HNI investors shift focus on commercial property for better returns
BENGALURU | NEW DELHI | MUMBAI: India’s rich investors have switched to buying commercial property in place of housing over the last 15-18 months following a tapering down of property price appreciation in the residential real estate in top Indian cities.
Commercial property serves as a lucrative investment option with investors gaining from rental income as well as capital appreciation. Grade A commercial properties give 8-10% rental returns on the capital value depending upon interest rates. Investors have been buying properties ranging from 1,300 sq ft to 20,000 sq ft. Investors and buyers from destinations like Indore, Belgaum and Noida have been flocking to prohibitively priced office space in the financial capital of Mumbai, an unheard of phenomena till now, says Vipul Shah, MD of Mumbai-based Parinee Group.
“Investors are looking to pick up even under-construction properties unlike before when only ready properties were being acquired. We have been able to conclude four outright transactions at our 0.5 million sq ft commercial project at Andheri (suburb of Mumbai) in the last two months, which is a much better pace than usual,” said Shah.
Major residential markets in the country saw average residential property prices in the city and suburbs appreciate by only 3.3% in 2015 as against an average of 7% in 2014, a study by property consultancy JLL India revealed.
In the Delhi-National Capital Region, a big investor market, Bengaluru and Chennai have seen prices appreciating around 2% in the last quarter of 2015. The trend is similar in peninsular India too. Prestige Estates Projects has also seen more HNI investments in commercial property.
“We have sold 0.5 million sqft in the last three months to HNIs as they are looking to build annuity portfolio as returns are better than residential projects,” said Nanda Kumar OP, vice president and head of leasing at Prestige Constructions. In Bengaluru, micro markets like Whitefield, outer ring road and central business district has already reached its peak in terms of rental appreciation too, he said. “We will continue to see rental appreciating by around 7% annually.”
“In the last year or so, investors have been keen on good commercial spaces, especially where infrastructure and quality of the building are sorted,” says Aakash Ohri, executive director at builder DLF Home Developers, who sold around 600,000 sq ft of space in its new office building Two Horizon Center in the last one year for close to Rs 1,000 crore. Strong absorption across major cities in the country has seen rentals moving up in the last one year. According to data from property consultancy CBRE Asia, rentals in Gurgaon’s Cyber City area rose 13% while those in Bengaluru’s Whitefield and Electronic City rose 12%. Rentals in Hyderabad’s IT corridor and areas such as HITEC City, Madhapur and Gachibowli rose by 14-20% in the last one year. However, rentals have stagnated in most parts of Mumbai and Chennai.
Abhay Khemka of Gurgaon-based brokerage Khemka Investments and Properties says whatever investor interest is left in the real estate market today is only for commercial property. “They have no interest in residential today as they are already stuck with apartments. It is a lot easier to exit a commercial property, especially if it is leased out, while it is very difficult to exit a residential investment today,” said Khemka.
Builders too are scrambling to build more commercial space. House of Hiranandani is looking to foray into commercial real estate and firming up plans to increase its footprint in Bengaluru & Chennai. “We are looking at an inorganic expansion strategy to expand the commercial portfolio and is on the lookout for projects which have already kicked off but are stuck due to lack of funding or expertise,” said Surendra Hiranandani, CMD, House of Hiranandani.
Commercial real estate witnessed a turnaround in 2015 after being sluggish for over three years. Cushman & Wakefield predicts absorption is likely to gain momentum with current pre-commitment levels across eight cities seen at 11.80 msf in 2015, which would give a fillip to the trend of large deals in 2016 amidst frenzied consolidation activity in the market. Most of the pre-commitments are likely to be absorbed in 2016, with the some of them spilling over to 2017.