With the residential housing markets showing no sign of recovery, investors and high-net worth individuals are now making a beeline towards the commercial real estate market, hoping to cash in on the record demand that the segment has seen over the past year.

Commercial Real Estate Emerges King

Confidence in India’s economy is increasing. And with it, big business is loosening its purse strings, ready to expand operations, setup new branches and take up more prime office space. The commercial real estate sector in India has never had it this good. Real estate consultants say these investors are now aggressively looking at investing in commercial real estate projects.

Pooja Batra, Director of new homes and relocation at MumbaiPropertyExchange.com, says the trend is increasingly visible among her clients, especially High-Net-Worth individuals or HNIs

“A lot of global investors have now started looking at the commercial real estate sector very seriously, simply because they have now realized that there is no capital appreciation happening in the residential segment.”

Real estate experts like Ramesh Nair, COO & Director of International Business at JLL India feels it makes sense to invest in commercial real estate at the moment. After all, developers are rushing to keep pace with demand, launching ever more office projects and even converting unfinished residential buildings into office spaces. All of this is further boosted by private equity funds and global funds that are scrambling to acquire high-quality, REITable office spaces.

“There are a huge amount of benefits in getting into the commercial space right now. Look at the numbers, residential yields are down to a little over 2% while commercial yields are anywhere from 8% to 10%. Second, we don’t expect capital appreciation in residential to be more than 5% to 6% for the next couple of years, while in commercial there is an opportunity of 8% to 10%.” claims Ramesh.

Commercial Real Estate: Not For Everyone

While most of the industry seems gung-ho about commercial real estate, some experts warn against following the herd. After all, the entry barriers are higher and investors should be ready to shell out anywhere between Rs 10 Crores to Rs 20 Crores to acquire high-quality Grade-A assets. Then there is the fact that developers may want to reserve their grade-A supply for long-term partnerships with institutions and may not want to sell to individual investors.

“Most of the players who are in commercial real estate do built-to-suit, they start building only when they know there is a requirement from a tenant which is expected in the near future. Commercial real estate is a very specialised subject. If you look at the entire country, there are only 10 or 12 developers who have mastered that art of doing commercial real estate, and also leasing it simultaneously.” warns Amit Bhagat, CEO & MD of ASK Property Investment Advisors.

With much of the demand so far being for smaller unit sizes; individual investors may find it tough to acquire the assets they require in commercial real estate.

“Most of the demand we have personally witnessed, is for office space ranging from as small of 500-600 sq. feet to 2,000-3,000 sq. feet.” says Pooja Batra.

Small Business Spaces Take Off

But there is hope for these investors, with several developers actively building smaller office spaces to attract more investors.

“It is tough for an HNI to buy anything for less than Rs 10 to Rs 15 Crores per unit. But we have seen a growing trend today, where most developers are willing to cut bits and pieces and package smaller office spaces so that you can buy anywhere from Rs 2 Crores even in a big city like Mumbai. “claims Ramesh Nair.

Add to this the fact that most experts believe the good times will continue for at least the next 2 to 3 years, and it seems increasingly clear that now may be the best time to get into the space.

Nikhil Narayan Sivadas, Assistant Editor, NDTV