NEW DELHI:
Both commercial and residential properties have their pros and cons. Commercial properties are a little higher in cost as compared to residential properties but they yield higher rental returns. On the other hand, residential properties are bought primarily for end-use as well as long-term investment. So, should one buy a residential property or a commercial one?
“Commercial real estate has been gradually growing in terms of demand with supply just about keeping up; so price points have steadily moved upwards. Presently, growth in capital and rental values of commercial real estate is on a growth curve. Residential real estate has remained largely stagnant since the past few years – caused by the impact of regulatory changes,” says Niranjan Hiranandani, national president, NAREDCO.
Returns on Investment (ROI)
Residential properties are mostly bought for self-use. However, one can also generate income from residential property by leasing it out. Price appreciation of residential properties over a period of time is another factor that attracts investors.
Properties which can create steady income are typically office spaces, warehouses, retail, industrial and institutional real estate. Regular rent is a key factor that makes investors buy commercial property and price appreciation also remains high.
“Commercial properties are good investment opportunities to earn regular income as they offer high rental rates compared to residential properties. While residential properties, during an economic downturn, are much better than commercial properties, said Ravindra Pai, managing director, Century Real Estate.
However, rental income and price appreciation depends on many factors such as current market trends, location, social and physical infrastructure. These are deciding factors for both commercial and residential property to appreciate.
“The residential market has now begun to pick up, although it will take some time for price appreciation to happen. Whereas in commercial real estate, Grade A office properties have been yielding higher returns. The estimated overall return in residential properties is around 3-4% per year and for commercial properties it is 8-10%,” adds Pai.
Residential data
| Cities | Rental Yield (in %) in 2014 | Rental Yield (in %) in 2019 |
| Gurgaon | 3.5 | 3.5 |
| Noida | 3 | 3.2 |
| Greater Noida | 1.8 | 2 |
| Delhi | 2 | 2.2 |
| Pune | 3 | 3.3 |
| Bengaluru | 3.15 | 3.6 |
| Mumbai | 3.3 | 3.5 |
| Navi Mumbai | 2.5 | 2.8 |
| Thane | 2.4 | 2.7 |
| Cities | Avg prices in INR/sq ft in Q1 2014 | Avg prices in INR/sq ft in Q1 2019 |
% Change in 5 yrs |
| Gurgaon | 6,000 | 6,075 | 1% |
| Noida | 4,620 | 4,780 | 3% |
| Greater Noida | 3,100 | 3,310 | 7% |
| Delhi | 18,110 | 18,000 | -1% |
| Pune | 4,400 | 5,480 | 25% |
| Bengaluru | 4,250 | 4,950 | 16% |
| Mumbai | 17,100 | 17,650 | 3% |
| Navi Mumbai | 6,400 | 6,850 | 7% |
| Thane | 8,400 | 8,760 | 4% |
(Source: ANAROCK Research)
Arrival of REITS
India witnessed the launch of its first Real Estate Investment Trust (REIT) by Blackstone and Embassy Group in March 2019. The success of this event led to fresh investment avenue for the country’s commercial real estate sector. It also gave retail investors an opportunity to invest in commercial properties.
JLL research indicates that 294 million sq ft (REITable asset from stock as on 2018 and includes Embassy Office Parks REIT) of office space stock would be eligible for REITs. This would translate to a potential investment of $35billion. This is certainly a big opportunity for Indian investors.
Growth of commercial real estate
Office properties in the right location and project attract quality corporate tenants and can, therefore, yield good rental returns over prolonged periods.
“The average rental yield of a commercial property falls in the range of 6%-10%, whereas the rental yield of a residential property is low in the range of 1.5% – 3.5%. Simultaneously, capital appreciation can also be more than satisfactory for the right office assets,” explains Anuj Puri, chairman, ANAROCK Property Consultants.
Due diligence
While investment is an opportunity it has its own set of risk involved. Hence, one needs to take a calculated step and perform due diligence before investing. You need to check the builder’s track record, location, past price trends, connectivity, job opportunities etc before investing in a commercial or residential property. Also, one needs to ensure that a property is RERA registered in case of an under-construction project.
Key markets
Some of the key markets for investing in both commercial and residential markets are Bengaluru, National Capital Region (NCR) and Mumbai Metropolitan Region (MMR). Growing job opportunities and multi-national companies taking up big land parcels in Indian cities are propelling growth of the commercial sector, not just in metros but tier 1, 2 and 3 cities. Residential market is also witnessing demand from buyers where connectivity is good and job hubs are located nearby.
“Traditionally, top metros including Delhi, Mumbai and Bengaluru, have been the favorite destinations for investors, a trend which has been apparent in the past decade. Metro cities, along with neighbouring areas have collectively ended up getting three-fourths of real estate investments over the past few years,” adds Hiranandani.
Investors must compare their options and price trends before investing either in commercial or residential property. A due diligence is a must with regard to price, location and property prospects before buying.
