Here's why now is good time to enter commercial real estate

A: If you had put Rs 100 in commercial market in Q3 2008, in cities like Mumbai it would have been around Rs 60-65 and residential anywhere in the country, it would have been around Rs 130-140. So, we believe commercial markets in most parts of India have bottomed out. This is definitely a good time for high networth individuals to get in and invest in commercial real estate.

Today if you are looking at commercial investment, one can look at four different types of investment – either you buy a commercial property directly, second you buy shares of a commercial developer, third you invest in a fund which focuses on commercial property and fourthly everyone today is talking about REITs. It is expected to roll out in the next few months. As of today, many HNI investors buy direct commercial real estate.

Q: But why should anyone right now in the midst of this slowdown and high vacancy level invest in commercial real estate over residential real estate?

A: Annual yield in residential properties are anywhere between 2-3.5 percent across the country. In commercial today one can get returns anywhere between 9-11 percent. Second is the potential of commercial office space growth in the country. If you look at just New York Manhattan as a city, the office total stock is 450 million square feet. If you look at India the entire country, all the large cities put together is less than 375 million square feet. It just shows the growth potential for office space in the country.

From a capital appreciation point of view, across the country we are going to see considerable amount of capital appreciation for commercial properties mainly because it has corrected from the peak since third quarter 2008.

Q: Are we in the midst of a buyers market? Can investors get good deals and negotiate?

A: Yes. Commercial real estate except in Bangalore today where the prices have come back to the old peak of 2008 across the country commercial real estate is available at anywhere between 55-80 percent of what it was during the peak. So, definitely a buyers market – good time to go do a deal.

Many tenants today are using this as an opportunity to move into either cheaper locations or consolidate within one’s premises or also looking at renegotiating with existing landlords.

Q: But are you referring to large corporates and IT companies here that typically book large office space?

A: Many developers who used to sell larger office space units, bigger floor plates, today are dividing those larger floor plates into smaller units. Today, a small investor can even look at buying 500 square feet to 1000 square feet of office space and that is bringing in a lot more new categories of buyers. So, we see professionals like chartered accountants, stock brokers, lawyers, even doctors investing in office properties across the country.

Q: But then wouldn't these doctors, lawyers CAs be using the commercial real estate for end use? Is there a pure investment opportunity here?

A: We are seeing two trends – one, professionals buying for their self use. Two, executives, senior corporate executives who would want to set up something on their own, just investing in it and third people who are looking for a steady rental inflow by making sure there is a tenant in the property.

Q: What on your list would be the 3 do's for investing in commercial real estate?

A: If you are looking at office real estate, one needs to look at the capability of the developer, the kind of projects he has done before, the kind of quality of finishes - the way he manages his property, one needs to look at various expenses involved in a commercial property whether it is property taxes, whether it is maintenance or whether it is insurance. The investors should also look at refurbishment, refinancing, retenanting potential of the property. Above all, the most important thing is that he needs to make sure the building is of sound quality and there are no legal issues.

One should make sure that they have done their due diligence on what exactly is going to be your property tax. Property tax varies in different parts of the city, different parts of the country. So, that due diligence has to be done before one invests in commercial real estate.

Q: You just said investors should be careful about refinancing. What exactly does that mean? Can you elaborate?

A: There have been properties where the existing landlords have taken a higher interest rate, there could be banks, financial institutions who would be willing to refinance it at a lower rate. That opportunity also needs to be looked at.

Q: What are the top 3 don'ts for investing in commercial real estate?

A: Don'ts is not to have a herd mentality. To make sure you think slightly contrarian. Keep a very close watch on vacancy. Third is to invest in a property which is among the top 10 buildings in that micro market. Don’t go after the 25th best building in that particular micro market which one is looking at.

Q: We have discussed office space. What about retail properties? What is your advice on that front?

A: Look at high street retail if you are looking at investing in retail properties, not to look at malls because any mall in the country which is being sold in bits and pieces has got into trouble.