Why Commercial Real Estate Gaining Pace Over Residential? Experts Speak

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While residential real estate may still be sluggish and speculative, commercial real estate is up and running. Commercial space absorption reportedly has been high at close to 40 million square feet (sq ft) leading to a spurt of activity among developers to build office spaces, new-age co-working joints, specialized e-commerce-specific buildings.

The industry leaders are also upbeat about the commercial real estate and deeming it as the toast of the season. While pre-2017 era was more about residential real estate, the present and the near future will see more demand and supply of Grade A office spaces.

“In a manner of speaking, we saw it well in time and effectively lead the market,” Business Standard quoted Niranjan Hiranandani, co-founder and managing director (MD) of Hiranandani Group, as saying. “A few years back, industry pundits, especially global consultants, were only talking about residential real estate as the only profitable option. The trend of corporate consolidating across different locations to a single place and expanding workspaces was something we tapped into much earlier.”

Here are some of the factors that are contributing in making the commercial real estate sector much more exciting for both developers as well as buyers:

  • Better ROI:

It is seen that commercial spaces give a higher return on investment (RoI), compared to residential spaces, wherein RoI is an aggregation of rental yields as well as capital appreciation.

  • Higher Rentals:

Lease rentals in the commercial segment have been on an upward trend, as per Ashish R Puravankara, MD, Puravankara. Rent realisation is broadly increasing at the rate of 8-10 per cent over the past four years. Commercial provides a more predictable and steady cash flow performance, which provides a cushion to the overall business.

  • Entry Of REITs:

The entry of REITs in the commercial real estate has reportedly made things more exciting for the investors.  The builder’s bottom line is better now because of a steady rise in rental income over the years. Also, the fact that they can now easily exit via real estate investment trusts is a major draw for a few builders.

  • Interest of PE Players:

Commercial segment has become a major attraction for private equity (PE) players who have been pumping funds into this segment over the past few years. According to the Anarock data, the commercial segment saw a total PE inflow of nearly $2.8 billion in 2018, up from $2.20 billion in 2017.

  • Emergence Of New Segments Within:

New segments are coming up in commercial real estate such as co-working spaces, organized retail, and integrated townships with light industrial and logistics, opening avenues for developers.

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