India's commercial office property asset class presents a profitable alternative for NRI investors looking at maximising returns and generating fixed income while simultaneously maintaining a low-risk investment profile. The attractiveness of good capital appreciation, as well as rental yield, has increased NRI inventor demand for Grade A offices, IT parks, logistics centres - and now REITs as well.
A good commercial property can give an average rental yield of 6-10 percent and the current rental yield from residential property is a mere 1.5-3.5 percent. The same growth range holds true for capital appreciation.
The upsurge of India’s commercial office market began in 2017 and has been further boosted by the arrival of REITs. Commercial real estate in India is driven by strong economic fundamentals, demand for quality Grade A office space, relatively affordable rents, and the new co-working office space trend in key markets.
The other key potentiating factors driving demand, especially for Grade A office spaces, are India’s rapid urbanisation and the increasing share of millennials.
Commercial Supply and Demand Dynamics
As per ANAROCK data, approx 11 mn. sq. ft. of office space was absorbed in Q1 2019, led by Bengaluru and followed by Mumbai, Chennai and Hyderabad. Supply addition in Q1 2019 rose by nearly 11 percent on a yearly basis to touch nearly 7.5 mn. sq. ft. in the first quarter across top 7 cities.
The cities with vibrant demand for office real estate – especially Grade A spaces - malls and co-working spaces are Bengaluru, Mumbai, Chennai, Pune, Hyderabad and Delhi-NCR. In Delhi-NCR, Gurugram has become a major investment destination for NRIs looking at investing in commercial real estate. Its close proximity to Delhi makes it ideal for NRI investors looking at long-term corporate tenants. Gurugram’s future office rental growth potential is good, and it has many commercial spaces which are seeing good absorption.
Office Rental Growth Rate (Last 2 Years): Chennai: 12 percent rental growth Hyderabad: 11 percent rental growth Bengaluru: 10 percent rental growth Pune: 10 percent rental growth Mumbai: 5 percent rental growth Gurugram: 3 percent rental growth (Source: ANAROCK Research)
If we compare commercial real estate yields to those for residential properties, it becomes evident why many HNI NRIs prefer investing in the former:
Residential Rental Yields in Major Indian Cities: Delhi NCR: 2.63 percent MMR: 3.00 percent Pune: 3.10 percent Chennai: 2.72 percent Kolkata: 2.65 percent Bengaluru: 3.30 percent Hyderabad: 3.70 percent (Source: ANAROCK Research)
While the numbers speak for themselves, commercial real estate nevertheless requires much larger investments than residential – and finding and retaining suitable tenants for office spaces can also be a lot more complicated than for residential properties. Moreover, commercial properties do not have the same emotional connect for NRIs as housing does.
That said, the value proposition of a well-chosen and suitably tenanted commercial property is certainly compelling for NRIs who can afford it.
Benefits of Commercial Real Estate for NRI investors:
NRIs keen to invest in the commercial real estate can lease their property out for long tenures, and their maintenance remains the responsibility of the tenants. India's liberalised foreign direct investment policy, especially with regards to expatriate participation in its economy as domestic investors, has made the country’s primary business cities hot destinations for NRIs focused on office real estate.
NRIs can also avail loans for commercial properties similar to residents in India but there are differences between the residential and commercial property loans including interest rates, loan processing fee, tenure of loan, age of the property etc. Hence, NRIs must do their due diligence before opting for one.
Shajai Jacob is CEO - GCC (Middle East), ANAROCK Property Consultants.