In this article, we will discuss about how to invest in a commercial property in India. Real estate investment is one of the most preferred and lucrative type of investment that people generally consider. Especially we Indians love real estate when it comes to parking our funds in a safe asset in order to receive assured monthly returns as well as a good capital appreciation.
When it comes to property, the one that give you more returns is a commercial property. A shop, showroom or an office space fetches you more returns than a residential property.
If you are looking to know more about how to invest in a commercial property in India, you have reached the right place.
Type Of Commercial Properties Available For Sale In India
When you think about how to invest in a commercial property in India, you need to consider the various types of commercial properties available for sale both from builders and owners. We have tried to list down these types one by one below:
This is the type of property that is available for sale in commercial building that you can buy and lease it out to a company or a professional who is looking out for an office for rent.
This is the type of property that is available for sale in commercial building that you can buy and lease it out to a shop , restaurant, cafe, etc.
This is the type of property that is available for sale in commercial building that you can buy and lease it out to a car dealership, retail stores, banks, supermarkets, etc.
4. Commercial Land
This is the property which is an open land parcel that is sanctioned for commercial use and that can be leased out to any business that needs to be set up on the ground e.g. auto workshops, schools, sports complexes, etc
In this article, we will discuss only about the first three types of commercial properties, i.e shops, showrooms and office spaces.
How To Invest In A Commercial Property In India
Investing in these types of commercial properties may seem a little daunting but it is not as difficult as it seems. It is almost similar to buying a residential property other than a few differentiating factors. First you need to understand some jargon that is involved in buying these properties.
1.ROI: ROI stands for ‘Return On Investment’. As the name suggests, it is a figure that indicates how much return you can expect after investing in a commercial property. It is the sum of the rental income that you stand to earn and the capital appreciation that you can expect in the future.
2.Yield: Yield is similar to the ROI except that it does not take into account the capital appreciation. It is purely the rental income that you derive from the property. There is a mathematical formula to calculate yield.
Yield= [Annual Rental Income / Acquisition Cost Of The Property] x 100
For instance, if you buy an office space for Rs. 1 Crore and it fetches you an annual rental income of Rs. 8 Lakhs, then your yield will be [8,00,000 / 1,00,00,000] x 100 i.e. 8%
3.Gross Yield: Gross Yield is the yield derived from the property before deducting your annual expenses. So in the above example, 8% is your gross yield.
4.Net Yield: Net Yield is the yield derived from the property after deducting your annual expenses. Owning a commercial property comes along with a host of expenses like maintenance, property tax, repairs, etc.
In case of our example, if you are earning 8 Lakhs as rental income and your yearly expenses are 1 lakh, then your net yield will be [(8,00,000-1,00,000)/1,00,00,000] x 100 which is 7%
How to calculate ROI in a commercial property
Now Let us calculate your ROI by continuing this example. Let’s assume, you bought this property for 1,00,00,000 and within an year you get a capital appreciation of 10,00,000 so now your property is worth 1,10,00,000 so you get a capital appreciation of 1%
Yearly ROI is Yearly Yield + Capital Appreciation in that particular year. Thus, in our case, it is 8%+1% = 9%
Buying options in commercial real estate
Now that you have a brief idea about the terms involved in investing in commercial real estate in India, let us see what options are available for investment in the market.
We have taken into consideration four most important types that are currently seen in India
1) Buying straight from the builder:
In this case you directly approach to a builder or approach him through a professional property consultant as your advisor. This deal is the most prevalent in the market and most of the investors prefer to go through this route.
a) You buy directly from the builder thus you do not pay any commissions or brokerage keeping the acquisition cost low
b) All the projects have to be RERA registered, thus you don’t have to worry much about the clear title and documentation of the property
c) Buying at the early stage of construction is usually cheaper than buying a ready property
d) The builder can give you good payment terms and schedules and discounts too
a) If the property is under-construction, you need to keep patience until it is ready.
b) Most of these properties are under construction so you will need to find a tenant yourself once it is ready.
2) Buying a resale commercial property:
In this case, you buy a commercial property from a person/entity that already owns this property. It could be an individual investor or a business that is selling their existing property to you.
a) You get a ready property that can fetch you returns immediately
b) Some of these properties are pre-leased that is they already have a tenant in place and you simple buy the property and sign a contract with the existing tenant in your name
a) Because you are dealing with an individual entity and not the builder, you need to do your due diligence about the clear title of the property and also verify whether nobody has a claim over it or there is any bank that has financed the property and there are any pending dues.
b) There are very limited options in this type of a property, if you want a particular floor or a direction or a view, then it is difficult. You need to go with whatever that is available.
3) Investing in a Real Estate Investment Trust (REIT):
This is a fairly new concept in the Indian market but gaining popularity quickly. REITs or Real Estate Investment Trusts are companies that pool in together money from retail investors and use it to buy a commercial property. It is similar to the mutual funds that you see in the stock market but only this is for real estate.
In this case, a trust is formed where you can earn dividends on your investment without having to go through the process of acquiring or maintaining a commercial property.
a) It is very easy to invest without doing any property transaction or having to worry about finding a tenant, recovering rents, repairs & maintenance of the property, legal compliances and disputes pertaining to owning a property, etc
b) Commercial property is expensive and in case of REITs, you don’t have to shell crores of rupees or take huge loans to buy the property, you can start with small amounts starting with a few thousand rupees.
a) As this concept is a fairly new one in the market, a lot of traditional investors are skeptical about it
b) You as an investor have no control over the operations or decision making regarding the property
4) Fractional Real Estate Investment:
This is somewhat similar to a REIT but here you need to have a bigger capital to invest. In this case you buy a fraction of the property at an equally proportional faction of the cost. For example, You can buy 25% of a property that is worth 1 Crore by paying Rs. 25 Lakhs. Similar to an REIT, there is a company that manages all the legalities and operations involved in it.
a) Smaller investors get an opportunity to invest and reap the benefits of owing Grade A commercial spaces
b) The property management company takes care of all the operations and expenses involved and simply shares the profits with you.
a) As this is a new way of investing in commercial property in India, there is very little regulatory framework around it
b) There are not many options available as of now because only a handful of companies are offering this service.
Cost of Buying a Commercial Property In India
The cost of a commercial property in India depends on various factors. We have listed the most important ones below:
1) Location, Location & Location
2) Grade of the property whether it is a Grade A or Grade B and so on
3) Whether it is a bare shell, warm shell or a furnished property
4) The types of facilities/amenities that the builder is providing
5) Whether there are any certification that the property has received e.g. Green building certification from LEED, etc
6) Whether the property is pre-launch, under-construction, ready or resale
Although these factors somewhat difficult to measure, there is an observation about commercial real estate prices in general. For a city like Pune, the cost of a commercial property can be judged to an extent. To get a ballpark idea of any commercial property in a particular location, you need to have an idea about the per square foot price of a residential property in that area.
If you know that then the rough estimate is that an office space will cost you 1.5 times the cost of a residential property and a retail property (shops & showrooms) will cost you 2 times the cost of a residential property.
For instance, if we take an example of the micro market of Baner in Pune, the average per square foot price of a residential property is Rs. 10,000 psf on carpet, then an office space is roughly 15,000 psf on carpet and a retail space is roughly 20,000 psf on carpet area. Let us assure you that these figures are based solely on our observations and are not any official figures.
Now that you have a fair idea about how to invest in a commercial property in India, we hope that you get one step closer to your journey of buying the right property that will always be a good investment in the future.
Frequently Asked Questions
Loved this article? Don’t forget to check out our other articles about investing in Indian real estate.