Investors are once again attracted to the real estate sector in India. Attractive capital gain potential, recurring rental income and the tangible nature of the sector have generated renewed interest from investors. Meanwhile, crypto and other financial markets have also weakened after a recent bull run, which further diverts investment into the real estate sector.
When it comes to real estate investing, as a general rule, commercial real estate is preferred over the residential market, as the former is a better option for generating rental returns. Within the commercial segment, offices are once again becoming the favourites.
As the crisis has subsided and a more conducive growth environment has taken over, demand for office space is growing rapidly in most major cities. Most organizations aggressively implement back-to-office programs, resulting in a significant increase in office uptake. This also translates into increased investor confidence in the asset class.
Another advantage for investors is the low prices of office shares. In 2021, according to a CBRE report on South Asia, India’s total rental business stood at 41 million square meters. Ft, up 16%. However, in the same year, a total of approximately 50 million square feet of new office space entered the market, bringing the total cumulative supply to 773 million square feet. An oversupply in the market would be a blessing in disguise for savvy investors as they can acquire the asset at affordable prices.
Higher rental yields
In India, offices offer much higher rental yields. There are several factors that dictate returns, including but not limited to demand, tenant profile, macroeconomic conditions, market situations and much more. However, if invested with caution, offices can easily yield returns in the 8-10% range.
By contrast, residential yields have been historically low in India. In most metros, yields vary between 2 and 4% in the housing market. Another category that can yield an attractive return could be retail. However, retail in India is still under pressure from low occupancy. According to Knight & Frank research, average vacancy rates in shopping centers are north of 19%. The slowdown in demand in the retail segment is explained not only by the pandemic, but also by poor asset utilization.
Industrial assets, logistics and warehouses have also seen renewed investor interest in recent years. These assets can show returns of around 9 to 10%. However, finding tenants is tedious. In addition, many maintenance activities are required for these asset classes.
This further makes desks one of the safest and most suitable assets to bet on for the fraternity.
Cautious asset to diversify
The desk is also a great asset for diversifying and spreading portfolio risk. While financial instruments are erratic, real estate assets such as the residential market provide sub-optimal returns. On the other hand, investing in the office market is not only safe, but can also generate simultaneous rental income. Meanwhile, offices can also give a decent return on capital, provided they are held for the medium to long term. (On average, before investing in an office asset, you need to have a holding period of around 5 years.)
For the foreseeable future, offices will continue to grow across the country. After the virus softened the stance of the economy over the past 2 years, the economy is again on solid footing. It is expected to grow by over 8% in the current fiscal year. At the same time, the growth of commercial activities will continue to guide the absorption of offices.
(By Suren Goyal, Partner, RPS Group)