Investing in Commercial Real Estate

by Sunil Kilaru Sunil Kilaru

Sunil Kilaru is an Entrepreneur based out of Bangalore. Sunil Kilaru run’s an IT Products &Services Company – PRIMUS (www.primusglobal.com) and a Real Estate Company – PRIME Living (www.primeliving.in). Mr. Sunil Kilaru gives his insights on Investing in Commercial Real Estate.

There are two components of commercial real estate. One being Office Space and the other being retail. If you are a savvy investor who wants to diversify his real estate portfolio, investing in commercial real estate is a good bet. It is a good way to earn high rental income and gain from capital appreciation.

Among all segments, residential is considered the safest, due to easy-to-understand demand-supply situation. It gives a small rental and good capital appreciation.However, those with adequate experience of investing in residential properties should consider office spaces as well. Offices, or any commercial real estate for that matter, diversify your real estate exposure.In offices, the rental income is 7-10% of the property's value in a year, several times more than what you earn from a house. Capital appreciation, however, depends upon the timing of the investment and the state of the economy.

It is my advise to go for prime locations and smaller units in the range of 3,000-5,000 square ft. Integrated mixed-use projects with residential as well as commercial spaces are likely to give better yields. If you want to invest in a large office space, you should go for one that can be split into smaller units if you are unable to find a big tenant.

Many developers, especially in cities such as Mumbai, are today offering smaller units of space (as small as 500-1,500 square feet) in Grade A buildings. Investors looking at retail space can now consider a multitude of affordable options in free-standing high street outlets or shops in malls. In fact, if you are looking at buying retail space, it is advisable to look at high street rather than a mall as a strata sold mall is a recipe for disaster. In a strata sale model, shops in a mall are pre-sold to individual investors. The developer thus restricts himself to selling a store as a unit and investor can hunt for a tenant. The problem arises because the model has no control over trade and tenant mix and there is no cohesiveness to the mall to attract customers.

Unlike with a residential property, the income that can be generated from commercial property is what determines its value. Minimum budget you should have in mind for a commercial investment is Rs 3-4 crore.You can expect returns of 10-11% per annum from commercial investment. Rental yield is nothing but the annual rent divided by the property value. Often, buyers tend to ignore rental yield and instead focus only on capital appreciation. However, rental yield is a very important parameter as it represents productivity of the price. When you buy a commercial property, make sure that you can get a rental yield of at least 11-12%. A yield of less than that means the property is overvalued.