Pre-leased Commercial Properties: High on Investor’s Radar

As per a report by JLL India, pre-leased commercial assets in the range of Rs 5 – 50 crore spread across the country’s top six cities followed by tier-2 cities are high on investors’ radar. Growing opportunities in pre-leased properties is being considered as an attractive asset class especially by high net-worth individuals (HNIs), who are once again eyeing a larger pie of the Indian real estate market, particularly commercial real estate. A pre-leased property refers to one that is chartered to a company and then sold to a client including that rent. The purchaser of a pre-leased property is assured of settled ROI (Returns on Investments) from the first day. The ROI has been designed in the form of rental revenue as the lease act is also transmitted to their name.
Better returns, a mature and transparent market are some of the factors that have made investors flock to the country’s commercial real estate. With commercial segment remaining the most favored among all kinds of asset classes, high-net-worth investors and the uber-rich are now looking at pre-leased assets, primarily office assets, with hope.

Why is commercial real estate attractive?
The biggest incentive for investors is the rental yield that is much more than that available through traditional investment option such as the residential segment. Growing opportunities in pre-leased properties is also being considered as a highly attractive asset class. Unlike residential properties, commercial or IT spaces in India do fetch an 7.5%-8.5% net yield per annum. And investors start getting returns on their investments immediately and don’t have to scout for a tenant. This segment gives returns that are similar to debt investments and also gives an added benefit of owning an asset, which could offer capital appreciation in the future.

What kind of properties do investors prefer?
Despite premium pricing, properties in metros are more in demand than their counterparts in smaller cities, the report said. With demand for Grade A office space in prime locales rising significantly, most HNIs prefer to invest into these low-risk and high income-generating assets. They prefer to get fixed rental income, which is much higher than residential properties. According to the report, increasingly, family offices are focusing on real estate asset segments, especially pre-leased assets. The market continues to witness active demand from HNIs and CXOs of corporates etc. These properties are largely commercial including office spaces that generate a rental income, likely to be followed by others, including shopping centres, hotels etc. Other than commercial, interest levels are also picking up for high-street retail and logistics and warehousing industry. Another trend that is catching on is student housing or rental housing. It may not be a hostel per se, but a service apartment that is rented out to students or to employees of a corporate, so it becomes corporate housing.

Regulation on Real Estate Investment Trust (REIT)
The commercial segment, has become increasingly lucrative for investors on account of the newly achieved professional standards in recent times. Regulation on Real Estate Investment Trust (REIT), entry of several foreign investors and strict disclosure norms under the real estate regulation (RERA) machinery are some of the indicators of economic growth. India’s regulatory scenario relating to REIT has also come a long way and is now an established machinery for investors. At the beginning of the year, India witnessed its first REIT listing by Blackstone-Embassy JV. The JV between Embassy Office Parks REIT includes Blackstone’s assets as well as those in partnership with Embassy Group, comprising 33 million sq. ft. across Mumbai, Pune, Bengaluru and Noida. 24 million sq. ft of the portfolio is completed and 95% leased. This includes 11 assets—seven office parks and four buildings. Country’s top six cities including Mumbai, Pune, Bengaluru, NCR, Hyderabad and Chennai followed by tier 2 cities are on their radar, the report said.

Opportunities in Delhi NCR
In Delhi-NCR, capital values in commercial hubs have remained stable over the last few quarters. Therefore, investing in a pre-leased asset may be the best option, as it will generate revenue from the first day. Investors can also gain from the periodic increase in rentals that can be defined in lease agreements. In Delhi-NCR, the peripheral locations of Gurgaon and Noida have consistently performed much better than the central and sub-urban areas. Sohna Road in Gurgaon and Noida-Greater Noida Expressway have emerged as new office hubs and offer good opportunities. These peripheral locations provide good Grade-A buildings at a lower cost. Social infrastructure in these areas is also developing rapidly. Pre-leased property for sale on Golf course road Gurgaon are the most in demand commercial properties in Gurgaon in terms of high-end clients.

Indiabulls Asset’s private equity arm is buying pre-leased commercial buildings at a yield of between 8.5 and 9 percent, and plans to hold those assets for five years. It partnered with Inter Globe Real Estate Ventures Pvt. last year to buy a commercial tower in Gurugram near New Delhi for about 2 billion rupees from Hines India Real Estate Pvt.

Conclusion
Regulatory initiatives including GST, RERA, REITs as well as demonetisation have resulted into higher transparency that would further boost the commercial space demand and therefore makes a compelling investment choice. It is expected that investors will continue to invest in these segments with demand likely to grow in coming years. With the absorption levels at an all-time high and vacancy levels for Grade A assets being in sub-10% zone, properties in most of the micro-markets will continue to witness healthy demand — both from tenants and investors. The office market is already headed for tremendous growth. The report also pointed out that 2019 is expected to set new benchmarks in terms of new completions of commercial assets with the segment expected to touch 47 mn sq ft levels.

 

Sources:

• www.jllapsites.com/real-estate-compass/2019/09/pre-leased-assets-commercial-assets-high-on-investors-and-occupiers-radar/
• https://www.moneycontrol.com/news/business/real-estate/investors-prefer-pre-leased-commercial-assets-in-range-of-rs-5-50-crore-4326351.html