Office spaces are seeing higher rental yields and it is a good investment option. The existing unconsumed stock of commercial space is now in demand. The commercial office space is gaining momentum as companies are looking to consolidate or expand due to improving business sentiment. Strong demand from the e-commerce segment, followed by the information technology and IT-enabled services sector, and the banking, financial services and insurance (BFSI) segments, has resulted in high absorption levels in quality office and commercial properties.
Manufacturing sector is seeing growth as well, which feeds the commercial real estate demand. Experts feel that this is the right time to invest in commercial real estate considering high rental yields. Grade A properties deliver capital appreciation and higher rentals.
Office space continues to give better rental yields, up to 8 to 11 percent per annum.
Real Estate Investment Trusts (Reits) are expected to hit (the market) soon, liquidity premium can also benefit from the commercial space
It is advisable to invest in a property which is already leased out, since it will assure cash flows. On an average, an investment of Rs 5 crore in an office space yields Rs 40-50 lakh as annual rental income.
Since unit sizes in case of commercial real estate are much larger than residential, amounts required for investing are also much higher. Investors must, therefore, be willing to lock in higher amounts of capital.
There is no tax incentive for investing in commercial real estate; investors can look at lease rental discounting to increase their investment capability. Investors can take a loan against the potential rental income they are likely to earn from the property. The rent, in this case, is directly paid to the bank. This will enable investors to buy a bigger property.
Investors can also look at a loan against the property. In the case of lease rental discounting or LAP, rates vary from 11 to 13 per cent. The loan can be structured so that all the payments are met from lease rentals received. However, one must be wary of the risk that if the tenant vacates and a new one cannot be on-boarded immediately, it will severely affect the cash flow structure.
It is better for investors to go through funds, rather than directly in commercial space, in order to be eligible for developer margin as well.