Real estate has always enjoyed a favorable preference among investors. The reason behind this is real estate investments provide a high return on investment and a sense of security.
The commercial real estate sector took a hit during the pandemic as companies worldwide shifted to work from home model. During these times, investors turned cautious about investing in office spaces. But as the work-from-home nears an end post-pandemic, commercial real estate is back with a bang!
Real estate investors are once again ready in full swing to bet on commercial real estate. A few reasons that contribute to this trend are –
- Attractive appreciation potential
- Recurrent rental income
- Tangible nature of the sector
In addition to this, the crypto and other investment markets have softened after their recent bullish run. This has shifted the investors’ interest back to the real estate sector.
When it comes to real estate investments, commercial real estate is investors’ favorite as it promises higher rental yields. In commercial real estate too, office spaces are back being a prime preference.
The pandemic crisis has de-escalated to give rise to a growth-enabling environment in which office spaces are a necessity. Countrywide companies are implementing return-to-office policies aggressively. This resulted in a considerable rise in the net absorption rate of office spaces.
Another reason why it is a good time to invest in office spaces is that commercial real estate at this point in time is a better bargain than residential properties. According to the Times of India, the cumulative leasing activity in India amounted to 41 million Sq Ft in 2021. The same year, a supply of an additional 50 million Sq Ft of office space entered the commercial real estate market. This took the total supply of office spaces to 773 million Sq Ft.
The oversupply of office space is a blessing in disguise for judicious investors as it allows them to acquire office space assets at affordable rates.
Here are some of the reasons why an investment in commercial office spaces will be a smart and profitable move –
1. Rising Demand:
Recent research makes a claim that the trend of working from home will not gain widespread acceptance as the new normal in India. There are several factors that convince employees to shift to work from the office module including smaller residences, rising family sizes, and internet connectivity issues. According to the Central Registration Centre, since the lockdown, nearly 16,000 new firms have been established. While these start-ups contribute to the rising demand for office spaces, global corporations also have plans to open data center offices in India, especially in tier 1 cities. So along with supply, the demand for office spaces is also on the rise.
2. Profitable yields on the rentals:
In both commercial real estate and residential real estate the rental yields depend on several factors including tenant profile, market situations, demand, and macroeconomic conditions. In India, when compared to residential real estate, office spaces offer much higher rental yields. If the investment is made judiciously, office spaces can bring rental yields to the tune of 8-10%. Sounds profitable, right?
The residential real estate yields, on the other hand, range between 2-4% in the housing market in most of the metro cities. Besides office spaces, logistics, industrial assets, and warehouses are also profitable avenues for investors. These sectors promise rental yields in the range of 9-10%. But there are a few drawbacks that investors can face with these avenues. Finding tenants for these assets can be cumbersome and these assets demand a lot of maintenance activities.
This again brings us back to office spaces being the safest option in the real estate market to bet on.
3. The ever-growing startup culture in the country:
India is the fastest-growing start-up economy in the world. These start-ups will soon be the leading office space occupiers in the coming years. The office leasing activity by startups alone is predicted to rise 1.3 times from 2019-2021 to 2022-2024. Despite Covid, entrepreneurs in the country rented 22.4 million sq ft in 2019-2020. The office lease share of the startups is highest in Bengaluru as the city is the leading hotspot of startup culture in the country.
The major factors that make Bengaluru a startup hub are –
- A well-developed ecosystem of the city
- Technological advancement
- Infrastructure for business growth
4. Portfolio diversification:
If you want to spread and diversify your portfolio risk, office spaces are the safest asset to invest in. It provides you with a concurrent rental income and a decent capital return. The latter aspect depends on how long you hold the property. An average commercial real estate property holding period is 5 years.
The hyped-up demand for office spaces is here to stay for years now and the sector is set to witness a booming momentum in the coming years. The economy is determined to overcome the aftermath of the pandemic and place its strong foot forward. Owing to this, commercial activities will also continue to grow and steer office space absorption.
