How to Invest in Commercial Properties Profitably

More than 50% of real estate investments fail to meet their desired outcomes.

The reason?

Lack of awareness regarding three fundamental factors, i.e., the product, pricing, and the location. A lot of investors fail to acknowledge how crucial these factors are to meeting their investment objectives, forcing them into a situation where the desired goals are not met.

This is especially true for commercial properties.

Here is all you need to know to make a rewarding commercial real estate investment in India.

Commercial Investments:

Commercial investments generally fall into one of four major categories–retail spaces, office spaces, hospitality & entertainment spaces, and real estate investment trusts (REITs).

Retail spaces are leased and occupied for trade or selling goods and services. These include brand outlets, shops, salons, pharmacies and more.

These are further classified based on size as below:

Individual investors and small businesses generally prefer small shops and mid-sized showrooms. Larger retails are mostly preferred by high net-worth individuals and corporates.

Office spaces are a building or a part of the building leased or occupied to serve as a working environment, primarily for administrative and managerial workers. These differ from retail spaces since these spaces do not directly sell goods or services.

Just like retail spaces, office spaces also are categorsied as small-sized offices, mid-sized offices, and large office spaces.

Individual investors prefer small and medium-sized spaces, whereas corporate houses, private equity funds and angel investors prefer larger office spaces.

Hospitality and entertainment spaces are one of the most popular ways to invest in commercial real estate. These include studio apartments, food courts, gaming zones, hotels, banquets, and party halls.

In this category, individual investors prefer studio apartments, food courts and gaming zones, whereas big investors, HNIs, and corporations pick hotels, banquets, and party halls as larger spaces.

REITs are great for making real estate incomes without directly investing, managing, or financing your real estate investments. Simply put, REITs are mutual funds that invest your capital into real estate. It can be a great source to generate income, but not if you want a remarkable capital appreciation.

Now that you know the different properties that individual investors can consider for commercial investments, it's time to understand why investing in commercial real estate is beneficial.

Advantages of investing in commercial properties:

Investing in commercial real estate can be fruitful in the long term. Understanding why investing in commercial property over residential is essential to setting clear investment objectives.

Here are some reasons why you should invest in a commercial property:

Residential property in India generally gives 2-4% annual rental value. However, the same is about 6-12% for commercial property.

This means if you invest ₹ 50 Lakhs on a residential property would only give a rental income of ₹ 12,500 per month (average). However, when invested in a commercial property, the same amount can bring a monthly rental of about ₹ 40,000.

This is only rental income; long-term capital appreciation on the property is an added advantage.

The lease duration for residential properties is typically 11 months. However, for commercial properties, it ranges from 3 to 15 years. This ensures stable rentals for a longer period. You also get to align with market conditions every three to five years based on your leasing terms.

Another reason to buy a commercial property in India is to hedge against inflation. The rental value of a commercial property is directly proportional to inflation. In the long term, you get protected from the rising inflation rates, and the investment's purchasing power is maintained.

Commercial properties also do maintenance; the maintenance cost is borne by the individual or the organisation renting your property (depending on the lease agreement).

Top factors to consider when making a commercial investment:

As discussed before, the fundamentals of an excellent commercial investment are product, price and location.

However, there are different factors one needs to consider for retail spaces and office spaces. The reason for this is the different sets of markets it caters to.

Here are the top factors to consider when investing in retail spaces:

For retail investors, location is the most essential factor to consider. This is because it directly impacts the expected footfall that your property will receive.

Footfall means the total number of people visiting any particular region, such as a market, shopping mall, commercial plaza, etc. The more the footfall, the higher the rent since businesses can expect high sales and revenue. Such properties are always in high demand and are generally located in high-density areas. These include areas near metro stations, airports, primary employment, and educational and residential hubs.

For example, Sector 18 in Noida is one of the best locations for commercial investment because of its strategic location. Multi-modal connectivity through roads and metro provides excellent connectivity to Delhi and NCR. In a short period, the area emerged as one of the biggest commercial hotspots of NCR, with malls like Great Indian Place, Wave Mall, and DLF Mall of India in its backdrop.

However, properties in Sector 18 are priced at a premium ranging between ₹ 40-45,000 per square foot. An average 250 square feet shop could cost investors upto ₹ one crore.

There are many locations that could be great for a commercial investment. However, looking for the tenant mix of the area where you want to make an investment would be best.

Tenant mix means a region, place, or location where different businesses and services, like supermarkets, grocery stores, bakeries, apparel, lifestyle stores and services like salons, restaurants, electronic stores, etc, have a presence.

Hence, if your property is in a location that offers a wide range of goods and services, it naturally attracts high footfall. This directly impacts businesses, giving them high visibility and footfall. This is why most developers hold the leasing right to the property you purchase for the first few years. This allows them to lease properties to multiple brands and create a diversified marketplace with a good tenant mix.

An essential aspect of this is pre-leased properties, another great investment option for investors. These properties are already leased to a business at the time of purchase. And investors start receiving rental incomes from the first day.

Ever noticed ground floor, front facing, corner stores or properties near lifts and elevators have the presence of premium brands like Smart Baazar, Croma, Decathlon, etc?

These are popularly known as anchor stores. Such properties are large spaces in high-visibility locations. However, one should note that these properties are premium and may cost 50-100% more than other spaces in the exact location.

Top factors to consider when investing in office spaces:

For investing in retail spaces, location plays an important role; similarly, for office spaces, connectivity is essential.

All major companies looking for office space tend to lease properties close to international airports, metro stations, or major roadways. This allows them to commute for business easily and makes their businesses easily accessible. That is why regions near airports are always in high demand and price.

Business districts are places that function as a commercial sector of the region. They comprise many office spaces and large corporate houses. These sectors are mainly located near metro stations or airports.

Investing in such places ensures that your property is leased easily for a long time. And, since these sectors are high in demand, your property can be leased easily at a great rental value.

Make a commercial investment today:

Commercial investments are great for investors who want to create a stable monthly income and enjoy long-term capital appreciation.

These properties generate high rental, have long leasing terms, and ensure your investment is safe from inflation.

If you are considering investing in a commercial property, you can simply contact us and start your investment journey by exploring the best RERA-approved properties by the best developers at the top location.