Commercial property ROI: Pointers to keep in mind

When it comes to commercial property ROI (Return on Investment) in India, average yield falls in between 5 and 10 per cent for a good property as per industry standards.

Depending on the viability of the property in terms of location, amenities, access to commuting options, configuration and builder’s brand, residential properties’ Return on Investment or ROI were generally good. But that has fizzled out owing to slowdown in the market which has affected the capital appreciation. For those looking at commercial realty, office spaces are far more attractive.

Buying commercial property for investment is an ideal choice because office properties in the right project and location attract quality corporate tenants which can lead to good commercial rental yields in India. Also, investors need to be careful about how they calculate rent on commercial property in India.

When comparing investment in commercial property vs residential property, it is important to note that while the average yield of a residential property is as low as 1.5 to 3 per cent, the average yield from a commercial property is in the range of 6 to 10 per cent. Similarly, capital appreciation can produce satisfactory yields for the right office assets.

With the need for continued employment generation and the first REITs listings, the demand for office assets is quite high. A steady and dependable ROI is generated through office properties in well-located Grade-A buildings, logistics centre and InfoTech Parks.

Even Tier-II and Tier-III cities are becoming popular destinations for commercial properties in India. There has also been a development of SEZs, industrial corridors and IT parks in the smaller cities.

In the current market scenario with a lot of manpower rationalisation, IT and IT-enabled services are looking to optimise commercial property ROI. Keeping the economies of scale in mind, firms are likely to consolidate operations and offices across various locations. Since such good office spaces will be in demand in the long-term as well, long-term leases may be terminated to reduce operating costs. The commercial property spaces would then be sold post-consolidation. This would lead to quality spaces in areas where there is a need.

Start-ups rule the roost: As start-ups lead to more employment and investment opportunities in sectors such as retail, manufacturing, life science and biotech and with the Government push towards Digital India, the need for office spaces that are modernised with architectural design technology has increased. This has also led to efficiency and transparency of real estate brokerage and research services.

While residential realty has gone from being investor-driven to end-user driven, commercial realty has captured the imagination of investors as well as institutional funds. As the need for office spaces that fit the working environments of start-ups and enterprises begin to emerge, so will the demand for residential housing spaces in the neighbourhood given the employment generation aspect of such commercial realty.

As developers respond to such demand, there is an automatic creation of demand for future housing around such office projects. All of it, according to experts, bodes well for the future of the real estate market in India.