Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy,” is a popular saying. And for Indians, it is also a mark of financial affluence and provider of emotional security. Most often than not residential real estate has always been a favorite option, whenever
anyone of us thinks of long term investing. It is tangible, it keeps appreciating over the years and can give returns when put on rent, thereby reducing the EMI load considerably.
HOW PRUDENT IS INVESTING IN RESIDENTIAL REAL ESTATE
Firstly, gone are the days of good appreciation of a residential apartment. It also involves maintenance costs that dents the rent earnings as also the risk of renting, given the poor rental laws of the country. The tax benefit on a home loan, probably is the only ray of sunshine. Buying a land also has its downsides. First and foremost, ensuring the clear land title and then safeguarding it from encroachments. In that regard, the current plotted developments by branded
developers offer a great investment option but the appreciation of a plot is less and slow.
SO, IF YOU ARE THINKING OF INVESTING IN REAL ESTATE. WHAT ARE THE OPTIONS?
According to a recent survey, around 18% of NRIs are strongly inclined towards investing in the commercial realty while 9% prefer to invest in the residential segment for a diversified investment portfolio. The major reasons for this shift are the better rental returns offered by commercial realty i.e. office
buildings and the new instruments of investing in office spaces via REITs and Fractional Ownership that do not require big capital investment. Instead, a set of investors can pool their funds as minimum as Rs. 20- 25 Lakhs to purchase a Grade A commercial property and enjoy higher returns.
WHY & HOW OF INVESTING IN OFFICE SPACES
Apart from the residential sector, the other asset class that is seeing growth is boutique offices. They not only have high appreciation potential, but also high rental yield of about 7-8% compared to other asset classes such residential of maximum 4% and bank fixed deposits of 5-6%. The key factors to keep in mind
while selecting an office property are –
- The maintenance costs that will define the net returns from the property.
- The location and quality of the space which will determine its rental value and ease of leasing.
- Resale potential of the office property and how easy or difficult it will be for the investor to resell.
DIRECT BUYOUT, REIT OR FRACTIONAL OWNERSHIP
There are a few pros and cons of buying an office property. If the buying of an office space is purely for investment to earn through rents, then it definitely gives good rental yield. Also, the tenant usually being professionals and corporate, there is an ease of dealing with them. The longevity of lease and ease of regular
cash flow is also much assured in case of office property. However, it will require big capital investment and the location of the property has to be in the preferred business district to attract the right tenants which would come at a premium. There are very few tax incentives for an investor of a commercial property and maintenance costs are generally high for the commercial property.
For a small time investor directly buying a commercial office property may not be a viable option. But if you still want to have a pie of the lucrative commercial real estate investing, consider the next two options.
Fractional ownership of commercial real estate is a low risk and high return proposition that involves low cost investment in developed or under construction office properties in a prime location. In fractional ownership, you own a share of the particular real estate and investors can exit whenever required. No maintenance charges or upfront cost is charged from the investors. Fractional ownership is a hard asset and the returns from it generally do not fluctuate, thus ensuring a safe and stable form of investment. Do check on how the ownership is structured and what restrictions may apply with regard to selling your share. Currently, there is a lack of laws related to fractional ownership, therefore make sure that the transactions are transparent and are with an established company.
Real Estate Investment Trust (REIT) has 80% of the funds invested in developed and income generating properties and are directly monitored by SEBI. There are no upfront and maintenance charges and returns are consistent. REIT like mutual funds pools in money on your behalf to invest in profitable real estate and pays regular dividends to the investor. REIT offers a portfolio with a set number of assets and does not allow the freedom to pick the property to invest in. Also, impact of underperformance of an asset within the portfolio will be negative on the cumulative yields, but less on individual investors as it will be spread across all investors.
‘TO BE OR NOT TO BE’ - IS THE CLASSIC DILEMMA FOR ANY INVESTOR
In conclusion, before investing figure your risk appetite, investing capacity and the type of return you need. Have a realistic and practical approach and pre decide the tenure and frequency of investment & return. Depending on your goal of investing whether it is for generating income or parking money, consider the options of actually purchasing an office space or investing through REITs or Fractional Ownership.
