With products like fractional ownership and REITs, investing in Commercial Real Estate (CRE) properties has become budget-friendly and less tedious. CRE can provide a steady cash flow in the form of rentals. However, experts advise that investors should first carefully scrutinize their financial health, investment goals, risk-bearing capacity and the timeline for generating profits.
CRE properties are valued at 25-30 crore and upwards. Traditionally, CRE investment has remained restricted to UHNIs and HNIs owing to the exorbitant ticket size. However, with new business models such as fractional ownership and REITs, CRE as an asset class has been largely democratized. While the average minimum amount of capital required to invest in residential property ranges anywhere between Rs. 50-70 lakh and the amount may vary depending upon the location of the property, fractional ownership allows owners to own a part of commercial property with a ticket size as low as 25 lakhs.
So, is CRE a better investment than residential property? According to Sudarshan Lodha, CEO and Co-Founder Strata, there is no simple one-word answer for this. “While it is true that profitability is much higher in commercial real estate, entering the CRE market as an individual investor is tough. Legal complications, domain knowledge, financial components are various hurdles that come in the way of retail investors. However, now they can be solved by opting for REITs or fractional ownership,” Lodha told FE Online.
“Having witnessed the rising demand for commercial real estate and positive future graph I would advise investors who are eyeing a second residential home from an investment perspective should in lieu consider investing into commercial real estate which will offer far better returns. Also, the main reason for preferring commercial real estate over residential counterparts is the higher rental value. Commercial real estate offers up to 3 times the returns to that of residential properties,” he added.
Average returns in last 5 years
Rental returns in the case of residential property is around 1-2% while in CRE it is 8-12%. The returns in real estate have been consistent over the last decade and may continue to perform similarly in the next few years.
“Rental returns in case of RRE is around 1-2% while in CRE it is 8-12%. With rising demand for commercial spaces, the demand for CREs is expected to pick up momentum in Tier-II cities as well,” said Lodha.
Pros and cons of investing in commercial real estate
CRE includes a wide variety of potential assets such as warehouses, manufacturing units, retail spaces, parking lots, schools, malls and movie theatres to name a few. According to Lodha, below are some pros and cons of investing in CRE
Stable source of high rental income: The average rental income of the residential real estate is 1-2% while that of commercial real …….