Investments by nature are always risky. Along with the risk, comes the chance to reap great returns. What’s important is to understand the capacity of risk you are comfortable with and how to identify the best opportunity in any investment option you choose to go forward with. Regarding commercial real estate, a rather robust investment option, the same rules apply. The key is to know the traits of a good market for CRE.
Any market can have a multitude of micro-markets as well. On a global scale, any nation can be considered a market, with its states being its constituent markets, cities, towns, and suburbs, the micro markets. So, let’s understand the notable points about a great CRE market - India, and what you can identify other prospective markets from the markers you see in India.
Commercial real estate (CRE) is a stable asset class primarily because of its physical nature, insulation from most other market factors, and generally a steady appreciation rate. So, it goes without saying that any market that offers an advantage to these traits will be good for CRE. But what are the other notable points that shouldn’t escape your scrutiny?
Markers of a Good CRE Market
Commercial real estate depends on a good business and development infrastructure. The more the number of companies and the faster the growth of businesses, the more the proliferation of spaces and assets that can be used by them. Despite the looming pandemic, India has seen more businesses start up with a wider and faster acceptance of new technology. So, marker one is undoubtedly - Growth.
Coming to the second point, growth, to a large extent depends on business-friendly government policies. The recent announcement of the Union Budget 2021 brought a major focus on developing infrastructure and real estate. Added to that, Maharashtra provided a relaxation of taxes for builders and developers. The better the orientation of policies, the stronger the market. Keep an eye out for Government Policies.
The third important aspect is the Vacancy Rate. It is simply a percentage of the CRE assets that are available for occupancy at any given time. There are peak periods of economic activity where these rates become very low, and times when they shoot through the roof. Just bear in mind that a rate of 4-5% on average works pretty well for a resilient portfolio.
Vacancy rates can change depending upon the Location, even within the same market. Suppose a market has assets available for manufacturing units as well as offices. Based on what business picks up in the location, the vacancy rate can change for either asset or both. Having a location that has a healthy variation of assets gives you a lot of options to choose from, should investment opportunities open up.
You always need a tenant in any kind of real estate investment. After all, the rent paid by the tenant is the source of your monthly returns. Tenancy is important to bear in mind when looking at a prospective CRE market for investment. Stable, established companies as tenants are always the safest bet.
Market Dynamics are not that hard to understand. It just requires a lot of data gathering and careful analysis. Even during the pandemic, the Indian CRE market stayed afloat, and in 2021, demand for offices, warehouses, and other asset types have increased. Partly due to the Atmanirbhar Bharat program, and also due to global factors, it was possible for the CRE market to ride this resurgence wave and bounce back better than before.
Building a Healthy CRE Investment Portfolio
While it is one of the most stable asset classes available, CRE still has some ground rules as per which an investor can reap great benefits. It helps to keep the following in mind when building your CRE investment portfolio.
- A long-term investment is a key to building a corpus through CRE
- Diversify your portfolio; use different asset types in different markets
- There are no ‘guaranteed returns’; stay wary of such advertisements
- The market rental rate and the vacancy rate define the appreciation of your portfolio
It’s not enough to be satisfied with just a single market. Based on your risk appetite, you can try out different asset subclasses and markets to understand how investments in different scenarios can be helpful in fulfilling your goals. To know more about how Strata can help you along in this journey of CRE investments, please visit us at www.strataprop.com.