Maximizing Returns and Mitigating Risks in India's Booming CRE Sector

India's Commercial Real Estate (CRE) sector is proving to be a strong investment ground for Indian investors, NRIs, funds and international investors. In 2022, it is reported that the total leasing in the country reached a record high of 50 million square feet, indicating the sector's upward momentum.

In a bid to showcase the immense potential of this sector, Moneycontrol and Property Share came together for a webinar under the aegis of CRE-Edge: Wealth Generation Through Commercial Real Estate.

Host Mugdha Kalra was joined by Viral Desai, Senior Executive Director, Occupier Strategy & Solutions, Industrial & Logistics, Capital Markets, Retail Agency, Knight Frank India, and Kunal Moktan, Co-founder and CEO of Property share, to discuss the CRE market in India, the latest trends, and key pointers for novice and seasoned investors alike.

Viral Desai explained that CRE specific to India is hinged on two sectors of key demand. The first is the Indian-facing business, which is more focused on the Indian economy, and the second is the CRE for businesses whose offices in India serve their key technological and process needs. He explains that the demand coming through from end-users across sectors such as banking, finance, manufacturing, and retail has been steadily growing and the key markets that participate in this segment are Mumbai, Bengaluru, Hyderabad and other metros. Of course, other cities across the country are also growing as companies seek to expand their footprint.

Kunal Moktan explained that the current market, which is defined by a high inflation and high-interest rate scenario, is when CRE has typically performed best as yields rise significantly. He went on to explain the various avenues available to investors - from real estate funds like Blackstone and Brookfield to REITs listed on Indian stock exchanges to tech platforms like Property Share that are creating unprecedented access to CRE for retail investors.

He also went on to compare the value provided by REITs in comparison to tech-driven platforms like Property Share, which combine direct access to CRE, strong yields, diversification and a fair degree of liquidity.

Viral added that the fundamental difference between CRE and residential real estate is the profile of the tenant, and churn rate. Churn is far slower in CRE as contracts are usually for longer terms: five years plus. Moreover, most corporations that occupy the space will maintain and manage it, making it a far more lucrative investment option than residential spaces, where maintenance remains the responsibility of the owner, not the tenant. He also talked about the superior quality of construction and design in CRE, as it tends to attract a different caliber of developers. Most importantly, rental Yields in CRE are much higher than that of residential real estate.

Viral also explained that CRE tends to be more stable: an established commercial market holds good for 30 to 50 years. It is also more locality specific: residential real estate rates and rents can vary widely within a locality because of the quality of construction and other factors, while CRE tends to have lower variation.

While there is a lesser chance of getting it wrong with a CRE investment for aforementioned reasons, it still carries its share of risks. Diligence is crucial in mitigating these risks and maximizing returns. As Kunal explained, one of the most important diligence tasks is title diligence, where you hire a top law firm to investigate the land's history and title ownership. This ensures that there are no legal issues with the property that could cause problems down the line.

Additionally, it's important to verify that the property has all the necessary approvals from government agencies. For example, if you're buying a property in Mumbai, you want to ensure that it has MMRDA's approval, or if you're buying a property in Karnataka, you want to make sure that it has KIDB's approval. You also want to confirm that the building's plans are fully sanctioned and that the property's height has been approved by the Ministry of Aviation, if necessary.

If you're purchasing a property through an SPV (Special Purpose Vehicle), you'll also need to conduct financial diligence. This includes reviewing the SPV's profit and loss account, balance sheet, and any liabilities that you may be taking over. Hiring a top firm to perform these financial checks is recommended.

For more insights, you can watch the full conversation.

https://www.youtube.com/watch?v=MZBg7G6gco0