With rental rates of commercial properties taking a hit recently due to oversupply and lack of demand, there is an investment opportunity for those who want to take a slightly higher risk with their real estate investment. Reports from various real estate consultant firms have predicted that rentals will remain stable for 12-18 months due to oversupply in the office and retail space, but that may not be so after that. Low rentals put pressure on the developer’s income forcing him to sell space at reasonable rates to generate liquidity.

Graphic: Yogesh Kumar / Mint

If you can afford to invest at the onset, this is also a good time to buy office space since the prices of commercial properties are also under pressure.

The background

The downturn started affecting the realty market in September 2008. Due to slump in the real estate market, rentals and capital values corrected drastically in 2009. But now the realty market is stabilizing. Says Anshul Jain, CEO (India), DTZ International Property Advisers Pvt. Ltd, property consultants: “There was an oversupply of commercial space. Rentals that were falling are now stabilizing. There will be a rise in vacancy till July. In my view, vacancy in oversupplied markets should be at its peak level till the end of July."

DTZ International Property Advisers’ report, titled DTZ Insight—The Second Coming, on office market released in November says, “Vacancy levels, despite healthy absorption, are likely to increase in the first half of 2010 and then stabilize or fall later. This will prevent any substantive price revival."

The opportunity

Low rentals have put pressure on existing and new stocks too. A recent report by international property consultant firm, Jones Lang LaSalle Meghraj, titled Global Market Perspective—Corporate Real Estate Market Conditions, corroborates Jain’s observation. It says, “Office and commercial rental values in the main Indian cities have corrected by up to 40% and have now returned to 2005-2006 levels, presenting good opportunities for corporate occupiers."

Jain adds, “Capital values are high but still affordable."

Snehdeep Aggarwal, chairman and founder, Bhartiya Group, which has diversified businesses across the real estate domain, adds, “Areas with new supply of commercial projects offer investment opportunity. Developers want to capitalize by selling the space instead of leasing. Selling space will provide liquidity to complete the project. On the other hand, retailers, too, tend to benefit in the long term through appreciation of the asset’s value. One should keep looking for new launches."

Says the DTZ report, “The marketable space and variety of product formats, now available in surplus, render an opportunity for occupiers’ to align their real estate requirements with actual business needs."

How you will benefit

If you are planning to start your own business, or are already running a small enterprise, investing in commercial space would make sense for you because it forms a major part of input cost.

Says Anshuman Magazine, managing director (South Asia), CB Richards Ellis (CBRE), an international property consultancy firm: “Any business is risk-prone. A dip in sales for a retailer will directly affect his business. Small retailers and entrepreneurs can, thus, run their shop/office at lower rates. Also, this provides safety against losses."

Why buying makes sense

Empty spaces in a commercial complex can offer you a good buying option. Says Jain of DTZ: “In a proven location, if the commercial complex is 60-70% leased out, buying can be looked at. The developer may offer some discount for increasing occupancy."

Besides, you can look at the gains you may make in the long term. Ravi Ahuja, executive director, development services (India), Cushman and Wakefield, international property consultants, says, “Long-term capital appreciation is the real benefit which accrues to small office operators and retailers."

If you do not use the office space, the rent you may get from it eventually could help you repay a loan you may have taken to fund it. Also, your rental income will keep growing annually. If you are using the office space, you will save the rent even as the price of property will keep increasing over a period of time.

Where to buy

Magazine of CBRE says: “A field survey in your region helps you find a complex or a market that has low occupancy but better prospects in terms of infrastructure and footfall. Commercial complexes and district centres with good catchment area will attract more consumers at your shop. Often visibility is the key factor for driving sales."

Looking at the master plan of the city would help. Says Aggarwal of Bhartiya Group: “This would give an indication of the possible infrastructure development. Based on that, you can put in your money in one of the suburbs."

Surf the Internet, meet dealers specialized in buying activity in your area to get an idea. Once you find the right place for your use, negotiate with the owner or the developer. Approach the developer directly to save brokerage cost.

Few developers pre-launch projects with an assured return product. The pricing is discounted upfront to meet the yield the buyer is looking for during the construction period. This option is for those who can wait for more than a year or two to start their business.

Things to keep in mind

Predicting the market is difficult, so always be prepared to take a hit on your rental income in case of a dip. You can safeguard your income by choosing the location carefully. Says Shakti Nath, chairman and managing director, Logix Group, a developer that has launched its commercial complex Logix City Centre in Noida recently: “It is better if you invest in a project that is part of an integrated township. If the project has other infrastructure, such as mettled roads, good connectivity and business districts, rental income levels will never drop."

Ahuja of Cushman and Wakefield cautions on investing in peripheral areas: “I would qualify the investment to be a safer bet if done in corporate office buildings situated within city limits, business districts rather than suburban or periphery locations that suit IT/ITeS companies."

In case you plan to take space for your shop in a mall, look at the tenant mix. Quality tenants in terms of type of business help generate more footfall. So, choose well.