India is already the fastest growing major economy in the world and slated to be the fourth largest economy by 2022. It is expected to overtake the economy of United Kingdom in the current year 2019. The rapid economic growth means that commercial real estate, particularly, the office spaces, will see a major boost. This asset class also holds good potential for returns for investors. There is no surprise that High Net-Worth Individuals (HNIs) are investing big time in the Indian commercial real estate market.
Bangalore based real estate player Prestige Estates has launched a huge commercial project in which it has reportedly sold 50 percent space to HNIs. Indiabulls Dual Advantage Commercial Assets Fund, which is an alternative investment fund, is reportedly raising Rs 500 crore HNIs.
Higher Returns & Regulatory Framework
One reason for HNIs getting into commercial real estate in India is that returns from residential real estate have been dwindling on account of slower sales in recent years and huge inventory pile up. The residential real estate as an asset class has been returning mere 2-3 percent in India in recent years where as commercial real estate has even returned 10-11 percent.
Another reason is that there is improved regulatory environment in the country for the real estate sector. While RERA has been in place for couple of years, the recent framework laid down by Securities and Exchange Board of India (SEBI) for Real Estate Investment Trusts (REITs) is also seen to be promoting the investment scenario for NHIs in the commercial real estate industry.
Introduction of REITs
The advent of REITs is seen as a major shot in the arm of HNIs for investment in rent earning commercial real estate which is highly lucrative at the moment. Embassy Office Parks, a joint venture between Bangalore-based Embassy Group and PE firm Blackstone Group, is listing the first REIT of the country. Then there are at least half a dozen of them that are slated to be launched later in 2019. The other half a dozen that are scheduled to launch REITs fund are mostly foreign players and the Indian market is getting mature for more sensible and systematic investment in the real estate sector.
This presents an excellent opportunity for NRIs and HNIs for further sharpen their focus on commercial real estate investment and augment their portfolio for the same. Investment in commercial real estate is almost risk free when its done through REITs juts like mutual funds. HNIs can invest through REITs or even though fund houses.
The HNIs typically have about 30-40 percent of their investment portfolio that comprises of real estate. Some of them prefer owning and managing properties on their own while others prefer investing through fund houses. HNIs will continue to have more of commercial real estate in their portfolio in the near future as the office space is getting more organized in India.
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