Investments are a great way to build a strong financial corpus. With every investment model, however, there are things that must be borne in mind so that your investment stays stable and profitable. Be it mutual funds, shares in the stock market, precious metals, or the like, every investment option has a few tenets to stick to. The same holds good for real estate as well. Both residential and commercial real estate follow almost the same rules of engagement when it comes to investment. However, there are some stark differences between them that should never be taken for granted.
The Salient Points for Getting Started
Residential real estate investment can be easier to approach but is very loosely regulated and includes a lot of dependence on the market, making it a weaker choice for investments that can generate a steady stream of passive income
Commercial real estate (CRE), on the other hand, comes with a huge investment cost that is normally not viable for a retail investor on their own. Thus, REITs and fractional ownership are the ways in which commercial real estate investment is made accessible to retail investors. CRE is mostly insulated from rapid or random market changes, so it is an ideal long-term investment.
The first and foremost thing to remember about CRE investment is that it is a very stable asset class and the return on investment is better in the long term. So, the longer you stay invested, the thumb rule says that your returns will be better. As with any kind of real estate, location plays a major role in how the asset will be valued in the future.
Let us make a note of the things any CRE investor should make a note of –
- Location
- Market
- Tenancy
- Investment Goals
Location
As simple as it sounds, location is one of the trickier things to manage. There are instances where a location can itself define the market and tenancy, making it the only external factor that you need to think about. Then again there are locations that are favored by certain businesses and ignored by others. A port town will be a great choice for companies that deal in a lot of import and export, even hospitality but it would not be ideal for IT and ITeS. Locations that house labs or research centers will be steady regarding the tenants, while a vacancy in dense urban and semi-urban locations can see tenants switching places on and off. However, the vacancy in these locations rare. It stays for relatively shorter periods.
Market
Commercial real estate is a resilient investment option that is mostly insulated from change sin the market. The glaring testimony to the resilience comes from the COVID pandemic wave that happened in 2020. Even though a lot of businesses in India suffered a setback, CRE stayed afloat, and demand came back in bloom in 2021, with a positive outlook for the long run. It is to be understood that while CRE is insulated from the market, policies and reforms that help a market grow also aid in the growth of the CRE avenue. The impetus provided by the government in terms of the Union Budget 2021, aimed at infrastructure and real estate did provide a much-needed breathing space for CRE.
Tenancy
Tenants are the ones that make a CRE investment worthwhile. The better the tenant and their financial standing, the more the growth of your investment. It also makes sense that the tenant in the asset is established well, which ensures the tenant would not switch offices as regularly and would be okay with any kind of appreciation that happens over the period of their tenancy.
Investment Goals
It is a combination of all the factors mentioned above. As an investor, it is your money that is going into the asset. You will be the one to decide what each investment is aimed at. If you are looking for short-term or long-term investment and if your risk appetite allows you to venture into asset subclasses that are not very mainstream. As a rule of thumb, you can invest in warehouses or labs for the long term, as these are taken up by businesses that rarely shift their priorities. Office spaces, parking lots, industrial work floors, and the like are good for relatively shorter periods of investment.
Hope this ready reckoner helps you in your next investment venture in commercial real estate. For more information on how all these factors are taken into account by Strata when offering an asset for investment purposes, visit us at www.strataprop.com.
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