Investing in commercial real estate in Delhi NCR is a lot different in more than one way when compared to residential. While the latter has provided investors with exponential capital gains in the past decade or so, the rental yields from residential properties have been a measly 2-3% at best. Commercial properties on the other hand, secure investors with rental yields ranging between 5 and 13% with moderate capital gains on an average. There are exception to this scenario though, many investor have been burned by bad investments when their commercial property lies vacant for years and they keep paying maintenance cost on a monthly basis. Going by a report, average 50% of total retail space in malls across is lying vacant, the figure is even higher in Delhi NCR area with a staggering 68% vacancy. So, how do can one make sure they are paying the right price and making the right commercial property investment in Delhi NCR?
Macro factors like economic situation, employment rate etc are transient and beyond the control of most investors and affect all in the same way, however, a closer look into micro factors like location, scale of the project, unsold inventory in the market, interest rates, amenities in the property etc can potentially fetch higher rental yields and save you a lot of headache later.
Location: This is often the most talked about metric when considering a real estate investment, however it can’t the stressed enough specially in case of Delhi, with so many infrastructure projects planned for the city in the new master plan 2021, take a deep look into future plans for the area surrounding project, how is the approach, metro connectivity, how wide are the roads in the front and around, proximity to other prominent commercial and residential hubs, proximity to the airport and railways.
Amenities. This is perhaps one of the most important factors, at least in short to medium term, since the Delhi market has a very truncated supply of quality commercial space at the moment. Therefore if the building you are eyeing has added features that new age tenants look for, the space is going to be fetch better rentals and yields. A good example is DLF Horizon center building on Golf course road, even though the building is not really a prime location per se, it is not even connected directly be metro at the moment, however, the office building already commands the highest rental in entire Gurgaon region. Features like high performance façade, advanced air conditioning systems, column less floor plates, well planned security system, are highly appreciated and rewarded by tenants of the building.
Distress Level of the Landlord. This is single most non tangible aspect while determining the value of a commercial space. You could be dealing with an investor who often relies on heavy borrowing from different source to make quick profits by flipping properties, they could have fairly realistic expectations to begin with, while some others might have the potential to hold longer. Therefore, it’s good to find out what’s cooking behind the scene, it could be a distressed investor, or an insolvent company who is looking to capitalize assets.
Market Trend and recent transactions. If the market is up trending, as an owner you jack the prices up a little bit, while a tenant can always bid at the bottom end in a down trending market. Review other commercial properties currently listed for sale or lease in the same area to see how much a similar property is priced, having said that don’t let one of recent transaction motivate you or put you off, as it could be way below or higher than current market conditions, one needs to take an average ballpark.
Higher or lower rental income: You may have an already rented property that you are looking to dispose of and the rental income could be way higher or lower as per today’s market conditions. A property with higher than average rentals not necessarily fetch to a higher price since there is a greater probability of losing that tenant once the lease is due for an escalation or the locking period expires. Similarly, a property fetching lower rentals than current market conditions should not be priced too low.
Tenant Mix: Having the right mix of tenants is especially important in case of a retail property, your property could be right next to India’s most celebrated mall and yet have very little traffic and purchase value. The success of Select city walk at Saket (the most visited and highest rental commanding mall) is often attributed to its right tenant mix and single ownership which prohibits arbitrary tenancy. Your goal as a landlord should be to make the building a destination hub for certain kind of business profile, it could be as small as a mecca for startups and as prolific as the whos who of fortune 500 companies like Google, Apple, Samsung, and Lockheed Martin etc. As soon as you transform your property into a destination hub, like mined tenants are willing to pay a certain premium on rentals. Higher rentals equals higher capitalization rates.
Bank lending Rates. If there is easy and cheap money available, its usually a great situation for landlords, because there will be floodgates of buyers, more people vying for their property means they can afford to jack up the price, thus pushing pricing up, while the opposite is true when money is hard to come by.
It’s important that as an owner of a commercial space you don’t have unrealistic expectations your property and at price it fairly so potential tenants and brokers start showing interest. Once you have done your pricing homework in detail, you more or less know when to let go or play it cool while negotiating with a potential occupier.