Introduction
Even amid the pandemic, commercial real estate has shown remarkable resilience. The sector’s future appears bright, with demand for office space and data centers recovering alongside REITs and the co-working boom. After being in limbo for a couple of years, residential real estate took a body blow due to the pandemic. However, things appear to be improving with multiple incentives for buyers. When investing, you only have two choices: commercial or residential real estate. Most people will fight for one side and be staunch supporters of it. However, depending on your financial situation and what you want to achieve, both may be viable options. Sure, you can invest in both, but renting out a residential home is a lot more work than owning a commercial property when we consider maintenance and time spent communicating with tenants, among other things. Indians have always been happy real estate investors. Still, the abundance of options and segments raises an important question: Is investing in commercial real estate better than residential property? While the answer is more complex, let us look at some aspects that may be useful.
- The potential return on investment is the first thing to evaluate. Because of higher rental prices and longer lease terms, commercial real estate often has a larger ROI than residential real estate. However, the initial investment for commercial properties is typically larger.
- Another consideration is the amount of time and effort needed to manage the property. Commercial properties are typically more complicated and need more time and care than residential homes. If you are unable to invest time and money necessary to operate a commercial property, it may not be the ideal investment for you.
- Finally, think about your personal aims and objectives. Commercial real estate may be a better long-term investment than residential property if you are seeking for a long-term investment with the potential for gain. Residential real estate, on the other hand, may be a better alternative if you are seeking for a shorter-term investment or a property that can generate income through rental payments.
Did you know?
- Globally, the commercial real estate market was worth approximately 34 trillion U.S. dollars in 2021-22.
- The commercial real estate industry significantly contributes to economic growth and investment returns. The average return on investment for commercial real estate assets has been 9.5% over time, comparable to major equity indices.
Current Real Estate Market Scenario
- According to news reports, the office sector received more than 70% of private equity funds, followed by retail (15%), warehousing (7%), and residential (7%).
- According to CBRE, one of the leading property consultants, flexible office stock is expected to rise by 10-15% year on year over the next three years.
- According to a Knight Frank India report, housing sales increased by 92 percent between July and September 2021-22. Sales rose to 64,000 units, up from 33,400 units sold the previous year.
- According to ICRA estimates, Indian firms will raise more than Rs. 3.5 trillion (US$ 48 billion) through infrastructure and real estate investment trusts in 2022, compared to US$ 29 billion raised to date.
- Residential property demand has increased due to increased urbanisation and rising household income. India is one of the top ten fastest-rising housing markets in the world.
- In Q4 FY21, the real estate sector attracted private equity investments totalling Rs. 23,946 crores (US$ 3,241 million) across 19 transactions.
Commercial vs Residential: Average Yields
According to estimates, commercial properties typically yield 8-11 percent returns, which is significantly higher than current residential rental yields (1.5-3.5 percent). It also applies to capital appreciation, as commercial properties can achieve yields of 5-10%, whereas residential units can achieve yields of 1-3%. According to experts, the difference is in lease agreements. After paying property taxes and maintenance fees, residential rental yields are typically 2-3 percent or less, while commercial rental yields are 7-8 percent. India’s commercial real estate market is a better investment proposition in terms of yield.
- The Commercial Real Estate Market In India is poised to grow at a CAGR of 13.85% by 2027
Swift Recovery in Residential Real Estate in Chennai
- During the first half of 2022, the Chennai residential market saw a 21% year-on-year (YoY) increase in sales.
- According to Knight Frank India’s latest report, India Real Estate: H1 2022 (January – June 2022), Chennai sold 6,951 housing units in the first half of 2022, compared to 5,751 housing units sold in the same period in 2021. The number of new home launches increased by 40% to 7,570 in the first half of 2022, up from 5,424 in the first half of 2021.
- South Chennai accounted for 58% of total sales in the first half of 2022. Buyers continued to be drawn to the south micro-market locations along the OMR and GST Road, followed by more affordable areas such as Porur, Valasaravakkam, and Poonamalle.
