Introduction
There are various reasons why you’d wish to own a property in India. Having your roots back in India, you probably are aware of the rising economy and the effect it brings over industries, business, infrastructure, society and to every individual at large. The growing Indian real estate market and its potential to offer good returns to investors is no longer a hidden secret. Along with the options that the industry has to offer comes the omnipresent complexity in deciding– Residential or Commercial – What’s best for me?
The decision to buy a property can be attributed to two main reasons at large – emotional or investment. We may buy a property as we wish to live into it or have our families enjoy a bigger space, a better locality or better schools. It could be a planning to return to the roots or a lifestyle issue. It could be treated as a second home which you’d use during your frequent trips to India to meet family, friends and get your kids to know your culture and values from a closer distance. In such cases, we must satisfy our emotional cravings and invest in the pride and comfort that come along owning a home back home. A home is a place which you can call yours, a place that you can relate to and fulfill your Indian Dream. Return on investment is not the primary objective in such case and should not be the main concern.
When investment is the objective, the decision factors change totally. While deciding to invest into Indian real estate for investment reasons, many choices are available today, and though the final decision might be based on the comfort of the individual, normally the ROI (Return on Investment) acts as one of the most important criteria. Now I agree that you’d be rather comfortable investing in a property that’s in your home town or a place which you know well. But I wish to bring out the point that ROI cannot and should not be ignored. As this is going to be your investment, focus on ROI will help you determine if your investment can be termed as a Great, good or an average one.
The Dilemma – Residential or Commercial?
Real Estate is seen as a reliable form of investment that has a tangible asset underneath and which normally appreciates over long period of time. Normally land is an appreciating asset while a building is a depreciating asset. While both commercial and residential properties appreciate in value over time and offer better returns as compared to other investment options like stocks, bonds and money markets, when compared relatively between commercial and residential, the results might vary.
A common dilemma that an investor normally faces is deciding whether he should own a residential or a commercial property. Which of the two could end up in higher returns, less effort and where one can leverage his investment to the fullest? There are several reasons why commercial property might be a better return then residential property. The reasons are clear for anyone who has ever worked as a landlord as he faces cranking tenants complaining about everything on earth in the middle of the night.
Most people invest in residential real estate because commercial real estate feels like unchartered waters and we are afraid. How exactly does a commercial landlord do, act, and say? Commercial property must work pretty well, after all Donald Trump started his emperor by being a commercial property ‘landlord’ and if it worked for him it can work for you.
Types – What are commercial properties?
In India the types of commercial properties include Commercial Shops, Showrooms, office spaces in busy markets, shopping malls, IT parks, factory, Business Centers, Industrial Plots, SEZ’s, time shares and more.
Reasons – Why Commercial Over Residential?
Below are a few reasons why you might want to consider investing in commercial real estate instead of residential.
The first reason is that commercial real estate has a higher rate of rental then residential properties. Commercial property is a space for businesses to sell their products and services. The main goal of Businesses is to earn profits. Businesses depend on the number of visitors they receive each day, availability of trained resources or access to freeways. These businesses know the value of being centrally located and they are willing to pay to be in the right place. Location is less important for residential properties and it takes time to fill up your real estate. When a business comes and want to rent from you they do so because they know you have a good location. Thereby commercial properties can command the most of the opportunity value it has over residential property.
Second reason is that commercial property has limited availability. Recently, India started the effort of segregating Residential from Commercial areas. This has fuelled into a very strong demand for commercial properties.
Thirdly, most commercial renters will fix problems and minor repairs on their own with out calling the landlord. This is because they realize that problems interfere with their business and need to be taken care of immediately. Unlike residential renters who need the help of a landlord to take care of repairs.
Fourth, the upgrades done on commercial property can be fairly substantial and stay with the space when the business moves on. Companies usually need to put in networking and cable wires, sound systems, and electrical outlets. All of which increase the market value and marketability of your commercial space. If you are interested in buying and renting property do not over look the benefits of buying commercial property.
It is far more passive then residential real estate and appreciates in value much quicker. Being a commercial ‘landlord’ is far easier and you have the ability to network with people and businesses which you may work with in the future.
With the above mentioned reasons let’s study with an example: an average apartment worth Rs. 40 Lac would potentially rent for an average Rs. 6000 per month, whereas a similar investment in commercial in the same vicinity will probably generate Rs 20,000 per month. Residential properties return an average of 2-5% or return whereas commercial can start from 3-4% and go to 20% p.a or higher.
Word of caution when selecting
India is going through a zoning exercise. Recently Supreme Court had a ruling to detach residential from commercial in order to provide a safer and more private environment of accommodation. MCD ran a notorious drive all around NCR. While selecting the commercial property care must be taken to ensure that the property falls under the commercial zoning area. For future any residential will no longer be able to operate commercial activity from the area.
Closure
There are many options currently available in form of IT Parks, where the developers are offering smaller unit sizes to own, with no property management hassle as they undertake the responsibility of leasing them initially and with assured returns for initial years; shopping malls, where the developers have rented out the property to reputed tenants with lock-in periods thereby ensuring a good return on investment for the investor and more. If your objective is purely an investment, consider commercial property as a choice that might help you achieve your objectives of a higher ROI.
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