Is commercial real estate is a better investment option over residential in India? Expert decodes

The recent tailspin in the financial market has further reinforced the importance of real estate as a safe haven to park your capital.

"In the past 5-6 years, trends are shifting with Indian investors now realizing the importance of commercial real estate as a sophisticated asset class to make elevated yields." Pixabay pic.

Real Estate Investment: Like other Asian societies, real estate comprises a major portion of overall investments in India. It is traditionally believed to be a tangible, long-term, and risk-mitigated investment. The recent tailspin in the financial market has further reinforced the importance of real estate as a safe haven to park your capital. Ankit Aggarwal, MD, Devika Group says, “In terms of investment, it was housing that was preferred during earlier days. The pivot towards housing was rooted in multiple factors such as easily available options, general suggestions from friends and family, limited hassle in managing the property alongside a dearth of knowledge about commercial real estate.” He decodes if commercial real estate is a better investment option over residential in India and why.

Shift in Preferences

“However, in the past 5-6 years, trends are shifting with Indian investors now realizing the importance of commercial real estate as a sophisticated asset class to make elevated yields. There is growing interest in office stocks, retail units, shops, etc. to make recurrent rental income along with attractive capital appreciation,” says Ankit Aggarwal.

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“The last decade was marked by the economic Bull Run in India, with the country also transforming into one of the fastest-growing emerging economies across the globe. While the international spotlight started turning to the South Asian economy, back in India people realize the importance of commercial real estate as a viable investment option. Buyers and investors started becoming aware of how commercial assets can outmanoeuvre their residential peers in terms of ROIs,” he added.

“The utilitarian value of a house as an asset is unquestionable, as everyone has to own a home. Nevertheless, when it comes to making smart returns, commercial is a much more attractive option to deal with. It helps you to build steady cashflow with attractive rental returns,” he suggested.

“In metros, rental yield from residential properties is mostly in the range of 2.5-3%. In contrast, offices in IT parks/ business zones give returns in the range of 6-8%. Commercial offices in much sought-after CBDs can give a higher yield of 7-9%. Meanwhile shops in malls & shopping complexes can give a yield of up to 9%. Other assets such as warehouses can also give competitive return in the range of 5-6%. Likewise, as the demand for commercial properties is on an upswing, they also offer lucrative capital appreciation in the midterms. Lease terms are also for larger time periods in commercial assets, which makes them more stable in the longer run,” he explained.

Portfolio diversification with commercial properties

“Commercial real estate also helps in investment diversification and mitigates risk to a greater extent. One can invest in multiple types of assets such as office, retail, mixed, etc. subject to the budget available at hand. Likewise, one can diversify geographically in multiple cities to reduce risk and reap benefits from markets that are doing good. Even in a regular portfolio comprising of bonds and stocks, exposure to commercial stocks can add some degree of resilience and robustness. Compared to stocks and bonds, commercial realty is less susceptible to market shocks and risks,” he opined.

“Commercial real estate can also be instrumental in hedging against inflation as property prices and rental rates are mostly in sync with the general rise in consumer prices,” he concluded.

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