Discover the essentials of investing in commercial properties. Learn the types, benefits, risks, and steps involved in making informed decisions for a profitable investment.
Are you looking to diversify your investment portfolio and are in the market for a commercial property investment? According to a recent report by Mordor intelligence, ”The India Commercial Real Estate Market size is estimated at USD 40.71 billion in 2024, and is expected to reach USD 106.05 billion by 2029, growing at a CAGR of 21.10% during the forecast period (2024-2029).”
This comprehensive guide has been written to address all potential queries an investor may have regarding investing in commercial real estate – pros and cons, due diligence, steps to investing in commercial real estate and much more.
Contents:
- What are Commercial Properties?
- Why Should You Invest In Commercial Properties?
- Potential Drawbacks of Investing in Commercial Properties
- Things to Keep In Mind Before Investing in a Commercial Property
- Commercial Real Estate Investments VS Other Investment Assets
- Steps to Invest in Commercial Real Estate
- Investing in Commercial Real Estate with WiseX
- Bottom Line
1. What are Commercial Properties?
Commercial properties are real estate assets used exclusively for business purposes. These properties generate income through leasing or renting out space to various types of businesses. The different types of commercial properties include:
i. Workspaces
Workspaces, or office buildings, are designed for businesses to conduct their operations. They range from single-tenant buildings to multi-tenant high-rises. Office spaces are often categorised into Class A, B, or C based on their quality, location, and amenities.
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ii. Warehouses and Manufacturing Plants
Warehouses are large storage spaces used by businesses to store goods and inventory. Manufacturing plants are industrial facilities where goods are produced. These properties are essential for logistics and supply chain operations.
iii. Malls and Shopping Centers
These are retail complexes where multiple stores and businesses operate under one roof. They include large shopping malls, strip malls, and retail parks. They attract a high volume of foot traffic and are located in prime areas.
iv. Production Facilities
These are specialised properties used for the mass production of goods. They include factories and assembly plants, which are equipped with heavy machinery and equipment necessary for manufacturing processes.
v. Lodging and Dining Establishments
This category includes hotels, motels, restaurants, and cafes. These properties cater to travellers and diners, providing lodging and food services. They are typically located in commercial districts and tourist areas.
vi. Medical Facilities
Medical facilities include hospitals, clinics, and medical offices. These properties are designed to meet the specific needs of healthcare providers, offering spaces for patient care, surgeries, and consultations.
vii. Stores
Standalone retail outlets or small shops fall under this category. They can be anything from a single store in a local neighbourhood to a chain store in a high-traffic area.
viii. Multi-purpose Properties
These properties serve more than one commercial purpose. Examples include mixed-use developments that combine office spaces, retail outlets, and residential units in one building. Multi-purpose properties are versatile and cater to diverse business needs.
2. Why Should You Invest In Commercial Properties?
Investing in commercial properties offers numerous advantages, making it an attractive option for investors. Here are the key reasons:
i. Thriving Commercial Industry
According to a recent report by Apeejay Real Estate, “The commercial real estate market in India is expected to grow by 7-8% in 2024, reaching a historic peak”. The commercial real estate sector is continuously growing, driven by increasing demand for office spaces, retail outlets, and industrial facilities. As businesses expand, the need for commercial properties rises, ensuring a robust market.
ii. Excellent Rental Returns
Commercial properties typically offer higher rental yields compared to residential properties. Long-term leases with businesses provide stable and substantial passive income, making it a lucrative investment option. According to our primary research, commercial real estate offers nearly 3X more rental yield than residential real estate.
iii. Steady and High Revenue Source
Commercial properties generate a consistent revenue stream due to long-term leases and reliable tenants. Businesses often sign multi-year leases, ensuring a steady income for property owners.
iv. Simple Management
Professional property management services can handle the day-to-day operations, maintenance, and tenant relations, reducing the burden on investors. This allows for efficient and hassle-free management.
v. Protection Against Inflation
Commercial property leases often include clauses that adjust rents according to inflation rates. This ensures that the rental income keeps pace with inflation, preserving the purchasing power of the investor’s returns.
vi. Investment Diversification
Adding commercial properties to an investment portfolio diversifies risk. Real estate often behaves differently from stocks and bonds, providing a hedge against market volatility and economic downturns.
vii. Top-tier Infrastructure
Commercial properties are usually located in prime areas with excellent infrastructure, including transportation links, utilities, and amenities. This enhances the property’s value and attractiveness to tenants.
viii. Consistent Returns
Commercial real estate investments tend to offer more predictable and consistent returns compared to other investment options. The stability of rental income from businesses contributes to this consistency.
ix. Value Growth
Commercial properties often appreciate in value over time, especially those located in prime areas with high demand. This appreciation can lead to substantial capital gains when the property is sold, further boosting the investor’s returns.
