Should you invest in commercial or residential property?

Commercial or residential? Which makes for a better real estate investment bet? Most of us prefer residential, but commercial has its own rewards. Experts feel commercial property ensures higher return over residentials, while giving a steady flow of income.

“Investment in commercial property provides higher returns than residential. Returns for both assets can be calculated as a sum of their annual income provided (lease rent) and the capital appreciation,” Ramesh Nair, COO – business & international director, JLL India said.

India remains a preferred back office destination for much of the developed world. With the economy showing signs of rubustness, business growth plans are back on track. Nair highlights the rental yields of both residential and commercial and said commercial properties provide 7-8.5 per cent annual income through rental yields while residential properties provide roughly 2-3 per cent. Capital appreciation on residential properties is higher but not enough to cover the deficit of annual income.

Real estate sector saw the worst phase in 2015-16 with sales and prices declining. New residential project launches reduced by 6 per cent in Q1CY16 over Q4CY15. For FY 2015-16, the number of new launches stood at 1,81,294 units compared to 2,16,082 units in FY 2014-15, equalling a drop of 16%, according to JLL statistics.

In the recent past (2012-14), annual supply of office space fell considerably below the 40 million sq ft mark pan-India, which was a sign of activity slowing down in the real estate space. However, 2015 saw supply inching closer to the 40 mn mark, and this situation will continue to remain in the medium-term as per JLL forecast.

It is wise to invest in commercial property amid slowdown as they are seen essentially seen as rental yielding assets and ensure a steady flow of yearly income.

As far as absorption in commercial property is concerned, 2015 witnessed a healthy revival and the momentum is likely to remain for couple of years. Consistent amount of supply and demand would ensure vacancy rate remains stable close to the 2015 levels of around 16-17% levels in the medium-term. Pan-India average rentals for office properties have been on a gradual uptrend in 2015 and is expected to rise moderately in the medium-term. Quality office spaces are helping rentals to rise across the major metropolitan cities in India.

Like most real estate investments, investing in commercial property requires sound research and planning. A good location makes for a good commercial realty bet and ensures better rental returns. Identifying a prime location in commercial space has its benefits as it ensures low likelihood of capital loss. Finding a tenant becomes easier and banks are more willing to give loans.

Cities that may offer good returns

In 1Q16, IT/ITES continued to emerge as the prime contributors in office space demand. Cities such as Bangalore, Chennai, Hyderabad & Pune with high presence of IT companies are expected to witness good demand through the entire year. IT/ITES companies drove office demand in 2015. As high as 13mn sqft of office space was taken up during CY 2015 by these companies. In 1Q16, the similar trend was observed where IT/ITES emerged as the prime contributors in office space demand.

Key trends in commercial real estate

  • Technology companies (including those operating in the e-commerce and IT start-up space) are again at the forefront of leasing office space across major cities.
  • There is a dearth of quality space that is completed or ready for possession, as a result of which rentals have risen in sub-markets in the prime areas.
  • Construction is on the rise as developers foresee good demand for office space in the medium-term.
  • Unlike in the last few years where demand is driven more by relocation and consolidation of office space, 2015 saw more of expansion-based office transactions

Credits Financial Express

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