Good time to invest in commercial realty as firms bring employees to office

Leasing of space is likely to rise as Covid-related uncertainties reduce and hybrid work model becomes the norm

With the third wave of the coronavirus (Covid-19) pandemic ebbing, the near-term prospects of commercial real estate are set to improve. The long-term prospects of this segment are tied to the pace of economic growth. Since India has among the fastest-growing economies globally, commercial real estate offers sound long-term prospects as well.  

Improving outlook

Work From Home (WFH) had marred the prospects of commercial real estate as companies let go of leased spaces to reduce their rental expense. “The uncertainty that office as an asset class witnessed since the start of Covid is now reducing with corporates inviting their employees back to office,” says Vishal Ahuja, head-private wealth group, India, JLL.

India’s position within the global economy is likely to strengthen in the future. “India’s value in the global market has increased steadily. From being an outsourcing destination, it has turned into a research and development hub for global companies. It is also a critical consumer market for products and services,” says Viral Desai, executive director, transactions, Knight Frank India.

According to JLL, the Indian office sector saw net absorption of 11.56 million sq. ft in October-December 2021, the highest in the last eight quarters, and up by 86 per cent quarter-on-quarter. Net absorption was up 26 per cent year-on-year for the half-yearly period of July-December 2021.

Time to enter

Experts believe this is a good time to invest in commercial real estate. “WFH had created uncertainties in investors’ minds. However, companies are now looking at a hybrid work environment which means the office is an integral part of their plans. This has led to resurgence in investor confidence,” says Ahuja.

Anuj Puri, chairman, ANAROCK Group agrees. “The market is definitely looking upbeat with leasing activity gaining momentum across the top seven cities in 2021. While many offices have already opened, many more are likely to open sooner or later. Hence, this is a good time to invest in commercial real estate,” he says.

Grade-A office space in a good location can fetch 7.5-10 per cent annual rental yield. In addition, there is scope for capital appreciation. Returns from this asset class also tend to be stable.  

Locations to bet on

Investors can look at any of the busy corporate and business centres across the country. “Bengaluru continues to see high demand from not just the IT/ITeS sector but also from start-ups. Outer Ring Road, Electronic City and Whitefield are some of the favoured locations in this city. In Hyderabad, HITECH city and Gachibowli are top favourites. In Gurugram it is MG Road, Sohna Road and the DLF IT parks. In Chennai, it is mostly OMR. In the Mumbai Metropolitan Region (MMR), the BKC area and Worli are favoured destinations,” says Puri.

Adds Ahuja: “Besides Mumbai and Pune in the West, Bengaluru and Hyderabad in the south, and NCR in the north, Kolkata and Chennai are also gaining momentum with investors examining opportunities in these cities.” He adds that micro markets that are witnessing strong infrastructure development in the vicinity have attractive prospects.

Key factors to consider

To earn attractive returns, investors must select the property carefully. “Location, occupier profile and entry and exit prices should be the key considerations. The property should be in a high-demand location and must have a stable occupier profile,” says Desai.  

Proper due diligence is a must. “Ensure that the property title is clean and there are no uncertainties in the documentation process. If the project is under construction, it must be RERA-registered,” says Ahuja. He too emphasises the need to check tenant quality. “A good tenant profile ensures stable returns,” he adds.  

Sometimes, exiting from an investment in commercial real estate can pose a challenge. According to Desai, “REITs are, therefore, a good option for investing in commercial real estate. All the REITs available in India belong to companies with strong portfolios,” says Desai.

Pros and cons of investing in commercial real estate
 

Pros

• Rental yield can range from 7.5-10 per cent in commercial realty, compared to 2-3.5 per cent in residential space
• Long-term lease agreements result in predictable cash flows

Cons

• Demand gets affected by economic downturn
• If a tenant vacates, that leads to uncertainty regarding when rental flows will commence again
• High capital outlay required
• Investing at high prices leads to poor rental yield