Rental income has become an important income stream for many Individuals and organizations that invest their money in real estate. Instead of just parking their extra money in real estate, and hoping for capital returns, people want to make the best use of their investment by expecting good assured returns on a regular basis. Though the ‘buy-in’ is higher, commercial returns tend to generate a higher yield than residential properties.
With the growth of the economy and ease of doing business in India, many new companies are entering the market. Various MNC’s are expanding their base & foothold in India with concrete long term vision and excellent corporate funding. Corporate Leasing has become an integral part of the real estate transaction scenario across all metro cities. In fact, even the markets of Tier 1 and Tier 2 cities too have not been left behind to attract Corporates and MNC’s for expanding their businesses. A strong customer base, skilled workforce, and lower rentals are some of the formidable reasons various corporates want to expand in Tier 1 & 2 cities.
Investing in the right commercial property can deliver strong and sustainable returns over the long term, but not every property has the same potential. Here are seven key features to look for in a stand-out property.
What makes the perfect commercial property investment? The truth is that there is no single right answer. A great deal depends on your investment strategy and the role each asset is destined to play in a larger portfolio – whether as a core income generator or an asset that can be transformed over time to create added value.
Nonetheless, successful investments do tend to have key features in common – features that can only be uncovered by disciplined analysis of each asset’s fundamentals. These following features do impact the property returns depending on the various types of options available in the market.
Here are seven of the most important features:
- Quality clients/tenants
Given the role income plays in commercial property returns, finding the right clients is the first and most important consideration. A reliable tenant, such as an MNC with a global presence, a government agency, an Indian corporate with a strong or a sizeable business with a healthy balance sheet and strong cash flow, is the single best guarantee of your future income. They represent the lowest risk in terms of being able to meet their lease obligations and showing stability to their customers and clients by not relocating very often. If a property is multi-tenanted, rather than a single-occupancy asset, high-quality clients can also attract other reliable clients.
- Attractive facilities
Apart from the aesthetics aspect of a Building, clients expect the quality services the building offers, like functioning lifts, adequate lighting, good air conditioning and a quality fit-out (to name just a few). Beyond expectations of basic services, clients will be attracted to properties that meet their specific needs. If the location isn’t easily accessible by public transport, more car parking spaces or private transport options (like a regular shuttle bus) is something they will expect.
A green Building with beautiful landscaping, adding green infrastructures like solar power, permeable pavements and green roofs, green plants to control air pollution play a major role in increasing the value of the property. To maintain such infrastructure and facilities, an efficient & professional Maintenance agency needs to be hired which plays a significant role in creating expectations in client’s mind who wants to give the best of the services to their employees. Meeting a tenant’s green credentials is another way to attract stable, long-term tenants who can only occupy properties that meet their organization-wide standards.
An ill-maintained Building with ineffective maintenance services can have a negative impact on the long-term return of that asset.
- An attractive location
A property has to be in a location where it can attract and retain tenants to generate the underlying income required. However, that doesn’t mean you should only focus on city centers or properties in high-density areas. A diversified portfolio is likely to include properties in the CBD area, low-density area, and even regional locations.
The advantage with the regional locations is that it offers more car parks at a lower rate, lower occupancy costs, and larger floor plates that support greater workplace requirements. Such locations also tend to make the best use of the efficient workforce available around that market thereby creating ample opportunities for employment.
CBD locations often have significantly higher land value with exorbitant construction costs making the Rentals really high. And so to attract clients sometimes can become increasingly challenging which could lead to cut in profit margins.
- The right leasing commercials
Most commercial property investors know that the various terms and conditions of a lease offered by the client play an important role in determining the capital value of the property or the asset. A good lock-in period offered by the client indicates the stability aspect of the tenant. If the infrastructure and services provided by the Owner or landlord match the client’s expectations, the client will not hesitate in agreeing for a strong lock-in period and long lease. Though long leases with fixed rental increases can provide stability, they may not always deliver the best returns over the life of the asset.
When demand for a property in a particular area is exceptionally strong, an asset with a short lease can potentially allow you to restart with a new lease on higher rentals than being in a long lease with a fixed Rent escalation. Nonetheless, short leases do have obvious downsides as well. In a not so competitive market, searching for new clients after every few years, investing in infrastructure again as per new client’s expectations, bearing the other related costs for hiring a consultant or broker, can actually be really challenging.
- The repositioning of vacant properties
A vacant property can still be a good investment, as long as you understand the reason for the vacancy and how it can be repositioned to attract new clients. In fact, properties that offer scope for repositioning can be highly valuable additions to a portfolio with the potential to improve both rental income and capital valuation through enhanced rental income. Having a vision, identifying the potential tenants and knowing how to reposition an asset to meet both market and tenant requirements is where experience really comes into play.
- Financial analysis
To have a clear understanding of all the capital expenditure you would incur initially even before your Rent starts is something which helps you to ascertain the overall investment you make in that asset and the returns you get out of it. The client demanding a furnished space or a bare shell space or requesting for any major modifications in the existing furnishing lets you analyze the total investment on the asset. Also, you need to include the outgoings in the form of property taxes, municipal taxes, other cesses related to the property which is generally paid every year. You need to structure the lease as per your comfort by deciding on which all expenses on the asset you want to incur yourself and which all you would want the client to contribute. You need to decide on the Rental aspect as well to make sure that the offered Rentals should cover the expenses you may incur as demanded by the moving in the tenant, and at the same time it should be at par with the prevailing market rates as well. Any investment made should be financially feasible for you to get the best from your investment. Every rupee spent on the asset reduces your potential return unless it clearly increases the property’s appeal, and thus, it’s long-term value.
Equally important is an analysis of the capital expenditure required to maintain, improve or position the asset so it can achieve the rents as forecast.
- The right mix for your investment portfolio
Finally, but perhaps most importantly, it’s important to assess whether an asset fits your portfolio’s overall asset mix. An investor with a well-established portfolio might consider a location that has unrealized future potential; whereas an investor seeking an instant rental income would invest in an established area with ample opportunities to lease the asset quickly.