Commercial Investment is definitely an attractive investment product, where you will be getting a regular income and also get capital appreciation over a time period as well. Commercial investments fetch better regular returns than residential investments. Residential investments usually fetch 2% – 2.5% returns annually whereas commercial investments fetch 5% – 8%. But before investing in a commercial property you should be knowing some key points which will help you in making the right decision about your investment.
Keys points to understand about Commercial investment in Gurgaon:
Location of the property
When it comes to property investment and specifically commercial investment location is the prime factor to be considered. As mentioned earlier, commercial properties offer you rent and capital appreciation. Both these returns are based greatly depends on the location of the property. If you talk about under-construction properties, you should be knowing and should be sure about what future developments are planned around that location. Those future developments are going to offer commercial space with the footfall of customers. It will ultimately help you fetching better returns post completion of the property. When it comes to ready to move-in properties, as an investor you should check the occupancy of the location. The occupancy should be more than 95%, which means that the supply of spaces is less for tenants. It will help in getting higher rental income and capital appreciation.
Quality of Construction & Structural Appearance
You must have an experience that two buildings in the same location have a different level of occupancy. One building is mostly occupied and the other one is struggling to get tenants. Usually, the reason for this situation is the quality of construction & a structural appearance on offer. The property offering better quality will always attract a better quality of tenants and helps in fetching higher rental income and capital appreciation. When it comes to MNCs they always ready to draw a premium amount in return of better quality. While investing in commercial spaces you should be looking for certified properties like LEED, Gold or Platinum ratings. Moreover, the structural appearance also plays an important role in getting tenants. Buildings with good façade, good looking entrance & lobbies, number of elevators, ceiling height and great views provide more liquidity and can be sold off quickly.
Market Rentals vs Property Rentals
It is an important factor to consider the assess the future risk of leasing associated with the property. First, let’s understand Market & property rentals. Market rentals are the rental returns prevailing in the market at the location of the property. Property rentals are the rental returns offering from your target investment property. It will be easier for us to understand this thing with the help of an example.
For assumption, there are 3 different properties with an almost similar price but with different rental incomes:
Property X Price – 1000 Rental Income – 100 Return Percentage – 10%
Property Y Price – 1050 Rental Income – 110 Return Percentage – 10.5% (Approx.)
Property Z Price – 950 Rental Income – 90Return Percentage – 9.5% (Approx.)
As an investor, definitely you will be going to invest in property Y as it generating the highest rental returns. However, this is not the only thing to be considered, as an investor you should be aware of the market rentals as well. If the prevailing market rental returns are 9.5%, then there are higher chances of tenants of property X & Y moving to other cheaper options. In another way, we can say that if you are going for property Y, it means it is an overpriced property with overstated rentals.
Quality of Tenants
The quality of tenants also plays an important role in selecting a commercial property for investment. A good tenant definitely going to increase the overall worth of the property. If a property is leased to an MNC or international brand definitely the quality of construction and facilities offered in the property are of world-class. Moreover, a Multinational tenant also attracts other tenants to the same property. Big tenants or big brands pay timely rentals, higher security deposits, stays longer in property and also upsurge the worth of the property.
Structure of Lease
When it comes to leasing structure of commercial properties, it is entirely different from residential. Usually, commercial lease agreements are structured in 3+3+3 leading to 9 years or 5+5+5 leading to 15 years. In the first scenario, the escalation in rent will be processed every 3 years and in second, it will be every 5 years. However, these agreements are one-sided which means the tenant can vacate the property at any time and the landlord cannot force them to stay till the lease period. Nevertheless, there can be a lock-in period in which the tenant cannot vacate the property. Usually, the lock-in period is for 3 years for midsize companies and 10 to 15 years for MNCs. While investing in commercial property the investors should understand the structure of the lease agreement. So, the longer the duration of the lock-in period, the better the chances of higher rentals and capital appreciation.