It's Time to Invest in Commercial Real Estate
Buoyed by resilience and positive outlook, the commercial real estate sector combines stability with high returns
If 2020 was the year of lockdowns, 2021 is likely to be the year of resurgent economic activity. Despite the havoc caused by the second wave, the general trend in India seems to be one of lifting Covid-19 related restrictions. The critical need to balance lives with livelihoods, and the much-awaited arrival of vaccines are the two factors driving the decision to reopen the economy in a cautious and calibrated manner.
Resilience and Stability
The resumption of economic activity has once again put the spotlight on the commercial real estate sector. Its resilience has been highlighted in recent figures estimating net absorption levels. Data suggests office net absorption in 2021 may remain close to the 10-year average of 30-31 million square feet despite the devastation brought by the pandemic. Co-working may end up as a key driver of growth, with the average co-working space doubling from 35,000 square feet to 70,000 square feet between 2019 and 2020.
As far as the rental market is concerned, it has remained stable, although Covid-19 has pushed landlords to offer more flexible terms to tenants. Overall, the trajectory of the commercial real estate sector seems to be largely positive owing to certain factors that are unique to the Indian scenario.
The Indian Market is Unique in Many Ways
What makes the Indian commercial real estate sector more resilient than elsewhere? The answer to this question lies in a combination of economic, social and cultural factors that are exclusive to the Indian context.
Back Office of the World
Since a big chunk of office tenants happens to be companies rendering back-office support to offshore organisations, there is a need for employees to work out of offices for purposes of coordination and data secrecy. The indispensability of office spaces was highlighted last year itself when net absorption for Q4 increased by 52 per cent compared to the previous quarter. As India vaccinates more people and economic activity rebounds, the demand for commercial real estate is only set to grow.
Space Crunch and Large Households
Many Indians don’t have adequate space to enable them to work from home on a sustainable basis. Relatively small houses coupled with multigenerational households imply work-from-home cannot be a practicable idea for many people. This means there will always be employees who would prefer to come to office even if it means travel expenses and long commutes. This is another reason why Indian firms will find it hard to discard the office model.
Preferences of Working Women
The work-from-home model is inherently skewed against working women. Why? Because in India, as elsewhere, it generally falls upon women to perform the bulk of the housework. Hence, they are expected to look after the children, do the laundry, supervise the house help, lay the food on the table etc.—the list is endless—in addition to doing their job. This segment of the population will be only too happy to return to office where they can work efficiently and without distraction.
Strong Economic Fundamentals
India may have seen negative GDP growth during the previous year but its growth story is intact. As the country continues on its development trajectory there will be a need for more offices, factories and warehouses. Even if one were to account for the fact that a certain percentage of the working population will not return to offices—opting for permanent work from home options instead—growth in sectors like IT, ecommerce, FMCG and healthcare will ensure sustained demand for commercial real estate for many years to come.
Investing Through Fractional Ownership
Buoyed by resilience and positive outlook, the commercial real estate sector presents an excellent investment opportunity by combining stability with high returns. With average rental yields at 9 per cent, and capital appreciation in the 7-16 per cent range, it can be an attractive option for your investment portfolio.
Unfortunately for retail investors, the space has traditionally been out of reach due to high price barriers. The advent of fractional ownership platforms is gradually changing this by allowing investments at lower ticket prices, thus making commercial real estate investment accessible to all.
Fractional ownership platforms take the help of experts to carefully vet each property using metrics like developer, location, asset quality, tenant credit worthiness, robust lease agreements etc. This also ensures stable rental income and good resale value when you finally decide to monetise your investment.
With offices and commercial establishments in India opening up after months of restrictions, this could be a good time to explore the magic of fractional ownership platforms.
The author is Director of Business Development and Investments, hBits.
DISCLAIMER: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.