REITs, strata sales attracting small investor to commercial real estate

Monopolised by large investors earlier, office realty can now be fragmented into smaller parcels of investments, making it easier for the small guy to take exposure

At a time when residential real estate is facing a downturn, with little price appreciation and lower rental returns, commercial real estate, particularly the office segment, has emerged as the favourite asset class of both global institutional investors and domestic investors, including high net worth individuals (HNIs) and retail investors. This is because the segment offers the potential for handsome rental returns along with capital appreciation.

In the past, investment in office real estate was monopolised by large investors and HNIs as it involves large investment. But today there is greater democratisation of this segment. Investment opportunities are opening up for small retail investors as well, with a pick-up in office strata sale and the launch of real estate investment trusts (REITs). According to Anarock Commercial, it is an over Rs 63,000 crore opportunity, with 25 per cent of the total office stock of Rs 2.5 trillion available for strata sale. 

Myriad opportunities: Today, the office segment offers multiple investment options. One can invest in under-construction property or can go for ready and pre-leased office property. For those who want to invest a small amount, there is the option of strata sale of smaller units. Fund-starved developers are offering 25-40 per cent of their office property for strata sale to generate cash flows. Recently, Prestige Estates offered 25 per cent of its office inventory for strata sale. All this has opened up a huge opportunity for retail investors. Says Ajay Rakheja, head, commercial,360 Realtors: “Depending on the city and the location, today non-lockable office spaces are available for as low as Rs 20 lakh and lockable office properties for Rs 30 lakh.” He adds that there is unprecedented demand today in the 300-5,000 sq ft range. 

More REITs could be launched: The emerging segment of REITs has also seen enthusiastic participation by retail investors, as it allows them to enter with an investment amount as low as Rs 50,000. The first REIT to be launched in India by Embassy-Blackstone has generated an absolute return of 33 per cent so far, besides also paying out dividend. With more REITs expected to be listed on the stock market this year, there will be more opportunities for both small and large investors. Says Ramesh Nair, chief executive officer (CEO), India, JLL: “Bigger opportunity awaits investors with office space worth $35 billion eligible to be listed under REITs.” He adds that this alternative asset class provides both transparency and easy exit.

Attractive return potential: Office asset ownership has gained traction among investors, including non-resident Indians (NRIs). Depending on the location and the building facility, the rental yield ranges from 7-9 per cent for Grade-A properties and 9-10 per cent for non-Grade-A spaces. Investing in pre-leased properties is a safer option as the rent starts from day one. Capital returns from office property can go as high as 14-15 per cent. Investment experts suggest that for better yields, investors should go for properties in prime locations and smaller unit sizes of 3,000-5,000 sq ft. Integrated, mixed-use developments with office, retail, hospitality and service apartments also offer better yield.

Investors should adhere to a few sound principles while investing in office property. Location is critical. Though office spaces in central business districts are ideal, investments in well-connected suburban areas can be equally rewarding, as they allow entry at a lower ticket size and yet hold the potential to offer good returns. Properties with proper parking facility,

air-conditioning and security fetch good rentals. “For income-producing office assets, it is imperative to consider factors like vacancy levels, maintenance expenses, property taxes and potential for long-term capital appreciation. The developer’s credential and potential scope for infrastructure upgrade in that area should also be factored in,” says Anuj Puri, chairman, ANAROCK Property Consultants.

Potential for higher rental return: Before investing, weigh the pros and cons of this asset class. One favourable factor is that rental return from office properties can be three times or more higher than residential property. Unlike residential real estate, which requires considerable investment, one can now enter the office space with quite a small amount due to the new trend of smaller offices and strata sale. For those who have the resources, this segment also offers the opportunity to invest a huge amount in one large property. Investment in an office property can also help the investor diversify his investment portfolio.

Stringent loan conditions: Investors entering this segment for the first time should not overlook the downside. Invest in office property is not as simple as investing in residential real estate and one may need to seek expert advice. If you buy an unleased property, then finding tenants could prove to be a challenge. According to Puri, on the loan front, office property does not compare well with residential property. The loan-to-value (LTV) ratio allowed by lenders in office property is much lower (55 per cent) than in residential property (75-90 per cent). The loan processing fee (one per cent of property value) is also much higher in case of office property. The rate of interest for this loan is also a couple of percentage points higher, and at 10 years the loan tenure allowed is three times less.

Despite these pros and cons, investors remain upbeat about office property. According to a recent survey by Colliers International, about 63 per cent of the investors who responded said that an investment in office property would be their top preference over the next one year. About 72 per cent investors expect a rate of return of more than 16 per cent from under-construction property. The survey listed Bengaluru, Mumbai, the National Capital Region (NCR), Pune and Hyderabad as the favoured investment destinations.