Understand Commercial Real Estate Investing, Now!By
Akhila Masapogu, 03-Nov-2019
The Property used for any sort of profit-producing activity excluding all the residential property is commercial real estate properties. It is one of the two primary sectors of real estate and includes all real estate properties except the property used for residential purposes. Commercial real estate properties generate income through rental income and capital appreciation. Just like residential real estate, commercial real estate also involves leasing out properties but, only for businesses.
Commercial properties can range from a small retail shop to Skyline malls. It includes office spaces, Hotels, Retail stores, warehouses, hospitals, stadiums, coliving places etc.
Commercial real estate v/s Residential real estate
Commercial real estate and residential real estate are like twins but are nonidentical twins. Though similar in many aspects, commercial and residential real estate have some significant differences. Commercial real estate compared to residential real estate is less explored by the general people. A misconception about only large players being able to generate profits in commercial real estate has kept away general people from exploring it. Some main differences between these two primary sectors of real estate include:
The process of buying or leasing a commercial property is more complicated than residential properties.
Unlike residential real estate, commercial real estate property is more concerned about location, local market, and population.
Commercial real is comparatively riskier than residential real estate but yields higher returns as well.
Capital appreciation is higher in the case of commercial real estate properties.
Commercial real estate property value, unlike residential properties, is not dependent on the age of the property.
Commercial real estate properties are less liquid than residential properties.
Commercial real estate : An attractive asset class
Though the Real estate is an age-old investment vehicle in India, people have only considered investing in land and residential real estate. Investment in commercial real estate rarely explored by ordinary people. Lack of awareness is the main reason that is also accompanied by many other factors. Also, a fear of less liquidy, high investment budget, and complications involved in the investment have stopped general people. But, this investment benefits the small players just like it does the big investors and is not very complicated as it may seem. You must as well have your perceptions and misconceptions about commercial real estate investment. Let me clear a few of your doubts regarding real estate investment.
Investing in commercial real estate.
Commercial properties are of high-risk and generate high-returns that will attract investors looking for a challenging investment option. Though a bit risky, it comes with its rewards. After all, what’s life without some risk. Commercial real estate offers a plethora of options investment options. From mega-malls to residential apartments to small warehouses and single building stores, investors can choose the area of investment according to their interests. Even the low budget investors can invest according to budget availability, as it offers diverse investment options.
1.Direct investment- Investors can directly invest in the property by buying the property or by investing in partnership firms.
2.Indirect investment- Investors can indirectly invest in Real estate platforms like Real estate investment trusts(REIT’s) and Private equity funds and P2P lending platforms.
Private equity funds are an online crowdfunding platform option where the investors directly invest in a private company. Investment in this company is backed up by physical real estate properties.
Real estate investment trusts (“REITs”) are a finance medium that allows individuals to invest in real estate properties that generate income. REIT's own and operate profitable real estate assets like office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses.
Basics of commercial real estate investment.
Just a considerable amount of knowledge about the real estate industry, it's legal, financial, regulatory aspects and a budget are all that you need for investing in commercial real estate. Here a few things that you should keep in mind before investing in real estate:
1.Location : Location is a prime factor that affects the value of a commercial property. Commercial properties in financial regions and IT hubs are the high yield properties that generate high rent and excellent capital appreciation. A location with amenities, services, nearby metro stations, malls, banks, and educational institutions will increase the value of the property immensely.
2.Demand : Demand and supply of commercial properties in a neighborhood influence its value. Assets in a location with, low supply and high demand are ideal for investment.
3.Tenants : Commercial properties occupied by reliable tenants like blue chips companies significantly increase the value of the property. These kinds of Tenants will stay the property for a longer time, invest in fit-outs, also pay rent on time. Good tenants will reduce the risk involved in the investment.
4.Lease structure : Lease structure is a crucial factor affecting the value of a property. Commercial properties with a lower lease structure are riskier and one-sided. Tenants leave anytime after the lease period, leading to a vacancy and finding good tenants is a tough task.
5.Fit-outs and rent :Another thing to look for while investing in a commercial property is fit-outs. Fit-outs can be done by the builder and the tenant. If tenants made the fit-outs, then they are going to stick there for a long time, and the investment is less risky.
A commercial real estate is a profitable option of investment though it comes with a little risk. Careful property assessment, due diligence, and the right investment vehicle will help you in investing in the right kind of commercial asset. Investing in the right commercial property is always the key to successfully reaping the profits. As most of the investment options, Real Estate is also dependent on the risk-taking capability of the investor. Assetmonk does a range of risk metrics as a part of its due diligence process.
Commercial real properties in an urban location with good demand will ensure high yield and IRR along with capital appreciation over a long time. Assetmonk regularly comes up with a range of options in different cities with office use, coliving and retail use options.