Resumption of work from offices, rising inflation, REITs to lift up demand northward
With the economy opening up and work from home gradually giving way to back to office dispensation, the hustle and bustle of office premises are going to come back with a bang. Today, most corporates have opted for a hybrid mode of working and are optimistic to open their office full-time sooner than later. This means, it is a good time to invest in office spaces.
The psychological side effect of working from home has also reached a tipping point such that employers and employees are forced to realise the immense benefits of the office culture on both productivity and mental health of workers. With this in the backdrop, the associated real estate price of commercial space has already started to go northward.
Concepts like strata sales (sales to retail or individual investors) of commercial properties adopted by developers have allowed small individual investors to buy commercial realty with a ticket size of as small as Rs 10 lakh. A few years ago, that was unheard of.
Besides individuals, startups and SMEs are also buying office spaces. Investing in office space helps many businesses to optimise their operational expenses. Buying strata office spaces not only gives these small investors a foothold in prime and swish locations but also helps them boost their brand. Few factors that investors need to take into account before buying commercial property:
Investment grade locations
The fundamental factors that drive property values are generally objective and not subjective. Factors like proximity to malls, schools, hospitals, arterial roads, CBD, land size, and metro station among others are such objective factors that investors consider before deciding to buy properties. These factors are thus objective and are not liable to change or even if they change, they take many decades. Thus, if these factors have been driving up the value of a property over a period of time, the same factors would continue to drive a similar growth rate even in the future.
Today tech parks and business centres thrive across tier-I and tier-II cities. They boast cutting-edge technology, quality ergonomics, and state of art infrastructure. Office spaces are futuristics that are girded to take on challenges thrown by the future of work. Workspace is not just about connectivity where employees and employers collaborate, but it is also about facilities and amenities that promote productivity and inclusivity. Today, tech parks are not just hi-tech, they have become employee-centric by housing clinics, creches, shopping malls, and multiplexes on their premises. Investors must make due diligence about infrastructural support that developers have built into the commercial space.
Credit quality of tenants
Because tenants of commercial properties generally belong to organised sector, it is easier for landlords to assess the creditworthiness of such tenants. Moreover, the strong credit quality of tenants ensures that rent payments come on time every month, irrespective of economic conditions. Tenants who have strong credit ratings also tend to have an indirect positive influence on the commercial realty asset’s value over time.
Investors, today are in the best time to invest in commercial real estate as an office space portfolio as an asset class is only going to rally up. Low return on investments from residential property is also another factor that is pushing many retail investors to invest in high-yield realty assets like office space. The ROI in commercial space range between 6 – 10 per cent (depending on the location), in contrast to returns of around 3 per cent in the residential segment.
According to a recent report by real estate consultancy firm Colliers, office space gross absorption across the top six cities saw almost a three-fold rise to 14.7 million sq feet during the second quarter of 2022 as compared to the same period last year. The report added, that all the major markets saw strong leasing activity during the quarter, driven by high occupier demand for large office spaces.
During inflationary periods, commercial realty investments not only benefit from rising real estate prices but also provide higher yields than the rental incomes from residential counterparts. As mentioned above the spread of yield over residential income is between 3 – 7 per cent depending on location. Investing in office space, thus is the go-to investment vehicle that generates positive real returns compared to residential property.
Hitherto, only the wealthy and affluent were able to invest in commercial real estate properties. But that’s not the same now. With the introduction of Strata sale concepts and Real Estate Investment Trust (REIT), many small and individual retail investors have started buying premium commercial realty assets. With the realty market already bottomed out, this is the best time for retail investors to piggyback on the rally that we are going to see soon.