Aria
In India, most people have always considered investment in housing as an asset with medium risk for income generation in the real estate sector. But, recently, with maturing and expansion of the real estate market, some other assets, such as Commercial Real Estate (CRE), have become prominent.
Though investing in residential units and CRE are both sources of steady rentals, retail investment yields higher returns. While yields of residential units are in the range of 1% to 3%, rentals from CRE are in the range of 6% to 8%. Double height showrooms for sale are lapped up quickly because of the promise of such high returns.
In the past, it was challenging to purchase a retail space because of a lack of supply and since there were a lot of non-adherence to regulatory needs of the segment. But the present situation is much different. In the past decade, the real estate market of India has undergone a significant transformation.
Why Invest in CRE?
An investment in CRE often entails an amount of investment that is too big to offer by a single investor. The most typical forms of CRE investment are through REITs (Real estate Investment Trusts) or Fractional ownership.
CRE investment is available with some advantages in contrast to traditional options of investments.
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Since it is part of real estate, it enjoys insulation from fluctuations in the market. In the role of an option of investment in the long term, it has stability and typically has a regular return rate.
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It has a period of lock-in, which keeps safe your investment, while it yields assured returns.
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Any CRE with a special purpose in an important location can be a goldmine since it will appeal to a niche sector of customers (tenants). This also assures that the renewal of investment will generate an income as passive returns. Thus, commercial property in Mohali is in high demand due to its prominent location.
How to Start an Investment?
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REITS
Such investments work similarly to Mutual Funds. A REIT is managed by a fund manager, and your share of the investment becomes part of an investment pool, which is divided across multiple assets. Such assets are chosen by fund managers on the basis of current market dynamics and their historical performance. All the returns from such assets are collated and shared with investors as per their investment in the fund of REIT.
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Fractional Ownership
In this mode, like-minded investors will pool their amounts of investment into ownership of assets. The minimum size of tickets is in the form of multiples of lakhs. Based on their funds and appetite for risk, individual CRE investors can own one or portions (fractions) of an asset, assigning them a portion of ownership. Returns from capital appreciation and rents are distributed based on the ratio of ownership of every investor.
Points to Note
Some of the key points to note before investing in commercial real estate are:
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CRE investment is only profitable in the long run
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It is good to diversify; investing in only one class of assets is risky.
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Though CRE is a robust asset, it has its risks. One must be wary of any claims of ‘guaranteed results”.
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Various markets exhibit varied behaviour
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Rental returns are decided by the rental rate in the market and vacancy rates
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If the asset does not yield profits even after 5 years, consult the asset manager.
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Use your discretion to either hold or trade assets.
Tips to Invest in Retail Stores
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Do your research
This is important for making any investment. It is desirable to judge the financial stability of the store, its competitive landscape and its growth potential. It will help in knowing whether CRE investment is worth it.
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Location of store
It is good to invest in a retail store in a high-traffic area. This will improve the chances of more people visiting the store and purchasing. Also, it is good to make the store easily accessible for customers, like retail showrooms in Mohali.
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Type of merchandise sold
It is critical to invest in a store that provides familiar merchandise. This will aid you in making superior investment decisions. Also, it is critical to choose a store whose products or services are in high demand.
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Know the different kinds of retail businesses
Several kinds of retail businesses exist, from huge retail chains to small mom-and-pop stores. Every type of store has its nature of rewards and risks; therefore, you must do adequate research before investing.
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Identify a niche
With regard to investing in CRE, the best bet is to focus on a particular niche. This way, one can understand the market in a better way and identify the best opportunities for investment.
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Determine a budget
Last but not least, you will wish to determine a budget for investing in CRE. This can help in monitoring your progress and help you avoid overspending. It is also critical to have realistic expectations while making CRE investments. Note that it takes a long time to generate profits from investments.
Factors Impacting CRE Investment
The following factors should be borne in mind before investing in CRE:
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Location
This plays an essential role in the performance of your asset. Accessibility to transport points like airports, highways, seaports, railroads, etc., impacts the value of your asset.
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Tenancy
The current tenants, the terms of tenancy and their financial condition are all factors that can reveal a great deal about the asset’s viability for a long time and how beneficial the asset is going to be. Office space for general purposes is likely to enjoy bigger opportunities for being occupied.
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Market dynamics
There is truth in the fact that CRE does not suffer from similar market shifts as other options of traditional investment. But market changes do impact the rate of vacancy, the stability of occupancy and the rentals. For instance, during the recent Pandemic, demand for CRE plunged with the rise in work-at-home arrangements.
In sum, the CRE field has become highly competitive with the coming of online businesses. The latter are popping up in every product category. Hence, CRE investors must discover new ways of doing business.
