Higher returns, better yields driving HNI investors to commercial realty in India

Driven by positive indicators including rising demand, better rental yields and a wide choice, a growing number of investors including high net worth individuals (HNIs) are now increasingly moving towards investing their funds in commercial/office real estate in India.

According to industry experts, inspite of their penchant to invest in luxury homes, market savvy investors and HNIs have shown a marked preference this time round to invest in commercial realty over the past 12-18 months.

It’s a trend that is reflected by Karvy’s India Wealth Report 2015, that puts pegs the total number of assets under the real estate funds category at approx INR 10,975 cr for the year, with the individual contribution valued at approx INR 3,622 cr or about 8% of a investor’s surplus.

As a leading Mumbai-based developer puts it succinctly, HNI investors have always been a market savvy category on the lookout for new investment avenues and this time the focus seems to be on commercial realty – clearly one of the best performing realty segments in the country today.

Industry data further reveals that a huge chunk of these investments (approx 44%) can be sourced back to HNI’s from smaller cities across the country like Jaipur, Ahmedabad, Lucknow and Indore, who have shown a keenness to invest huge sums in commercial realty in their efforts to secure optimize their asset allocation.

Key reasons behind this change: 
So what are the reasons behind what can only be termed as a tectonic shift in investment patterns?

For one, with its current GDP of 7.9%, the Indian economy is clearly on the growth path and inspiring confidence about its robust future. This in turn has inspired many global corporations to set up base in the country to leverage this growth, which has caused a marked spike in commercial leasing activities.

Commercial realty also enjoys an advantage over residential realty in terms of being a more profitable investment option. In addition to the opportunity of earning an impressive 8-10% rental returns there also exists a better chance at higher capital appreciation. Residential realty in comparison only witnessed a paltry 3.3% appreciation in 2015, which was substantially lower than its performance in the preceding year.

Further the option to exit the investment without any major hassles has also been a strong lure for the increased investments into commercial realty. Of course, the substantial ready stock in the residential segment that is funding no takers has also helped divert a substantial chunk of investment into the commercial sector.

Preferred destinations:
Cities like Mumbai, Delhi-NCR, Pune, Bengaluru, Chennai and Hyderabad currently top the list of preferred destinations for HNI investors looking for opportunities in commercial realty. For example, locations like Gurgaon and Noida are always in demand given their excellent track record as sought after commercial and office locations which offer excellent value for money.

A case in point here is the Noida-Greater Noida Expressway (Sectors 124-144 of Noida) which is an emerging destination for offices with its rapidly improving social infrastructure. 

Cities that have been selected under the Prime Minister’s ambitious 100 Smart Cities scheme are also attracting a lot of interest among the HNI investor community although current trends indicate a wait-and-watch approach with the actual investments being held back until the work actually begins.

Impact on residential realty:
This shift in investment preferences is expected to have a positive impact on the residential realty segment with the rising demand for offices expected to hike demand for homes in nearby locations. It’s an accepted fact that commercial development and the creation of more employment opportunities drive a increase in the demand for quality homes within a short span of time. 

Future scope:
Industry experts are confident that India’ realty segment that has traditionally delivered handsome returns on investment will deliver again in the coming months – a fact that is not hidden from savvy HNI investors tracking the market.

With the economy showing signs of faster growth and major MNC corporations making a beeline to invest and/or set up offices in India, this is clearly the best time to make shrewd investments into the commercial realty sector in order to ensure handsome returns going forward.