Investing in commercial property in India might look difficult but it is not. If you take heed of the following tips for long term investing, you can earn much higher returns.
Location, Location, Location
When it comes to commercial properties, location is everything. There are two avenues through which commercial properties provide returns. These are 1) rent and 2) capital appreciation, and both are heavily dependent on location. Try to look for locations where vacancy is less than 5%. This implies that supply is in check and there is a less likely chance of tenants vacating. This will lead to higher rent returns and capital appreciation. Also, a high vacancy location gives the tenants to move and negotiate rents.
Quality: B, B+ OR A
There might be two building in the same location but the one boasting of better infrastructure will always get rented first. Such buildings will also attract better quality of tenants. It goes without saying that the building will get the investor higher rents, better tenant retention and a higher capital appreciation. MNCs, for example, are always willing to pay a premium for quality. Try to look for certifications like LEED Gold or Platinum ratings or building that have more elevators, better views, nicer looking lobbies, etc. Buildings with better infrastructure are also more liquid and can be sold much faster.
Commercial properties in India have a lease structure that is very different from residential ones. The lease are structured either as 3+3+3 or 5+5+5, meaning a 9 year or a 15 year lease with escalation in the lease amount every 3 or 5 years. The lease structure is also one-sided as the tenant has the option to vacate any time whereas the landlord cannot do the same during the lease period. There might be a lock-in period, which is generally 3 years, during which the tenant cannot vacate the property. When investing in a commercial property, try and understand how the lease is structured and the inherent risks that are involved. Remember, in most cases, the longer the lock-in period, the better it is for you as an investor.
There are other things that you can keep in mind, like the quality of the tenant. A good tenant can help in increasing the value of the commercial property significantly. Try and look for blue-chip MNCs tenants for this purpose. Remember, good tenants pay rent on time, stay longer and help increase the value of the building.
Banner Image Credits – http://www.thenewecologist.com/2018/02/benefits-kitchen-garden/