Pros & Cons of Investing in commercial Property

Indian commercial Real Estate has been going from strength to strength in recent years. The demand for office & retail space is growing at a notable pace. As the demand is soaring high, it is natural that increasingly investors are becoming more interested in owning a commercial property. It is believed that commercial property investment is primarily meant for big corporates, HNIs & institutional investors. This is not always the case. Even other buyers can look forward to owning a commercial property such as an office space or a retail shop.

However, at the same time, one should realize that owning a commercial property requires some homework & preliminary research to accomplish the task. Like other asset classes, commercial properties have their own Pros & Cons. It is essential for a buyer or an investor to look into them before making an investment decision.

PROs

Higher Rental Yields- One of the biggest advantages of investing in commercial property involves rental returns. A residential property in an Indian metro can give a return to the tune of around 2-3%. In contrast, in commercial properties one can make a return to the tune of around 5-9%. Thus in terms of the rental income, commercial properties can ensure much higher returns.

Longer Lease Terms- Commercial properties such as offices & retail shops are leased for higher time periods. For instance, offices are generally leased for 3+3+3 or 5+ 5+5 (which means rentals will be updated every 3 or 5 years.) A larger lease term ensures that the constant flow of income will continue in a hassle-free fashion.

Professional Tenants- The tenants are generally professional in a commercial setup. Office space is generally rented by a Bank, MNC or an enterprise. Hence, they are professionals & relatively easy to manage. It gives the landlord more peace of mind in managing a commercial space.

Cons

Higher Investments- Commercial property involves higher investments when compared to residential units. Likewise, while paying the EMIs for a residential unit, one can avail tax benefits. Such benefits are not available in case of commercial properties.

Dependent on the Economic Climate- Commercial properties are generally dependent on the economic climate of the country. If the economic outlook is bullish, the demand for commercial Real Estate is higher. However, if the outlook moderates, then a lot of times it becomes difficult to find tenants.

Finding replacements are tedious- It is not very easy to find a replacement when tenants leave. Although a lease term is longer in case of a commercial property, but once the tenant leaves, finding another one might not be very easy. Also, generally the lease is unidirectional- which means a tenant cannot be replaced before the lease period, but a tenant can leave.

Need to Do Some Prior Research- Investing in commercial Real Estate requires a lot of prior research work. One has to do a bit of homework before taking the investment call. One has to consider a number of factors such as market potential, location analysis, demand-supply etc. before taking a final decision.