Commercial real estate investment is one of the most rewarding forms of investment. The Indian real estate sector is booming for the first time since the pandemic. Tier 2 and Tier 3 cities are contributing a significant proportion to the commercial real estate market.
Industrial and residential real estate investments come after commercial real estate investments in terms of cash flow generation. However, it is not as easy as it seems because the taxes, rules, and regulations levied on commercial property are relatively higher than on residential real estate properties. In order to pave the way for commercial real estate investment, an individual has to make a large capital investment that comes with a high risk. So it is recommended to make financial investments post-taking a calculated risk.
In this blog, we will walk you through commercial property investment and should you invest in commercial real estate.
Table of contents
What is Commercial Real Estate?
Commercial real estate is property that is solely used for commercial and business purposes. The commercial real estate is diverse and broad, which includes a single store to multi-story shopping centres. Commercial real estate also includes several categories, such as hotels, strip malls, resorts, healthcare facilities, restaurants, and office spaces.
Check out the key pieces of information below for a better understanding of commercial real estate:
- Publicly Traded Real Estate Investment Trusts (REITs) are the global platform for investors to make indirect real and commercial estate investments.
- It requires more capital than residential real estate. In this vertical, the profits are bigger, and so is the risk.
- Commercial real estate investment opens the doors to potential rental income along with capital appreciation.
How to Get Started in Commercial Real Estate Investing?
An investment in the commercial real estate sector generally starts with a large capital investment. The most common way to invest in commercial real estate is via Real Estate Investment Trust (REITs) or via fractional ownership.
Direct Investment vs Indirect Investment
Direct investment
Direct investment gives you absolute ownership of the physical property. An individual who has adequate amounts of capital and knowledge of the commercial real estate industry can make a serious profit.
However, these investments are commonly both high-rewarding and high-risk. There is potential to generate a high net worth since the CRE investing requires a considerable capital investment. The more investments you make, the more cash flow you get.
Furthermore, you need to be mindful of the fact that your investment is subject to market risk.
The ideal properties for making an investment are those where areas have lower CRE and higher demand. Such properties generate higher rental yields. The CRE is determined by the strength of the local economy of the area.
Indirect Investment
Indirect investment is made in the CRE indirectly via the ownership of the various market securities. Indirect real estate investments include Exchange Traded Funds (ETFs) or Real Estate Investment Trusts (REITs) that invest in commercial property-related stocks, realtors, and banks.
Pros and Cons of CRE Investing
CRE is a diversified field of investment that has a variety of potential assets such as manufacturing units, warehouses, schools, movie theatres, malls, retail spaces, and so on. The below-mentioned information is the pros and cons of CRE investments.
Pros of CRE Investments
Stability: CRE investment is a stable source of high rental yields. 9-12% is the average rental yield of the property value, whereas the rental yield of residential properties is only about 1-2% of the property value, which is only about one-third of the CRE property.
Consistency: The CRE tenants are more likely to make timely payments as they have a well-established business model. This factor helps in the assurance of professional behaviour.
Beneficial in Long-term Commitments: The tenure for leasing a commercial property is generally higher and ranges somewhere between 1-2 decades. It provides a secure and stable source of income for CRE investors.
Purchasing Value: A commercial property is more rewarding over a period of time as compared to other residential properties. Moreover, making a financial investment in premium properties via financial ownership or REITs has the potential to provide attractive returns with relatively lower investments.
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Cons of CRE Investments
Property Management: Investing in commercial real estate is nothing like investing in fixed deposits or other safer investments where you simply invest an amount and relax. To ensure smooth property management requires additional investment.
Initial Investment: Paving the way through CRE is a bit difficult as the initial capital investment is an exorbitant amount. This includes legal expenses as they are more complex with a limited market opportunity.
High Investment Requirement: The minimum investment requirement for CRE is about INR 25 to 20 crore, which is an extravagant amount, making the CRE investment beyond the reach of a small-cap investor.
Right Property Selection: Finding the right kind of property for a large capital investment is always an important consideration. The geographical location of the property needs to be researched extensively and investment market knowledge needs to be acquired to avoid a serious financial crisis.
Should I Invest in Commercial Real Estate?
The Indian real estate market and sector vary according to the geographical area. The metropolitan cities comprise a significant portion of the Indian real estate activity. During the time of the pandemic, there was a certain downturn in the commercial market.
However, according to the government, cities with a population cap ranging from 50,000 to 100,000 are known as Tier 2 cities, while cities with a population cap of 20,000 to 50,000 are known as Tier 3 cities. These cities are expected to drive the recovery of the commercial real estate market in the coming years. This factor means that now and the coming years are going to be the golden period for commercial real estate investments. We strongly recommend that you make a well-researched model prior to making a financial investment, as the attractive returns come with a high risk.
Consider the calculated risk before you invest, as it could boost your commercial real estate investments.
To Sum Up
Commercial real estate investment is one of the greatest investment avenues through which an investor may make serious profits. However, the more rewarding an investment opportunity is, the more risk it poses to the investors. As we mentioned above, commercial property investments require a larger capital investment. There should be no room for mishap and miscalculation. It is recommended to do prior research on the situation, purpose, zoning, size, and state of the property before making a financial decision.
FAQ’s about Commercial Property Investment
Q1. What is commercial real estate investing?
Making financial investments in commercial real estate properties such as manufacturing units, warehouses, schools, movie theatres, malls, retail spaces, and so on is known as commercial real estate investing.
Q2. Is it better to invest in commercial property or residential property?
Both commercial and residential properties offer different benefits. If you have a large capital, then you should invest in commercial real estate properties as they are more rewarding as long as you take calculated risks. If you want a safer, cashflow-generating asset with a lower capital investment, then you should invest in the residential real estate market. However, in terms of cash flow generation, commercial real estate investment takes the lead.
Q3. What type of commercial real estate is the best investment?
Office spaces are one of the best real estate investments as they generate higher cash flow and come with a longer leasing period. Making an investment in office space properties is recommended as the tenant comes with a well-defined business model, which enhances professionalism.
Q4. What makes more cash flow, commercial or residential real estate?
No wonder, commercial real estate generates higher cash flow as the investment made by the investor or the tenant is relatively higher than residential space, which makes the property capable of providing higher cash flow. However, commercial properties are a more rewarding but more risky form of investment, so make a smart investment.
Q5. Is now a good time to invest in commercial property?
Yes, the Tier 2 and Tier 3 cities in India are driving the commercial real estate market towards recovery after the damage the pandemic did to the real estate sector. So, making a financial investment in the real estate market could be beneficial for an individual who has a well-established business model ready before investing.
