance, and many other features that may play a key role in its earnings. Whereas, stocks, bonds, mutual funds, etc. may not look appealing to such investors, because you can’t see them.
Cons1. High ticket size: Generally, commercial properties are valued at Rs. 25 to 30 cr, and the minimum investment in CRE is typically beyond the reach of a retail investor. However, with fractional ownership, now you can start investing with Rs. 30 Lacs onwards.
2. Complex asset management: CRE tenants are corporates and not individuals, which requires smooth end-to-end asset management. Retail investors usually lack professional expertise in managing complex commercial assets.
3. Difficult entry: Because of complex legalities, extensive research required, and limited market opportunities, investing in this type of asset can be challenging for a naive retail investor.
4. Selection of property: Finding the right property and geographical location needs due diligence and market knowledge. An individual investor may therefore find it extremely difficult to invest in commercial properties due to a lack of market knowledge and other resources.
Commercial Vs Retail Property: Which is better to invest?
For this, first let's compare commercial and residential properties as per the below parameters:
| Category | Commercial Property | Residential Property |
|---|---|---|
| Buying Process | As it’s a huge property, buying a CRE is a lengthy process and hence many formalities are involved | The process of buying a residential property is comparatively easier |
| Period of Lease | CREs are leased to tenants for a long period of time. These leases may range from 3-9 years or more, as businesses rarely want to shift their operations from one place to another in a short span | Residential properties are leased for a shorter span of time, as here individuals/families may want to shift to another place within as less as 6 months due to a variety of reasons |
| Contract for Rent/Lease | CRE lease/rent contracts are in-depth and complex, as they are created for a long tenure | Residential property lease/rent contracts are comparatively simpler as they are created for short tenures |
| Rental Yield | Rental yield for a CRE may range from 8-11% of the capital invested | Rental yield for residential property may range from 1.5-3.5% of the capital invested |
| Income Stability | Due to the longer lease period, they generate regular rental income for owners for a long time period | As tenants shift to another place in short intervals, rental income for owners is less stable |
| Loan for Buying Property | A loan for buying a commercial property can be given to an individual or a business | A loan for buying a residential property can only be given to an individual |
| Leasing Process | The tenant and owner both are involved equally in the process of leasing | Residential legislation supports tenants over the owners, hence it is tough to evict the tenants |
Conclusion:
Even though certain factors like buying process and getting a loan are easier for residential property owners; the rental yield, income stability, and leasing process for CRE make it a preferred option for investment.
What type of commercial property is most profitable?
Anyone would want to invest in a property that gives good returns, isn’t it? These parameters will help you analyze a property before investing and make better-informed decisions.
Key considerations before investing in commercial real estate:
Properties located in Prime Locations- The location of a property is a crucial part of investing in a commercial property. Location decides the price of the property, its rent, ROI, IRR, appreciation/CAGR rate, and much more! Hence, choose a property situated in the investment hotspots of any area. Though the costs of such properties are much higher, you can surely cover the costs from future returns.
Total number of Tenants and their Quality- The more the occupancy rate of your property, the more the rental income you’ll earn. Also, the tenant quality matters a lot. Generally, the majority of the commercial properties are occupied by big MNCs and Fortune 500 companies. Hence, they maintain professionalism and pay regular rent too. Low-quality tenants possess the risk of delayed rental payments or skip rentals causing hassle. Hence tenant quality and occupancy are essential aspects.
Type of Property: Choose the correct type of commercial property (office spaces, retail, industrial, etc.) based on your investment goals, as different property types have varying risk and return profiles.
Market Trends: Market conditions, including demand and supply, vacancy rates, and other factors influencing commercial property values.
Check for Amenities and Facilities- A commercial property with top amenities and facilities attracts good tenants. Having basic amenities like restaurants, hotels, parks, elevators, cafes, etc elevates the want of that particular property. A good commercial property is also one that is well-connected to transportation. This eases daily commutes and your property becomes a convenient option for prospective buyers/tenants.
Lock-in Period: The 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.
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.
Financial Metrics: Financial Metrics, like NOI and IRR, are essential tools used to evaluate the performance and profitability of investments. Net Operating Income (NOI) measures a property’s income after operating expenses but before taxes and interest, indicating its operational efficiency. Internal Rate of Return (IRR) represents the annualized rate of return on an investment, considering the time value of money and all cash flows. These metrics help make informed decisions about property investments.
Free from Legal Nuisance: Before making any investment, ensure the seller has all proper documents related to the property. This will ensure a safe and verified transaction and eliminate the risk of any fraudulent activity.
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