Key factors to evaluate before investing in commercial real estate

31 August, 2020
Commercial Property: Investing in Commercial Real Estate

Commercial real estate (CRE) is that segment which, as the name suggests, is used for commercial purposes and may be in the form of office spaces, data centres, warehouses, retail spaces like malls, industrial and institutional real estate. The key feature of such properties is rent and price appreciation, the chances of which are more as compared to other segments. In the last few years, India witnessed a surge in the demand and sale of commercial spaces, and in 2019, recorded the highest-ever office net absorption of 47 million sq. ft. in its top 8 cities. For 2020 too, expectations for this asset class were high but ever since the pandemic began in March this year, the sale of commercial properties took a hit. Now, as things are gradually picking up, it is expected that the CRE segment will witness a turnaround as the economy moves forward towards the path of recovery, which brings us to the question: what are the key factors to evaluate before investing in commercial real estate?

Identify the right location

One of the most important points to remember before investing in a commercial property is finding the right location which ensures appropriate rental returns and minimizes the risk of capital loss. Moreover, if the location is good, finding a tenant becomes easier and banks give loans more easily. The investor, therefore, needs to make sure that they have taken the demographics and trends of the area into account and should avoid investing in a business that located in a place which is experiencing a slump. In this case, market research and analysis are important to know how the property that one is planning to buy would perform in a particular location. Talking to local brokers and agents who are well-versed about the strengths and weaknesses of an area before spending money is also advisable.

Understand market trends

Before you invest, it’s important to conduct a research on the performance of each asset class to establish the feasibility of that sector as an investment option and then elect which property type you would like to buy. The market is ever changing according to the new trends. For example, if you are thinking of investing in retail, don’t forget to consider the impact of e-commerce on tenants and consumer demand. For example, the pandemic led to a shutting down of malls and people queued up in front of their laptops to buy things online. Now, even when physical shopping spaces are opening, people are still hesitant to go out which means that the demand for retail properties has taken a hit and may take some time to restore itself. Meanwhile, the increasing use of online streaming platforms and work from home has meant a rise in the demand for industrial spaces like warehouses, factories and data centres, which are flourishing now.

Invest time in research

It is very important for a prospective buyer to spend time doing thorough research about the investment option before making a decision. They should go through all the legal documents and paperwork, along with conducting a property survey and an inspection along with researching about the related financial considerations before reaching a decision. It is not unusual for investors to get excited about a property, but they should not lose sight of the important things and make the decision to invest only after carrying out a well-analysed research.

Commercial real estate is an investment option that offers a stable, rich source of income and has the potential for capital appreciation, if the property is well-maintained and kept up to date. However, one thing to always keep in mind before investing is that while there is potential for profit, not all commercial investments are considered equal and therefore, one needs to know when, what and how to invest in commercial real estate for it to be a success.

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