Important Rules of Investing in Commercial Real Estate

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  • 01 Dec 2019

It is quite evident that Investment in commercial Real Estate is better than investment in Residential properties as because Commercial properties offers better rental and Capital appreciation compared to residential properties. On an average in Metro cities the residential rental yield is roughly 2 to 3 % of the property value while a commercial property can give a return of 4-5%. Commercial properties make  good investment choice as the Capital appreciation are also higher ensuring a steady rental income along with high Return on Investment. The development of Malls and Commercial spaces are growing at an exponential rate especially in Tier -1 cities creating huge demand, in fact now even the tier 2 and tier 3 cities are also gaining momentum.

It is very important to some research before identifying a suitable property for investment. There are some key steps needs to be checked before putting your money into commercial Real Estate.

To Study in Detail about the Location:                                              

As it is for a residential Real Estate, location is also very important for a Commercial Real Estate. To do a research, it is advised to check the occupancy level in commercial projects built around. Location with fewer vacancy level say 5% can ensure higher rental income. A commercial Real Estate with high vacancy; level posses some challenges for the Investors to make high rental Income.

High Fallout of Lease Holders                                        

An investor may require checking the frequency of tenanted shops vacating. There could be various reasons. It could be because of low foot fall of customers, facilities are not satisfactory or there are better options available in the same locality. In such cases the investor is likely to get low rentals and capital gains and may become a problem to get the commercial property leased to reputed or established retail chain. The frequent fall out of shops also effects the reputation in the market.

Study the Supply and Demand Dynamics:

It is worth analyzing the balance between Demand and Supply. The best way is to see the list of reputed brands have already entered into contract if the project is under construction. Take feedback from the existing shop owners if it is a completed Commercial Project. Speak to the sales department to know about the vacancies. If you find that there is only very limited choices left in the prime locations of the project, it may be concluded that the demand is high. Also if you find that there is a huge scope for negotiation in price of the property, it may be because the demand is low. This will give the discerning buyer a fair idea about the supply-demand dynamics.

Profile of Tenants

When blue chip MNCs are present as lease holders, builders have the advantage to attract investors. Reputed brands of retail chain increase value of the property. MNC will also always pay the rent on time, give higher deposits & lease for higher time period. When a Commercial Real Estate has more branded retail chain, the footfall is also expected to be high and the investor can reap benefit.

Quality of Buildings

The overall look of a commercial property depends much on the architectural structure and its esthetic look. High profile tenants always prefer better quality building even if it claims higher rentals. Even customers like to visit a better structured shopping mall.

Terms of Lease

It is important to study the lease structure. The investor would be interested to invest in a property where there is a lock-in period for lease and includes proper escalation clause. Commercial leases are normally for higher period compared to residential lease. Investors need to be careful while designing the lease structure. Generally the longer the lease structures, the better.

Deposits

There should be reasonable deposits comprise of rental for 12 months. Higher the deposit better it is for the investor. There is a risk involved when the deposits are low as this may be due to cash flow problem of the tenant or may be looking for short term option. This also may indicate that such tenants may not be able to pay their rents in due time.

Investing in multiple properties

Like any other Real Estate or other financial investment option, commercial realty also calls for prudent diversification strategy to mitigate risk & maximize returns. Rather than putting all the eggs in just one basket, it is advisable to have multiple properties. In the case of just one property, it might become a little difficult if the tenant vacates. However, in case of multiple properties such risk can be managed easily.

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