In the game for gain

Investing in commercial real estate is gaining traction due to higher rental yields and appreciation potential. Fractional ownership enables investments of ₹20 lakhs in profit-generating assets. Yields for office assets range from 6-8%, while residential yields are 2.5-3%. Warehouses are a safe option with 7-9% yields and long lease terms. Physical retail is also a viable option with high rental returns and capital appreciation potential.

Commercial Real Estate was one of the fastest-growing segments in India prior to COVID-19. But then it went into a tailspin for over two years. But now, both international and indigenous investors are betting big on the segment, courtesy elevated rental yields and higher appreciation potential. It is also perceived as a prudent strategy to diversify one’s portfolio and spread the overall risk.

With fractional ownership, anyone with an investment of ₹20 lakhs can also invest in profit-generating commercial assets.

As per Colliers data, this year, office assets received a total Private Equity investment of ₹2.7 billion. This is 74% of the overall PE investments in real estate. Investing in good quality Grade-A office assets in Central Business Districts is a proven way to make steady rental income, with yields of 6-8%. Alternately, the rental yield for residential assets ranges from 2.5-3%.

It’s not surprising that there is a gold rush when it comes to owning such assets. Besides, the demand in Secondary Business Districts and tier-2 cities is also picking up. Real Estate Investment Trusts, companies that own or finance income-producing real estate, are also becoming popular, enabling smaller investors to invest in high-value office deals.

Warehouses in particular are becoming a prized asset in India, with an average yield of 7-9%. Among commercial assets, it is a relatively safe investment option due to the lower cost of investment and longer lease terms of the occupiers (generally 9-15 years). Last year, the total warehouse absorption in India amounted to 47 million sq.ft, as per data revealed by Savills. Even during the pandemic, warehouses had remained a compelling category due to a surge in demand from the e-commerce industry. Warehouses are expected to continue thriving, with demand emanating from manufacturing, e-commerce, and third party logistics companies, and the total warehouse market in India is set to reach 700 million sq.ft. by 2030.

There was a time during the lockdown when industry pundits believed that virtual retail will outpace its physical counterpart. However, the idea is far-fetched. Physical retail continues to be the epitome of the modern world, with footfall in high streets, malls, and shopping centres bouncing back to pre-pandemic levels.

This makes retail a suitable investment option with higher rental returns alongside strong capital appreciation potential. It also comes with the benefit of creating a valuable asset, which can be used in the future for self-owned businesses and other commercial purposes.