Office Real Estate is commercial property that is used for business purposes. For some investor looking to diversify his portfolio, commercial spaces can be a great option. Office Spaces are found in single buildings and business parks etc. An office usually requires desk space, conference rooms and basic facilities like lifts, fire safety, quality wiring, kitchens and toilets etc.
Commercial Real Estate has two aspects, firstly the office space developers and secondly the investors who mainly earn high incomes from high rents on commercial spaces and the gains they make from capital appreciation. An office that is well located and well maintained with secure tenants provides the investors with excellent returns on their investment. Therefore the office spaces are quite popular with the investors for a good reason.
We are listing some of the key benefits and cautions for investment in office space:
Stock Markets are known more for erratic movements but real estate investments are considered safer where decent returns are concerned. Based on the very basic rule of economics i.e. Demand and Supply, residential is considered the safest amongst all segments of the real estate. Though residential investments yield good capital appreciation but rental income is quite small (about 2-3%).
Anyone with adequate experience of residential real estate must consider commercial real estate as well and inflate their real estate exposure. In office spaces the rental income per year is as high as 7-10% of the property’s total value. As compared to the rental income from a residential property it is quite high. The general cash flow starts from the beginning and when the mortgage is paid off, your investment becomes a sufficient retirement plan and helps you avail wealth tax exemption. Capital appreciation of commercial property depends mainly on the macroeconomics and investment conditions, which varies from area to area.
In case of India having a very stable government at the Centre and a Prime Minister that promotes industry and with the proposed changes in the FDI norms in real estate there is a renewed sense of confidence amongst the industrialist as well as several foreign companies looking to set up operations in India. The requirement of office spaces will be on a rise in the near future therefore now is considered an apposite time for investment in property. The scope for both regular incomes as well as capital appreciation is there.
“Real Estate investments in India have given superior returns than other assets such as equity and debt over the last five years,” says a report by real estate consultancy Knight Frank India.
Office space investments usually can’t be flipped easily and are mainly mid to long term investments. Therefore they need to be managed a bit differently than the residential properties. Office spaces need bigger investments as compared to residential investments.
Investing in a large office space is ideal and then they can always be split in smaller units for renting out. Finding a big tenant is not possible always then splitting is great option to make even better rents.
If your budget is not very huge then investing in smaller spaces will also prove beneficial as there is sharp rise in the entrepreneurship culture. The number of new enterprises registering every year is increasing. As per the data by RBI there is an increase in the number of loans to commercial real estate every year, which indicates the high demand of commercial real estate.
Professionals such as lawyers, doctors, chartered accountants too need an office space and smaller units of office spaces can be used to rent out. No professional or businessman would want an office in an area that is difficult to access, therefore the investor must make sure the place is easily accessible and is in a prime location. Most companies or any businessman would not want to shift their office space for a long term as moving is an expensive and time consuming task which leads to excellent secure rental income for the investor.
“Integrated mixed- use projects are gaining popularity as they provide business and residence in the same locality,” says L.C.Mittal (Managing Director of Motia Group Zirakpur)
Each city has its own local industry and the demand for office spaces depend on economic players and prospective tenants. Before making an investment, you must understand all the dynamics. For e.g. if city has bigger companies ruling and require large office spaces to accommodate their workforce then you will need bigger space and vice-versa.
Reasons for caution
Risk of Vacancy:
Major chunk of the income from investment in commercial spaces is from rent but if the place is vacant and not given on rent then the investor suffers loss. General state of economy is what affects the demand for office spaces, if the state is good then it’s all gold for investor but in the opposite case scenario they may have to reduce the rents to survive in the competitive market. Such a situation can also be dodged by renting out to multiple tenants as this spreads the risk of vacancy or by renting to a secure tenant such as a govt. dept. or some bank.
Repair’s on time to time:
The investor must get the basic repairs of the space from time to time and make sure the interiors are not outdated or cramped otherwise it can become hard to find a good tenant. Same goes for the location- it should be desirable at all times.