Seven Reasons To Invest In A Commercial Property!!!!! SHOBHIT MALETA lists down the main reasons that make investing funds in commercial properties,a smart option >> WORLD-CLASS ASSET QUALITY Indian developers are providing the latest technological advancements to ensure that the buildings today are green and secure,with ambience and facilities that match international standards.Automatic valet parking,e-glass,water harvesting,zero disposal with sewage treatment plants,access control,intelligent building management systems,under-body car scanners and intelligent elevator technologies,are some of the world-class features that are provided by developers in new commercial office space projects today. >> GREAT TENANTS The occupiers of these buildings are a veritable whos-who of Fortune 500 and BT 300 companies.Facebook,Google,Fedex,Goldman Sachs and Deutsche Bank,were some of the corporates who took up office space on rent in 2012.Typically,banks are considered to be the best tenants but large conglomerates like Tata and Mahindra are coveted clients.Why Firstly,they pay the rent on time as they are cash rich and secondly,these companies bring with them superior standards of corporate governance and compliance,thus,ensuring process-driven smooth payment flows. >> GREAT LOCATIONS The locations of these buildings are in the prime Central Business Districts of major metros,e.g.Bandra Kurla Complex (BKC) in Mumbai,Sector 18 in Noida,Hinjewadi in Pune,Gachibowli in Hyderabad,Salt Lake in Kolkata,Whitefield in Bangalore,and Gurgaon and Noida in the NCR.Locations like BKC are still attracting investments from the government,with a beautification project and the monorail proposed for it.With the government working to provide superior infrastructure in locations like GIFT City Ahmedabad,Gachibowli and Noida,a virtuous growth cycle has been initiated.This is because the government itself can occupy large buildings with multiple departments and ministries.Additionally,a large number of government owned companies and PSUs may be directed by the government to occupy in these locations. >> STABLE PREDICTABLE INCOME Another good aspect of commercial property leases is that the tenure is long,typically three years and in multiples of three years with monthly or quarterly payments and deposits ranging from 6-12 months.The tenant invests alongside the investor in the property and at times,spends good money in the upkeep of the building amenities and landscaping to meet global standards.The tenant invests in the property by doing the fit-outs,which could cost anywhere between Rs 1,500-4000 per sq ft based on corporate guidelines.This makes the tenant sticky,as he has a financial disincentive to terminate the agreement,apart from the lease contract termination clauses. >> HIGH YIELDS According to a recent study,India has the highest yields (rent/capital value ) only second to Manila,which are almost 50 per cent higher than Europe or USA.This can be better appreciated as the quality of the tenants (Fortune 500 MNCs) and quality of buildings (energy efficient,glass and aluminium) is the same.Contrast this to residential yields which are around that of commercial yields in India.The case for commercial property becomes stronger as one can earn up to four times more with the same initial investment.Another benefit of locking in high yield is that as interest rates fall,investors can earn a spread between the yield and the interest rate charged to the investors,should they take a loan to finance the acquisition. >> TAX EFFICIENT STRUCTURES There are multiple tax efficient structures available to hold commercial property investments,ranging from trusts,private limited companies and the recent LLP formats.These structures can impact taxation levels,quantum,incidence and estate planning,and investors should take help from experts to arrive at the optimum structure for their objectives.The tax and legal structures do not address one inherent risk in commercial property: concentration risk,which is further dissected into financial concentration and geographical concentration.This risk exists as normally desirable tenants like banks/MNCs do not occupy spaces below 5,000-10,000 sq ft,thus,forcing an individual to invest upwards of Rs 5 crores in one single property. >> EXIT OPTIONS Truth be told,exit options are limited.My advice is simple: make it small.It is advisable to bifurcate the space one is purchasing into multiple units.This may be done buildingwise,floor-wise or unit-wise.Never buy large assets,anything above Rs 25 crores as one single unit,as the large amount of investment by prospective buyers will reduce the actual number of buyers. (The writer is director portfolio advisory services,Knight Frank India) Report of Times Property
Posted on: Sat, 07 Sep 2013 08:14:53 +0000
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