Wednesday, 27 January 2016

Investors bet big on commercial property

Ashish Trivedi, 38, belongs to a family that has been investing in the country’s property markets, mostly residential, for the last 20 years. Trivedi, partner with a diamond exports firm, however, has decided to tread on a different path, and invest in a commercial property.

“Where are the returns in residential?” asks Trivedi, who has recently invested in an office space in Bandra Kurla Complex (BKC).

“I bought a 2,330 sq ft office space in One BKC about a year and a half ago, and the kind of returns and appreciation in capital values that I am seeing on my investments in this short time frame, is no where comparable to residential properties,”  he said.

Trivedi told FE that he is making 8% as the annual rental yield from the office space, which he has leased out to Hitachi for five years.

“This rental yield is almost double of what is made from residential investments,” says Trivedi.

The rental yield for commercial property is usually 8-11%, which is much higher than the yield in residential property of 2-4%, according to a JLL India report. Yield calculations are worked out by dividing the annual rental income on a property by how much it cost to buy it.

Trivedi is just one such investor from a host of investors, like smaller firms, traders, doctors, law firms, accounting firms, etc, which are increasingly investing in commercial property.

Elaborating on the changing trend, Anuj Puri, chairman and country head, JLL India observes that in a best case scenario, an investor may still make money though not at a good growth rate as the values of residential properties have already reached their peak. “In the worst-case scenario, investors may even lose money as the residential property market in many parts of the country see stagnation and declining capital values,” he says.

According to Puri, the average capital values in the Indian commercial real estate sector are still 25% lower than the most recent peaks seen in mid-2008. “Capital values in the residential sector, however, had surpassed their previous peak by end-2011. Given that commercial rental and capital values have bottomed out considerably in most major cities in India over the last couple of years, commercial real estate is now attracting a larger share of investor interest,” he says.

Investors that FE spoke with also said that large unsold inventory and high residential property prices is leaving lesser scope of making good returns from residential property investments, a big reason for them to keep hands off from investing in residential property. In contrast, India’s office space absorption during 2015 stood at 35 million sq ft, highest after 2011, while the vacancy stands at around 8-9%, according to industry estimates. In fact, CBRE’s January 2016 office market report observes that office leasing transactions in 2015 crossed 38 million sq ft for the first time ever, registering an increase of 18% y-o-y.

“Return on capital on selling a residential property maybe good, but lease rentals on an annualized basis are pathetic,” says Anil Sehgal, a 62-year-old owner of an executive research firm in BKC. Sehgal wants a regular rental income, which he says residential investments lack, which is why he has invested in a 3,000 sq ft office space in BKC.

Pravin Shah, another such investor runs a financial consultancy firm in the western suburbs in Mumbai. Shah has bought a 1,350 sq ft space in an upcoming building called Parinee I by Mumbai-based developer Parinee Group.

“There is no near term return horizon in residential investment due to high inventory,” says Shah, who is scouting for more opportunities to invest in office properties.

This increasing interest from retail investors towards commercial property is being seen after a long time, says Shishir Baijal, chairman and managing director, Knight Frank India. “I think after 2009, this is for the first time that we are seeing this kind of investor interest in commercial property. Falling vacancy rates and firming up of rents in Grade A buildings and prime office areas, coupled with increase in leasing activity is finding a lot of favor with investors looking for stable regular rental income.”

Gauging where the market is moving, developers are also offering more small office options. Ashish N Shah, chief operating officer, Radius Developers says, “Unlike residential, where returns are realized only upon exit, a commercial asset is regular income generating. At the same time there are individual firms and professionals who are looking to upgrade their offices and move out from old south Mumbai areas to BKC, which is when the idea of small offices came in.”

Mumbai-based Radius Developers, has been marketing ONE BKC as offering office spaces designed to suit occupiers of all sizes. The company has been using this as its unique selling point by offering office spaces of as small as 1,000 square feet. Parinee Group is targeting this segment of investors and small office occupiers in its upcoming property in Andheri. According to sources, the likes of Hiranandani, Wadhwa and Lodha Group are also looking to build more commercial projects, some of which will house small office spaces as well.

Source: PropertyatNeoDevelopers.Wordpress.Com

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