Residential Vs Commercial Real Estate: Where to invest for higher returns?

Residential Vs Commercial Real Estate Where to invest for higher returns

Here are some tips to assist investors in deciding whether to invest in the residential or commercial real estate sector in 2023.

2022 proved to be a very good year for the real estate market, both in the residential and commercial segments in India. We expect the real estate sector as a whole to continue to grow in 2023 and beyond.

Real estate investment depends significantly on the investor’s objectives and risk appetite. The points shared below are tips to assist investors in deciding whether to invest in the residential or commercial real estate sector in 2023:

A. Residential Sector

a. This sector currently has a tailwind driving its sustained growth across markets in India.

b. Interest rates are expected to peak this year, and hence its impact on demand will be limited.

c. Supply continues to grow – confidence in developers keeping their commitments across markets has resulted in an increase in supply.

d. There is a balance between the supply and demand, and therefore residential prices are likely to remain stable in 2023. Consequently, there will be limited room for retail investors to make returns on the purchase of real estate inventory.

Robust demand and uptick in supply present attractive investment opportunities for institutional investors to fund under construction projects through debt investments.

B. Commercial Sector

a. This sector is a little different from the residential sector currently. Inflationary and increasing interest rates globally are headwinds for large-format offices in India.

b. Demand for boutique offices and retail spaces will continue to be robust as they are supported by the consumption theme prevalent in the economy currently.

c. The best route for investors in this sector is through Real Estate Investment Trusts (REITs), and at current valuations, REITs are offering reasonable returns through dividend pay-outs.

The commercial segment has been a recipient of significant institutional capital over the years, and the last two years have witnessed increased institutional investment towards the development of new offices and retail spaces. Significant supply additions and headwinds in the global technology sector would mean investors seeking completed assets with stabilised occupancy.

Irrespective of which sector a retail investor decides to invest in, a few aspects which have to be considered prior to making investment decision are:

1. Invest with a reputed developer: Look for a proven track record even if there is a premium for the asset. Study the developer’s track record of timely and quality delivery in the micro market.

2. Use RERA disclosures: Now that the Real Estate Regulatory Act (RERA) is enforced in most states, study the disclosures to understand the approval status, timelines, construction progress, existing sales in the building, and other nuances of the asset. Do not blindly trust brokers or intermediaries who are not registered with the project.

3. Research on prevailing pricing / rental in the micro-market: Technology has made significant inroads into the real estate sector. There are many websites / tech platforms which analyse competitive projects, pricing trends and provide relevant information to investors. Investors should utilise this information and make thorough research on the project / location prior to making investment.

4. Plan your finances: Once you have decided to purchase a house, plan your finances to understand the down payment you can afford to make. Consider stamp duty and GST into the total cost of the unit and discuss with your bank on items which have to be funded by your own equity. Don’t forget to check your outgoings as well. New buildings with an array of amenities generally mean higher Common Area Maintenance (CAM) bills per month. This needs to be part of your calculations.

5. Check your credit score: To avoid any unpleasant surprises when you apply for the loan, try to keep your expenses for the past 12 months as low as you can. The RBI has instructed that a person should get at least one base-level credit report free in a year.

Source : FE

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