It is common knowledge that a commercial property fetches higher return on investment compared to a residential property at the same cost. The usual ROI from key residential markets at best is between 2-4%, while a commercial property in Delhi NCR area provides anywhere between 5% and 13% PA depending on property type, location, tenant profile etc. It’s a great investment option for people who are looking for cash flow. Having said that, commercial property investment is not everyone’s cup of tea either. The reason we think that way is not because investing in commercial properties involve risk taking, while some of degree of appetite is required to be able to aim for higher returns but investing in commercial properties actually demands more domain knowledge, foresight and due diligence than what may be required for residential properties.
Opportunities and Risks factors:
- Start ups: What started with dot com and out sourcing boom back in early 2000’s in Gurgaon and Noida markets have now become a monster. In the manner which barley 2 year old IT startups like Zomato (120000 sq ft), (Snapdeal 450000 sq ft) etc are guzzling up office space, the commercial office space market has never been disrupted like this before. Some of these IT/ITES buildings with such tenant profiles are offering yields as high as 10% PA and these are looking like great investment vehicle however one needs to do a thorough investigation into the tenant profile along with property due diligence before investing in these type of properties because some IT companies have not been able to take it to higher skies after a great take off.
- IT rebound: IT, energy and healthcare are perhaps the only sectors that one can safely bet on and say that these here to stay for a long time. While some momentum was lost right after the 2011 market crash in the west and ripples were felt in the IT sector for a little bit, things are now back on track with companies like TCS, Honeywell, Naggaro, Oxygen, Covidian, Boston Consulting etc acquiring huge office spaces throughout Delhi NCR. Most of these spaces are IT/ITES buildings that are available as single unit at a decent return of around 7.5-9%.
- Logistics and Warehousing hubs: Considering the fact that, there are several infrastructure projects either underway or in pipeline, there is going to be a series of related specialized commercial hubs that will be coming up with each such project. Projects like the DMIC (Delhi Mumbai industrial corridor) and KMP expressway (150 km corridor connecting Kundli – Manesar and Palwal) promise to great warehousing and logistics corridors along with manufacturing hubs like Dharuhera, Bhiwadi etc. Some of already established warehouses in areas like Manesar, Pataudi, Farrukhnagar, Narela, Bawana, Sonepat and Palwal, offer annual returns of around 12% by entering at the right time. The risk of course with such projects is timely delivery, funds, industry sentiment, and political will.
- Specialized Commercial Hubs: While spaces like Aerocity in Delhi (over 62 Acres of hospitality, retail and office space hub), Medi city in Gurgaon (over 42 Acres of Medical and pharma Commercial Park) provide impetus to particular sectors and it seems like things are moving in right direction with over more and more companies acquiring spaces at attractive rentals however, areas like are always fraught with the risks of oversupply and property status (lease hold or fee hold). Both Medicity and Aerocity are lease hold areas which means a depreciating re sale value given the security concerns over projects like Aerocity. Again, such areas are best for people who are up for taking risks for attractive returns, investors in Aerocity and Medanta have booked returns in the tune of around 8-10% in commercial office spaces. These area are a value for money proposition for specific industry type end users who are looking for commercial space in an ecosystem that translates into better overall productivity for their businesses.
- Space Consolidation by bigger companies: This category in our opinion is best for people who are looking for a more secured investment which also provide reasonably sound return around 5.5% – 7.5%. Most of Delhi’s commercial districts are over 3 decade old and do not have bigger floor plates with modern amenities to meet the demands of many companies who have over the years become big and are forced to have multiple floors within a building or worse several different offices across the city. Many such A grade companies like Reliance, Hyndai, Hitachi, HSBC, ONGC, E&Y, C&B Fashion, S&C Lavalin, Thales, Axis bank, and many others have done consolidation under one roof at different locations throughout Delhi and NCR areas while rentals are soft providing enough padding against and rental increase in the short to medium term. Investment in such rental properties can be seen like the debt fund in Delhi real estate market that are bound to provide a secured cash flow for many years to come.
So far so good, India has seen a stable Govt after nearly two decades and whatever the naysers may say, this new government has looked committed to provide better infrastructure and bringing in more business into India through its various campaigns like “make in india” DMIC, Bharat Mala etc. Realtors are getting inquiries from companies about possible future expansion plans, commercial property prices and rentals are looking reasonable, the overall sentiment looks great. Time for tenants to lock in low rentals and as well as for landlords to get quality tenants with attractive lease terms to unlock the true potential of their properties.