HNIs flock to commercial properties as residential market slows down

Last year, a Delhi-based high-net-worth individual (HNI) bought a 29,495 square feet commercial property in the Raheja Titanium complex in Goregaon East, Mumbai. The seller was based out of Kenya. Similarly, a tech-based fund bought 48,000 sq ft and 7,721 sq ft at the L&T Seawoods in Navi Mumbai and The Capital in the Bandra Kurla Complex, respectively. 

These two instances are not isolated. For, with residential markets continuing to struggle, giving poor yields and capital appreciation for investors, strata sales in office properties are seeing a sharp spurt in top cities, say consultants and investors. 

Strata sales are sales of commercial properties in a building or complex to an individual or retail investor.

About Rs 2.5 trillion worth of Grade A office space is under construction in the top seven cities and will be completed over the next four years. Of this, 25 per cent (worth Rs 63,000 crore) is up for strata sale, said a recent report by Anarock Property Consultants.

Strata sales in the top five cities last year were worth Rs 6,000 crore, according to Nisus Finance, a Mumbai-based fund manager.

“There are close to 180,000 ultra HNIs in the country, growing at a rate of 10 per cent. As the residential markets have slowed down over the last few years, HNIs are looking at other asset classes such as commercial very actively,” said Ramesh Nair, chief executive officer and country head at JLL, India’s largest real estate services firm.

Nair said while residential properties are offering a yield of 2-2.5 per cent, and capital appreciation of 1-2 per cent per annum, commercial properties are providing a rental yield of 7-9 per cent and capital appreciation of 4-8 per cent per annum. JLL brokered many such deals last year in the top 7 cities, he said.

Even property companies and consultants are getting into strata sales in a big way. Early in 2019, realty major Prestige Estates announced its plan to strata sell 25 per cent of its office assets to individual investors looking for plays in high-yield realty assets.

“Except for a few companies in office properties, mostly all want to do strata sales,” said Bappaditya Basu, chief business officer at Anarock Commercial, which was recently set up to focus on strata sales of commercial properties.

“Unlike the southern region, a majority of developers take construction loan and are liable to pay the sum. It takes 8-9 years to pay back the loan, [but] with strata sale, they can fulfil 25 per cent of construction liabilities and reduce their project-exit period,” Basu said.

Anarock Chairman Anuj Puri said the brokerage had already secured a mandate from builders to sell 3 million sq ft.  Puri said the brokerage in selling office assets is higher at 2-7 per cent compared to 2-4 per cent in the housing segment.

However, Gaurav Kumar, managing director-capital markets and residential services, at CBRE South Asia, said: “Investors must study the financial strength and development track record of the developer from whom they are buying strata space to ensure timely delivery of a quality product. It may help if the developer undertakes the responsibility of building and tenancy management as that offers protection against deterioration in asset quality, a key risk factor in such investments.”