Real Estate Investing: Investing in Commercial Real Estate vs. Residential Real Estate


Indian real estate is once again poised to grow on a massive scale. She holds solid ground, marked by healthy economic sentiments and low interest rates. Along with end-user activities, investments also get a boost. In the meantime, the old debate about investing in Commercial Real Estate (CRE) or Residential Real Estate (RRE) is also resurfacing. Nakul Mathur, MD, Avanta India, shares his knowledge on the pros and cons of this asset class and suggests what to do with regards to investing in commercial real estate versus residential real estate and its comparative analysis rental yields.

“There is no set of standardized parameters to compare CRE and RRE. However, CRE clearly outperforms its residential peers, when it comes to rental yields. Commercial assets such as offices, shops, warehouses, etc. remain safe assets to bet on, as they can be a source of recurring rental income,” explains Nakul Mathur.

Rental yields are higher in CRE in India

“Globally, housing rentals can be a source of smart returns. London city center can easily yield around 4.5%. Similarly, Dubai and Bangkok can post returns of 5.5% and 5.3% respectively, fostering an environment conducive to better investor participation. However, the same perspective does not apply to the Indian market. In India, the growth in rental rates has not been commensurate with the growth in property prices,” Mathur added.

He further adds: “Housing yields are around 2-3%. , significantly lower compared to international markets. Rental yields are just under 3% in Delhi NCR. In the Mumbai Metropolitan Region (MMR), it mainly varies between 2.5 and 2.7%. In the South, Upcoming IT Corridors in Bangalore can yield up to 3.3% (general average is 2.4-3%). Meanwhile, with the help of furnishings or other added value, one can increase the yield by 25-50 basis points. However, beyond a certain point, they cannot be increased.

“In comparison, commercial properties offer much higher returns. Class A office space can easily offer an average return of around 6-7%. Increased economic activity coupled with a stable macroeconomic outlook for FY23 also bodes well for commercial leasing in the country. Meanwhile, after an extended period of working from home, most organizations are implementing back-to-office initiatives, fueling demand. Retail trade is also picking up after battling the sting of the pandemic. FY23 is expected to see an increase in transactions in department stores, hypermarkets, supermarkets, malls, etc. Retail units can provide returns in the 8-9% range and can be a conservative investment option,” he explained. .

Alternative CRE assets to invest

“Within the commercial segment, other sub-categories are also moving up the curve and attracting investor interest. For example, warehousing attracts the interest of large volume investors. According to research by Knight and Frank, in FY21, warehousing transactions amounted to just under 2.95 million square feet, a significant jump from FY20, when it was 1.29 million square feet. The warehouse market in India will continue to soar, driven by the growth in consumer internet space, packaged food, FMCG, etc. Warehouses in India can easily generate returns in the range of 5-6%, well above those in the residential market,” he suggested.

“At a time when there is a growing appetite for low risk but high return investments, commercial assets will be the preferred investment option. Despite the fallout from rising oil prices, India’s economy will continue to recover in the current fiscal year, providing a conducive environment for commercial leasing. At the same time, the residential sector will also experience positive growth, fueled by an expanding middle class and growing urbanization. However, rental yields will remain in the low range, weighing on the overall return on investment,” he concluded.

(Disclaimer: Opinions/suggestions/advice expressed here in this article are investment experts only. Zee Business suggests its readers consult their investment advisors before making any financial decisions.)


Comments are closed.