Real estate is a great addition to anyone's investment portfolio. Cash-flowing hard assets like real estate are a great hedge against inflation. The tangible assets such an investment is backed by makes it a good asset to add to your portfolio mix. There are many types of real estate investments from which one can choose. The four main types are
- Commercial real estate
- Residential real estate
- Land
- Industrial
In this blog, we will understand the different aspects of commercial real estate investing which is often the most lucrative option.
What Is Commercial Real Estate Investment?
Commercial real estate is property used for business-related purposes. Real estate is considered to be an asset and a long-term investment with the potential to generate high returns. This is also one of the main reasons it is favored by many investors.
The main source of income from such investments is rental payment. The property is used for commercial purposes rather than residential purposes.
CRE is a broad category of real assets and includes a range of properties like shopping malls, restaurants, healthcare facilities, warehouses, and convenience stores etc. The owners enter into lease agreements with the tenants to let out the property. The benefit is often that the tenants are well known brands who are unlikely to default on payments compared to tenants of residential properties.
Commercial Real Estate Investment Types
Commercial real estate is vast and offers various kinds of investments. The four main classes of commercial real estate are as follows:
1. Office Space
These spaces are leased to companies to build and run offices. If you find these spaces in the right location, the return on investment is generally higher than expected.
One of the major factors that draws investors to invest in this form of commercial real estate is the feature of accommodating multi-tenancy. Even if one tenant decides to leave, there will not be a huge difference in the returns.
2. Warehouses
Warehouse is property used for industrial purposes. It is usually related to setting up production and manufacturing units and carrying out all industrial-related activities. These spaces are usually located on the outskirts of the city. They are huge spaces to accommodate heavy machinery, storage, etc.
Small-to-medium-sized industrial properties are relatively less expensive than retail office spaces and multi-dwelling spaces, both for the buyers and the tenants signing the deal.
One of the major advantages of this type of investment is that all the major expenses are bearable by the tenant. Moreover, the minimum lease period is 3 years. This benefits the owner and the investor as it is comparatively longer than a residential investment.
3. Retail Spaces
Investing in retail spaces is very similar to investing in office spaces. These retail spaces could be smaller spaces like grocery stores or supermarkets, or they could be as big as strip malls.
The most important factor to consider when investing in retail space is location. Consider a location that has a steady amount of moving traffic where there is always an increase in the percentage of footfall in the store.
These properties are also leased for a minimum of 3 years. This is very beneficial for the investor, as your rate of returns won't go down considering the tax and rent are going to increase.
4. REIT (Real Estate Investment Trust)
These are firms that own and operate real estate to generate income. These companies manage portfolios of high-profile properties and mortgages.
Individual investors can use these firms to invest in a high-priced property and earn dividends while diversifying their investment portfolio.
Investing in Commercial Vs Residential Real Estate
These two investing types are the two sides of the same coin: real estate. Nonetheless, they have some significant differences. One of them lies in the leased property generating income, along with the legalities involved.
Commercial real estate, as we saw, is property used for business-related purposes. whereas RRE is classified as any complex that comprises 1-4 units. RRE is strictly for living purposes.
CRE investing is considered to be more complex than residential real estate investing. Compared to CRE investing, it requires a greater amount of capital, which comes with a higher risk. It is a long-term investment which also has the potential to gain higher returns.
Benefits Of CRE Investments
- Income Stability: The potential for income stability when compared to stock markets, shares, and other bonds.
- Higher Returns: It is historically proven that CRE has generated higher returns as it offers an average rental yield of 8–11%.
- Long-Term Investment: ensures that stable income is generated over the invested time period.
- 0 Furnishing Cost: This is the most advantageous feature, as the tenant will himself furnish the property as per his requirements.
Risks Involved In CRE Investments
- Huge Investment: A large amount of capital is required to invest in CRE. This cannot be afforded by every individual. But now, every individual can invest in CRE with a minimum amount of ₹1,00,000 through Grip on Cube.
- A Few Tax Incentives: For an investor, the tax benefits are very minimal compared to the RRE investment. But with Grip’s new partnership with leading CRE platforms, you can expect 11-15% XIRR.
- Finding The Right Tenant: It's a task to find the right tenant and sign an agreement for a minimum of 3 years.
- Research: Before investing, you'll have to do a lot of research into the laws, regulations, and inspection of the property.
Luckily with Cube's partner Grip, you can leave all the hard work to us.
Invest In CRE By Grip Via Cube
Grip has partnered with Strata to provide its users access to commercial property investment opportunities which are available on Strata’s website at a minimum ticket size of ₹25-30 Lacs.
The minimum ticket size on Cube via Grip however is only ₹1Lac, through a partnership with a SEBI registered AIF partner. As a result, investor’s returns while investing through Grip will be marginally lower, than investing directly on Strata’s website, this is on account for fees charged by Grip’s AIF partner.
Tenants are established MNCs with long lock-in/lease tenures, contracted rent escalations, and strong credit.
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Illustration Of The Cash Flow For 1 Lakh Of Investment
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Particulars
|
Amount in Rs
|
|
Investment Amount
|
1,00,000
|
|
Annual Capital Appreciation (Assumed)
|
7%
|
|
Exit Year (Assumed)
|
5th year
|
|
Rent Year 1
|
5,857
|
|
Rent Year 2
|
6,336
|
|
Rent Year 3
|
7,223
|
|
Rent Year 4
|
7,303
|
|
Rent Year 5
|
9,129
|
|
Total Rent
|
30,371
|
|
Sale Price
|
1,32,889
|
|
Net IRR (Post fees, Pre Tax)
|
12.1%
|