Commercial vs Residential: What should you choose?
The choice between commercial or residential investment would depend on several factors, which will be discussed as follows:
|
Basis |
Commercial investment | Residential investment |
|
Rental yields |
High rental yields |
Low rental yields/ rental incomes |
|
Volatility |
Commercial values are not volatile. |
Residential investments could be volatile depending on the market situation and property value. |
|
Returns profile |
ROI is usually higher with commercial properties |
The ROI for residential property is around 4-10%, and for commercial property, it is approximately 6-12%. |
|
Risk profile |
Commercial properties are leased out for extended periods, giving the owner a stable income. |
The leasing tenure and risk returns would depend upon the situation. |
Commercial real estate investments may be less risky, provide higher yields, and have longer lease durations and lower volatility. The only difference is that long-term returns are more likely, whereas entry-level investments may be more expensive. On the other hand, residential real estate may require a lower entry-level investment in some cases (although REITs may change this altogether). Buyers will appreciate easy loans, simple leasing procedures, and a shorter holding period for returns than commercial properties. However, average yields are lower than for commercial units, interior investments are required, additional costs are high, rental agreements cover shorter tenures, and market volatility is always higher.
- Tax advantages: Income from house property is taxed on commercial and residential properties that are rented. On the other hand, a house property purchased with a home loan qualifies for tax breaks under Sections 24 and 80C of the Income-Tax Act.
- Risk and volatility: They are perceived to be higher in residential properties due to frequent tenant turnover, higher maintenance and upkeep costs, and lower returns. Commercial properties provide long-term, stable rentals with predictable income streams.
- Getting into and out of an investment: Both are illiquid assets. However, with Real Estate Investment Trust (REIT) regulations in place, it would be easier to build a portfolio of commercial properties rather than residential properties.
Why is Commercial Real Estate Investment Growing?
- With flexible workspaces and hybrid work models becoming the new normal in business, India’s best commercial real estate projects will be more comprehensive than in metro cities. Still, they will also include tier-I and III locations.
- The reversal of a large portion of the urban workforce to tier-II and tier-III cities will naturally strengthen the hub and spoke working model.
- Most employees will eventually want to work at their employer’s co-working spaces or branches, thus enhancing commercial real estate projects.
- Another advantage of these markets is that they have lower rental rates, encouraging more developers and businesses to establish secondary hubs in these cities.
- An increasing embrace of advanced technologies will fuel the future of commercial real estate in India. Workspaces are now selecting a cloud-based and AI-based technology framework while reviewing tenant applications, profiles, and inspection requests, among other things.
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FAQS
1 . What are the various types of commercial rental properties available in India?
Some commercial properties include shopping malls, retail spaces, free-standing buildings converted into office spaces, and professional offices.
2. What are the benefits of investing in commercial properties?
Commercial real estate investment ensures steady cash flow and builds substantial cash equity. In a nutshell, commercial real estate provides excellent appreciation value with higher, stable returns.
3. Is it better to invest in commercial or residential property?
Increased return on investment: Commercial properties typically outperform residential properties in income and appreciation over time. It’s also easier to add value to commercial properties, which may make raising rents easier to justify. However, it depends on your tax-seeking benefits and expected potential returns.
4. How do you determine whether a commercial property is a good investment?
It depends upon Net Operating Income. To calculate a property’s NOI, add all revenue sources (rent, leases, parking) and subtract all expenses (utilities, maintenance, taxes, but not mortgage) from that figure. The better investment is a property with a high NOI.
Wrapping Up
The choice between commercial or residential investment entirely depends on the requirements and benefits you seek. However, the above-listed points would have given you a fair idea of the types of investments, their tax benefits and many more. If you are looking for a commercial space to set up your business, with several amenities and world-class infrastructure, you can check out Market of India.
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