Thursday 7 February 2019

A Look Into The Future Of Commercial Real Estate

The Indian real estate sector has experienced a landmark couple of years with the introduction of government reforms such as affordable housing segment, RERA Act, introduction of Real Estate Investment Trust (REIT), and eliminating title fraud risk with Blockchain Technology which have improved the transparency and accountability in the sector. However, it is not just residential realty that has been benefited from these reforms but also commercial realty. In fact, Colliers International forecasts that the commercial market will remain vigorous with 35 million sq. ft. of average absorption in the next couple of years.

The recent trend of leasing of co-working space led by startups in India has resulted in a significant growth in the commercial real estate. Co-working spaces are considered perfect platforms for collaboration, exchange of ideas and higher networking opportunities along with enabling optimum use of the scarce resources available to us. Across India the potential market size of the co-working segment stands at $12-16 million and is expected to grow by $1 million in 2018. As per syndicated reports, in the next 5 years investment of $400 million is expected to be poured into this segment of the real estate market every year. With such high scope and investments in commercial real estate, its future certainly looks quite bright.

Three basic factors affect the commercial real estate. Firstly, a centrally located property with maximum connectivity to major suburbs will be preferred over others. Secondly, the proximity to commercial businesses or university district matters, and lastly property amenities and infrastructure development is also factored in.

There are various benefits of investing in commercial real estate. Some of them are:

     Higher return on investment: Commercial real estate investing can result in higher returns than investing in a residential one. In general the average ROI for commercial properties is 6-12% while the ROI for residential properties is typically between 1-4%. As a result it provides you a way to earn more money each year.
     Forced Appreciation: While the valuation of residential properties can increase over time, commercial real estate properties can increase relatively quickly.
     Less competition: Investing in commercial property is a huge undertaking and that’s why most investors shy away from it. For an experienced investor with a healthy risk appetite commercial real estate provides less competition, thus providing opportunities to excel.
     Easier access to funds: Even though commercial real investing costs more than residential, banks are much more willing to lend money for a high performing commercial project than a residential one.

 The key drivers in growth of commercial real estate are:

  Rapid growth in service sectors: The rapid growth in service sectors such as IT/ITes, Banking, Finance and Insurance        Services (BFSI) and telecom has resulted in growth of commercial real estate.
     Rising demand from MNCs: Mumbai, Delhi-NCR and Bangalore account for 60% of total office space demand in India as of 2017. The office space absorption in 2016 across the top 8 cities amounted to 34 million square feet (msf) with Bangalore having the highest rate among them.
     Demand for office space in Tier 2 cities: Business are moving from Central Business District (CBDs) to Special Business District (SBDs). Similarly, offices are also moving from Tier 1 cities such as Bangalore, Chennai, Delhi, Mumbai etc to Tier 2 cities such as Agra, Lucknow, Jaipur, Navi Mumbai, etc.

With a liberalised framework, especially 100% FDI through the automatic route there has been an increase in investment in commercial real estate space. In the second quarter of 2018, the value of commercial segment stood at $766 million and residential at $34 million in the same period. This indicates the value of investing in commercial real estate. With the big bang reforms, the benefits of investing in commercial real estate, and a liberalised economy, a strong growth in the commercial real estate sector is expected.