Buying an office or retail space is a huge investment, which is why commercial real estate has been traditionally seen as an investment avenue for only institutional investors or high net worth individuals. However, things are changing. Many retail investors are now getting into the office real estate game.
INVESTMENT ROUTES
There are three ways to invest in commercial real estate: buy office space directly from a developer, buy shares of a commercial developer from the stock market, or invest in a real estate fund focused on commercial real estate.
Many developers, especially in cities such as Mumbai, are today offering smaller units of space (as small as 500-1,000 square feet) in Grade A buildings. This is in sharp contrast to the scenario a few years back, where only much larger units were available, making it tough for a small investor to invest in office real estate. Investors looking at retail space can now consider a multitude of affordable options in free-standing high street outlets or shops in malls.
The advantages of smaller units are two-fold — it is easier to find tenants for them and the premises can also be used for business by their owners if they happen to have an entrepreneurial bent of mind.
Today, even professionals like doctors, auditors and lawyers are buying commercial properties for investment and self use. Of course, HNIs also continue to plough huge amounts of money into high-ticket commercial properties in the quest for yield. Private bankers and wealth management firms confirm that their clients have actively started investing in commercial properties after staying away in 2009 and 2010. These investors have bought into commercial properties because they seek assets that can protect their portfolios from inflation and stock market volatility. On their side, banks are willing to lend up to 50% to 60% of the LTV to buy commercial properties, subject to the borrower's adequate net worth and established ability to repay.
WHAT TO LOOK FOR
Despite the availability of more rationally priced options, investing in commercial real estate is most definitely not child's play. It requires forethought, research and planning.
LOCATION: Investors need to establish the soundness of the location and its demand/supply dynamics. If they do not engage in sufficient research, they may end up buying into micro markets which have or will have high vacancies.
ECONOMY: They need to ensure that the economy, job market and population growth in the market is healthy/p>
DEVELOPER: They need to check the developer credentials, potential for infrastructure development, access to public transport and quality of property management in the project
ADVICE: They need a knowledgeable real estate agent and a lawyer who can give them sound advice