Should you include commercial real estate investing in your portfolio?

Commercial real estate investing – A lucrative tool that diversifies your portfolio

Are you a curious investor always looking for new commercial real estate investing options to diversify your portfolio?

If yes, this article is sure to help you.

We will discuss a unique type of new commercial real estate investing opportunity that has been gaining popularity in India in recent times.

Investing in real estate properties to construct buildings has been happening since time immemorial. But, this is an investment opportunity which allows you to own office spaces.

Yes, you read that right. Here’s everything you need to know about commercial real estate in India.

What is commercial real estate?

To put it simply, real estate properties used for commercial purposes are called commercial real estate. 

Commercial purpose involves anything that generates income. For example, office spaces, restaurants, apartments, factories, warehouses, retail stores etc., that bring about an inflow of money, come under the purview of commercial real estate.

Types of Commercial Real Estate Investing Options

Real estate offers investments in residential, commercial, industrial and other areas. Under commercial real estate, investors have the following options to choose from:

• Office spaces – Includes investing in tech parks, shared office spaces, etc.
• Apartments – This includes investing in residential apartments with multiple units. Investing in an entire project comes under commercial real estate, whereas buying a single unit is considered a residential investment.
• Industrial spaces – Includes investments in warehouses, showrooms, manufacturing units, etc.
• Retail investments – Investments in retail stores like malls, showrooms, shops, etc.
• Hospitality – Includes investments in restaurants, hotels, resorts, homestays, etc.

Growth of commercial real estate investing in India

It was in the early 2000s when multinational companies started coming to India to establish their backend operations. As the corporate biggies began their operations in India, the demand for office spaces increased. 

By the end of 2010, various corporate players set up their operations across different tech centres in the country. 

All this while, the option of commercial space investments was mainly available for large institutional investors, as it required investors to own the properties fully by investing in huge amounts.

The Real Estate Investment Trust (REIT) regulations in 2014-15 led to the revolution of commercial real estate investments in India.

REITs are companies similar to mutual funds that pool money from various investors and allocate it to commercial properties. With REITs, commercial property investments opened up to retail and small-scale investors.

What are the benefits of investing in commercial real estate?

• Diversification is one of the primary benefits of commercial real estate investing . While the financial markets are subject to constant risks and price fluctuations, investing a portion of funds in commercial real estate helps balance risks and returns.

• Return on real estate investments is stable, as compared to investments in financial markets. Rental yield for commercial properties offers regular income to investors, which makes commercial real estate an attractive option for investors.

• Commercial land investments in prime locations offer continuous appreciation in value. While investing in sites and lands may not provide rent to investors, they offer consistent increase in value, especially if the property is in a good location. The development of the area surrounding commercial properties has a large impact on the value of the properties. For example, a new metro line increases the value of properties to a great extent.

• Inflation is generally seen as a negative event affecting returns on most investments like equities and bonds. However, property prices react positively to inflation. Increasing construction costs lead to an increase in property prices, benefitting investors in the real estate space.

• Property investments have various tax benefits and deductions. While Section 24A of the Income Tax Act mentions tax deductions on rental income, Sections 30 and 31 deal with deductions on repair and renovation charges. Apart from the two, Section 80C allows a deduction of up to 1.5 lakhs on property taxes.

Investment options in commercial real estate space

Some popular commercial real estate investing options in India are:

• Bhive Properties: Bhive has over 25 properties spread across 2 million square feet. It currently has 38,000+ investors with over ₹130 crore assets under management. 

• Strata Properties: Strata properties allows investors to start investing from ₹25 lakhs and offers a rate of return between 14-16%. It has multiple locations throughout the country, spread across 3 million square feet. The property has already distributed a rental income of ₹70 crores and has over ₹1200 crore assets under management.

• Embassy Office Parks: One of the first REITs in India, the shares of Embassy Office Parks are listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). The current share prices are ₹319.05 on NSE and ₹320.15 on BSE. It has over 43.5 million square feet in its portfolio with over 240 companies occupying them.

• hBits – Founded in 2018, hBits aims to make commercial investments in real estate more accessible to retail investors. It has over 3,000+ crores of assets under management and more than 60,000 users. It allows investors to begin their investments from ₹25 lakhs and offers returns ranging from 13% to 20%.

• Mindspace Business Parks – Mindspace Business Parks is a REIT with shares listed on NSE and BSE. The shares are currently priced at ₹324.1 on NSE and ₹325.57 on BSE. It has an area of 32.3 million square feet spread across Mumbai, Hyderabad, Pune and Chennai.

• Brookfield India Real Estate Investment Trust – Being the first REIT in India sponsored by Brookfield Asset Management, Brookfield has over 25.3 million square feet of leasable area. The shares are currently available at ₹239.3 on NSE and ₹239.02 on BSE.

Conclusion

Commercial real estate investing has gained popularity in India in recent times. The liberalisation of policies in the REIT sector has attracted more investors towards the commercial space.

Despite its benefits to investors, commercial investment in real estate has limitations like high initial investment costs, expensive loan charges, and so on.

However, investors still consider it given the profitable returns and quick appreciation in investment value.

Hence, investing in commercial real estate is indeed an explorable avenue for investors looking to diversify, however, it requires a thorough understanding of one’s risk appetite and financial goals.

DISCLAIMER: This article is not meant to be giving financial advice. Please seek a registered financial advisor for any investments.