Tips to invest in office property


With the residential market still in a slump, investors looking for regular income, could consider putting their money in office properties

The residential market continues to witness a slowdown but commercial real estate has turned around, thanks to the improvement in business sentiment since last year. Traditional sectors like IT-ITeS, banking and financial services, continue to stimulate the demand for office space. Now, technology start-ups and e-commerce companies, have also provided a big fillip to the segment. According to a recent report from Knight Frank India, there is a shortage of high-quality office space in Mumbai, Delhi-NCR, Pune, Bengaluru, Chennai and Hyderabad. The demand has been exceeding supply since 2014, leading to rentals firming up in several locations.

For those interested in regular income, office property is a better bet than the residential kind. Leased office space yields as high as 8-10% annually, whereas, the yield from residential space is a meagre 2-3%. In addition, there is the capital appreciation (although admittedly lower than residential property). There’s also the standard deduction of 30% on your rental income for repair and maintenance. Do keep in mind that income from leased offices, can act as a hedge against inflation, since in most years, you can hike it from 5-10%.

However, investors should remember that investing in an office space usually requires much more money than residential property.

 

Risks

The risk depends on the stage at which you invest. When the property is under-construction; when it has been constructed but not let-out; or when it has been completed and also has a tenant. You earn the highest capital appreciation by investing at the first stage but investing then also carries the highest risk. It is safest to invest in a building that is completed and rented out. Another risk of investing in office property, is that your building may remain vacant after a tenant’s lease has expired. This risk is further increased during economic downturns.

 

Unscrupulous schemes

Investors should be wary of the various schemes such as the assured returns one. There are two big risks here. First, the developer may charge a higher price from you than the going rate for similar buildings in the area, which don’t offer a scheme.

“By charging you more, the builder is taking money from you upfront for the assured return that he is promising you,” points out Sajid, manager, Silverline Realty, a Bengaluru-based real estate consultancy.

See also: Demand for office space is not fuelling housing sales

Second, there is also the risk that the building may not find a tenant once it is completed, or the rent earned may be lower than expected, in which case, the developer could delay or default on the payment of assured returns.

Another high-risk game is the soft launch. The risk of investing at such a preliminary stage is that the developer may not be able to get approvals and the project may get stalled.

 

Due diligence

Bet on an area that is economically vibrant and will continue to attract business. Research the supply that will come into your area by the time the building will be ready for occupation. “If the level of supply that comes in is high, it will prevent rentals from appreciating,” explains Bibhash Surya, head of Sri Sai Dreamlands, a Noida-based real estate consultancy.

If you are investing in a peripheral micro-market, it should be well-connected by the metro and highways, and also have good internal roads. The quality of the building is also very important. As the Knight Frank India report points out, it is primarily the landlords in high-quality buildings, who are reaping the financial benefits today.

 

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