3. Potential Drawbacks of Investing in Commercial Properties
Investing in commercial properties offers numerous benefits, but it is not without its drawbacks. Potential investors must be aware of these challenges to make informed decisions. Below are some disadvantages associated with investing in commercial properties:
i. Demands Extensive Research
Investing in commercial properties requires thorough and comprehensive research. Prospective investors need to analyse market trends, property values, and economic indicators to identify profitable opportunities. Unlike residential real estate, where market conditions are relatively straightforward, commercial real estate markets are complex and vary significantly by location and sector. Failure to conduct adequate research can lead to poor investment choices and financial losses. Keeping abreast of market developments by reading reports and research articles from reputable sources such as JLL, Colliers, and Cushman and Wakefield would be the best way to make an informed investment.
ii. Higher Capital Needed
Commercial real estate investments generally require a substantial amount of capital. The cost of purchasing commercial properties is significantly higher than residential properties, often necessitating large down payments and significant financial reserves. Additionally, ongoing expenses, such as maintenance, property management, and taxes, can be considerable. This high capital requirement can be a barrier to entry for many investors, limiting access to potentially lucrative opportunities.
However, with SEBI’s new regulations issued for Small and medium real estate investment trusts (SM Reits), investing in real estate has become quite economical for the retail investors with investments amounts as low as 25 lakhs.
iii. Costly Loans
Securing financing for commercial properties can be more challenging and expensive compared to residential properties. Commercial real estate loans often come with higher interest rates and stricter lending criteria. Lenders typically require detailed business plans and proof of stable income streams to approve loans.
iv. Economic Uncertainty
Commercial real estate investments are particularly susceptible to economic fluctuations. Economic downturns can lead to decreased demand for commercial spaces, resulting in lower occupancy rates and reduced rental income. During recessions, businesses may downsize or close, further impacting the profitability of commercial properties. Investors must be prepared for the potential volatility in rental income and property values, which can affect their overall return on investment.
v. Tenant Acquisition Challenges
Attracting and retaining tenants in commercial properties can be challenging. Unlike residential properties, where tenants are typically individuals or families, commercial properties rely on businesses, which may have specific requirements and expectations. Securing long-term, reliable tenants is crucial for maintaining steady cash flow. High vacancy rates can significantly impact profitability, as commercial properties may remain unoccupied for extended periods, leading to financial strain on the investor.
4. Things to Keep In Mind Before Investing in a Commercial Property
Investing in commercial property requires careful consideration of several factors to ensure a profitable and sustainable investment. Here are some key aspects to keep in mind:
i. Site Location
The location of a commercial property is paramount to its success. A prime location can attract high-quality tenants and ensure a steady stream of rental income. Investors should evaluate the property’s proximity to major transportation hubs, accessibility, visibility, and the surrounding area’s economic activity. Locations in thriving business districts or areas with planned future developments often provide better returns. Additionally, understanding local zoning laws and regulations is crucial to ensure the intended use of the property is permissible.
ii. Sufficient Amenities
The availability of amenities can significantly influence the attractiveness of a commercial property to potential tenants. Essential amenities may include parking facilities, security systems, and access to public transportation. Depending on the type of commercial property, additional amenities such as conference rooms, high-speed internet, and fitness centres can add value. Investors should consider the needs of their target tenants and ensure the property offers amenities that meet those requirements, enhancing tenant satisfaction and retention.
iii. Lease Arrangement
The structure and terms of lease agreements are critical components of commercial property investment. Investors should carefully review the lease duration, rental rates, and escalation clauses. Long-term leases with reliable tenants provide stability and predictable income, whereas shorter leases might offer flexibility but come with higher risk. It’s also important to understand the tenant’s business model and financial health to assess their ability to meet lease obligations. Additionally, including clauses that allow for rent adjustments based on market conditions can protect against inflation and economic fluctuations.
iv. Expansion Potential
Considering the future expansion potential of a commercial property can add significant value to the investment. Investors should evaluate whether the property has room for physical expansion or if there are possibilities for increasing rental income through renovations or improvements. Properties with adaptable layouts that can accommodate various business types offer greater flexibility and resilience to market changes. Evaluating the long-term growth prospects of the location and the property itself can provide insights into future profitability and the ability to attract diverse tenants.
5. How Does Commercial Real Estate Investments Perform Against Other Investment Assets
| Metrics | Commercial Real Estate | Residential Real Estate | SIPs/Mutual Funds | Bonds | Gold |
| Returns | High | Moderate | Varies | Low | Varies |
| Risk | Moderate | Low | Varies | Low | Moderate |
| Volatility | Moderate | Low | High | Low | High |
| Ticket Size | High | Moderate | Low | Low | Low |
| Liquidity | Moderate | High | High | High | High |
Learn more: How Is Fractional Ownership Better Than Stocks?
