The Indian real estate market has matured to the extent that it is seen as the best investment instrument, as a recent survey by ASSOCHAM points out. However, in the absence of any formal investment education there is a general perception that residential property is the best bet for investment. With my exposure to the business of real estate what I find is that commercial property is much more profitable and rewarding than residential one.
I have facts to back my claim. For example, ten years back in Gurgaon, the market rate for residential property was around Rs. 10 lakh and commercial property in the same area was Rs.15 lakh. However, the rates for the same residential property now are Rs. 80 lakh and that of the same commercial property is Rs. 2 crore & 20 lakh. This shows that an investment of Rs 10 lakh in residential property at that point of time has resulted in a deficit gap of Rs. 1 crore and 40 lakh.
Defying the general perception there are figure available that shows why commercial realty provides the kind of returns that residential property could not. Look at the some of the properties located in the heart of Gurgaon. The introductory price for commercial space in these pockets was in the range of Rs. 5000-5500 per Sq. Ft. as against todayâ€™s cost of around Rs.60-70 thousand per Sq. Ft. This makes the capital appreciation in 10 years to reach 1000% in Commercial property. Â In the same area residential plots were launched at the rate of Rs. 3-5 thousand per Sq. Yd. and now it is 30-40 per Sq. Yd.
This clearly reflects the gap and the reward difference between residential and commercial property. Commercial property is also way ahead of residential in terms of its leasing value. In commercial property the investors can get directly benefitted by leasing or renting the space to a multi national company for establishing their corporate or branch offices. Now if one compares the residential one, definitely the income incurred from leasing out a commercial space would be far greater than the later one.
Commercial properties have two other big pluses. They can deliver higher yields than residential and lessees usually take responsibility for decoration and maintenance. Another advantage is that lessees are usually long term, meaning less hassle searching for new tenants.
Commercial real estate offers many benefits over residential real estate in addition to higher returns on your investment. It also allows for forced appreciation. Residential real estate is typically valued based on other comparable properties that have sold in the area that are similar in features. However, in commercial real estate, the valuation of a property is based on the revenue that the property generates. A small increase in revenue can increase the value of a property significantly. Unfortunately, with residential real estate this isnâ€™t an option as you really canâ€™t force appreciation; your property will be valued in the general range of the market.
The author, Sunil Dahiya, is Managing Director, Vigneshwara Developers Pvt. Ltd.