Investing in real estate can be a lucrative endeavor, providing long-term financial stability and potential growth. However, choosing between commercial and residential properties can be a daunting task for investors. Both options have their unique benefits and considerations.
Despite the pandemic, commercial real estate has shown some resilience. With opening of economy, there has been some recovery of the demand for office space and data centres, REITs, and the rise of co-working. Likewise in residential property space, with numerous incentives for consumers, things now appear to be improving after epidemic.
“This upward trajectory is further fueled by the government’s favourable affordable housing schemes, propelling the Indian real estate sector towards an ambitious goal of reaching a staggering market size of $1 trillion by 2030. Despite the undeniable allure of substantial returns, investors often vacillate between commercial and residential properties,” said BK Malagi, COO, Experion Developers.
“Traditionally when it comes to real estate, residential properties have always come as the winner due to their stability and consistent demand. The perpetual need for shelter ensures a steady rental income stream, making residential real estate an attractive choice for investors. Additionally, first-time buyers often find residential properties less complex to navigate. Furthermore, the recent surge of 4.1% (QoQ basis) in average home rentals across the top 13 markets solidifies residential properties as a promising avenue for significant financial gains,” Malagi said.
While residential properties are synonymous with sustained income, they experience more frequent tenant turnover, impacting cash flow and requiring additional effort to find new tenants.
“On the other hand, commercial properties are experiencing a surge in popularity among local buyers and NRIs, thanks to their lucrative long-term advantages. These properties offer attractive opportunities for investors, with long-term leases and annual rent increases ranging from 5% to 8%. Such features ensure a consistent flow of income over time. However, commercial properties tend to lose value during economic crises, increasing vacancies,” Malagi added.
Undoubtedly, commercial and residential properties each possess their distinct strengths and shortcomings. However, investors can capitalise on the dynamic real estate market by conducting thorough research, diligently evaluating market conditions, and aligning their investments with individual goals. By making informed decisions based on these considerations, investors can strategically position themselves to maximise returns in the ever-changing real estate landscape.
“While the advantages of asset ownership, tax incentives, and rental income are common to both commercial and residential real estate investment, there are notable distinctions between the two segments that need to be considered as per your risk appetite, desired returns, and timeline,” Rakesh Reddy, Director, Aparna Constructions, said.
While the risk and overall investment cost is considerably greater, the majority of seasoned real estate investors look to the commercial real estate segment due to higher returns and better capital appreciation.
“Despite global economic volatility, the commercial real estate sector in India has demonstrated resilience and experienced sustained growth due to an expanding workforce and emergence of decentralised growth corridors. Commercial real estate has been a prominent investment among HNIs and corporations due to its higher yields, consistent returns, equity building, leveraging & longer leases. The yields remain as high as 12% per annum placing commercial real-estate in most investment portfolios,” Vijeth Reddy, co-founder & CEO at Kots, Bangalore said.
Here are some other things investors should remember while picking the investment option.
Purpose and Investment Goals: Determine your investment objectives and long-term goals. Consider factors such as expected rental income, property appreciation, potential tax advantages, and your risk tolerance. Commercial properties typically yield higher rental income, while residential properties offer more stability and a potentially larger pool of tenants.
Market Analysis: Conduct thorough market research to understand the local real estate dynamics. Analyze supply and demand trends, vacancy rates, rental yields, and projected growth. Consider economic factors, employment opportunities, infrastructure development, and future market prospects. This analysis will help identify which sector aligns better with the current and future market conditions.
Risk and Return: Evaluate the risk and return potential of each investment option. Commercial properties tend to have higher risk due to factors like tenant turnover, economic fluctuations, and longer vacancy periods. However, they can offer higher rental yields and potentially significant capital appreciation. Residential properties generally offer more stability with consistent demand, but returns may be lower compared to commercial investments.
Management and Involvement: Consider your level of involvement and management preferences. Commercial properties often require active management, including lease negotiations, maintenance, and dealing with larger-scale tenants. Residential properties may involve more direct interaction with tenants but can be managed with the help of property managers. Assess your availability, expertise, and willingness to handle the responsibilities associated with each property type.
Financing and Affordability: Evaluate your financial capabilities and access to financing. Commercial properties typically require larger upfront investments, higher down payments, and stricter lending criteria. Residential properties may be more affordable and accessible for individual investors. Analyze your financial position, assess potential returns, and determine the type of property that aligns with your budget and investment capacity.
Diversification: Consider diversifying your portfolio. Investing in a mix of commercial and residential properties can provide a balanced approach. Diversification helps mitigate risks associated with market fluctuations and changes in demand. Assess your overall investment strategy and determine the optimal allocation between commercial and residential properties based on your risk appetite and investment objectives.
Long-Term Outlook: Evaluate the long-term prospects of the chosen property type. Consider factors such as urbanization trends, population growth, and emerging market opportunities. Assess whether commercial or residential properties align better with anticipated changes in demographics and market demands over the long run.