6. Steps to Invest in Commercial Real Estate
Investing in commercial real estate is a structured process that involves several critical steps. Here’s a comprehensive guide to help you navigate the process effectively:
i. Establish Your Investment Objective and Plan
The first step in investing in commercial real estate is to define your investment objectives. Determine whether you are seeking short-term gains through property flipping, long-term income through rental yields, or value appreciation over time. Establishing clear objectives will guide your investment strategy and decision-making process. Develop a detailed plan outlining your budget, risk tolerance, target property types, and expected returns.
ii. Investigate Potential Markets and Properties
Once your objectives are set, research potential markets and properties. Analyse market trends, economic indicators, and demographic data to identify regions with growth potential. Consider factors such as employment rates, population growth, and infrastructure development. Investigate specific properties that align with your investment criteria, evaluating their location, condition, tenant mix, and income potential. Engaging with local real estate agents and attending industry events can provide valuable insights and opportunities.
iii. Secure Suitable Financing
Securing financing is a critical step in the investment process. Explore various financing options, including traditional bank loans, commercial mortgages, and private lenders. Compare interest rates, loan terms, and eligibility criteria to find the most suitable financing solution for your investment. Prepare a comprehensive business plan and financial projections to present to potential lenders. Ensure that you have sufficient capital for down payments, closing costs, and initial expenses.
iv. Propose and Negotiate Conditions
Once you identify a promising property, submit a formal offer to the seller. This proposal should include the purchase price, proposed terms, and contingencies. Negotiation is a crucial aspect of this step, as it can significantly impact the final agreement. Work with a real estate attorney to ensure that the contract terms protect your interests and address potential risks. Effective negotiation can lead to favourable terms, such as reduced purchase prices or additional concessions.
v. Perform Due Diligence
Conducting due diligence is essential to verify the property’s condition and financial viability. This process involves inspecting the property, reviewing financial statements, and assessing legal documents. Hire professionals such as property inspectors, appraisers, and environmental consultants to evaluate the property’s physical and environmental status. Analyse lease agreements, tenant history, and operating expenses to ensure the property meets your investment criteria and expectations.
vi. Finalise the Purchase
After completing due diligence and resolving any issues, proceed to finalize the purchase. This step involves signing the purchase agreement, securing financing, and transferring funds. Work with a real estate attorney to ensure all legal and contractual obligations are met. Conduct a final walkthrough of the property to confirm its condition. Once all documents are signed and funds are transferred, the property ownership is officially transferred to you.
vii. Oversee the Investment
Managing and overseeing your commercial real estate investment is crucial for achieving long-term success. Develop a comprehensive property management plan to ensure smooth operations and tenant satisfaction. This plan should include regular maintenance, rent collection, and tenant communication strategies. Monitor market trends and property performance to make informed decisions about lease renewals, rent adjustments, and potential property improvements. Engaging a professional property management company can help streamline operations and enhance the property’s value.
7. Investing in Commercial Real Estate with WiseX
WiseX simplifies the process of investing in commercial real estate by addressing common pain points such as extensive research by conducting thorough due diligence, high capital requirements by offering a relatively economical ticket size, and tenant acquisition challenges by ensuring the lease agreement is ironclad. Our platform offers a curated selection of high-quality properties, accessible investment amounts, and comprehensive due diligence reports. Additionally, WiseX provides professional property management services and a seamless investment process, ensuring a hassle-free experience for investors.
Step 1: Property Selection
Begin by browsing through a diverse range of properties across various locations to identify one that aligns with your investment strategy. Evaluate each property based on factors such as location, market potential, and suitability for your investment goals.
Step 2: Review Investment Details
Once you have selected a property, review the available details, including its valuation, available shares, and price per share. Determine your investment amount based on your budget and risk tolerance, ensuring it aligns with your overall investment plan.
Step 3: Complete KYC and Confirm Investment
Complete the Know Your Customer (KYC) documentation online to verify your identity. Confirm your investment amount with the assistance of your dedicated investment manager, who will guide you through the process and address any queries you may have.
Step 4: Sign EOI and Deposit Initial Investment
After confirming your investment, sign an Expression of Interest (EOI) document. Deposit 5% of your investment amount into an Escrow account, which secures your investment opportunity and demonstrates your commitment.
Step 5: Complete the Investment Procedure
When the investment opportunity reaches full commitment, you will be notified to submit the remaining 95% of your investment amount. This step completes your financial commitment to the investment post which your rental income will begin to accrue.
Step 6: Documentation and Returns
Upon completing these steps, WiseX will initiate the documentation process to finalise your investment. Once your investment is successfully finalised, you will begin receiving returns on a monthly basis, in accordance with the terms of the investment agreement.
Learn more: Advantages of Investing With WiseX
8. Bottom Line
Now that you are aware of the benefits and drawbacks associated with commercial property investments, here are some additional resources that will help you in diversifying your portfolio:
- Take a look at WiseX’s commercial real estate fractional ownership opportunities.
- Book a call with a dedicated investment manager to learn more about the opportunities available.
- Explore our articles on numerous subjects related to alternative investments.
