In most countries, real estate comprises a major part of overall investments. It is because a real estate investment is considered a safe, tangible, and risk-mitigated investment. Traditionally, investing in real estate meant purchasing a house or a residential unit. But, in the past few years, with the real estate sector growing and maturing, retail and commercial real estate has also started gaining prominence.
What is commercial property?
Before proceeding with the concept of investing in commercial real estate, one must understand what commercial properties refer to. These include:
- office buildings
- apartment buildings
- retail buildings
- industrial buildings
- mixed-use buildings, where one can use the property as an office, apartment, or retail
It is also essential to understand what is retail investing. A retail investment means investing in a high street or mall where the tenant runs a cinema, restaurant, or retail store.
Investors in real estate retail can rent, lease, acquire, manage, or sell locations ranging from pop-up shops and individual businesses to shopping malls. In India, retail stores comprise all kinds of businesses, from pharmacies and dry cleaners to shopping malls and cafes.
Why should one invest in retail real estate?
There are many challenges but also advantages to investing in retail. Firstly, rental yields in retail are higher when compared to residential spaces. Secondly, owning a retail asset lowers the overall cost if one wants to launch a business later. Investing in commercial property is a good idea due to several reasons:
1. Ease in dealing with tenants
One of the most vital benefits of commercial property investment is that the tenants are retail chains, banks, or corporate houses. Dealing with such entities is relatively easy, and there isn’t much hassle involved when it comes to acquiring the rent. If the tenant is a reputed corporate or bank occupying one floor or section of the property, rental yield for the rest of the property is likely to appreciate.
2. Higher rental income
When evaluating the benefits and demerits of a commercial property, start by comparing which investment gives a higher rental income. The rental yield from a commercial or retail property investment is much higher than from residential property. However, there is no comparison between rental income from commercial real estate property and residential property, as these spaces have their own function.
Moreover, if the condition and location of the commercial property are good, the income can be even higher. Therefore, for those who wish to invest with the goal of earning potential income through rent, retail real estate is a good option.
3. Better maintenance
Retail tenants have a vested interest in maintaining their stores because that is what attracts customers. Consequently, retail tenants have the same interests as the property owners, which ensures that the property is well-maintained. When the quality of the property does not deteriorate, its investment value is also likely to appreciate.
4. Zero furnishing cost
The furnishing cost of a retail investment is zero. This is an essential advantage of investing in commercial property. After renting out the property to a tenant, the furnishing costs are theirs. So, an investor can provide an unfurnished property that the tenant can design per the essential guidelines. For instance, the layout requirements for a bank will be different from a department store.
5. Limited hours of operation
Most businesses stop their operations after some fixed hours daily. Thus, their hours of operation are likely to be the same as the investor’s hours. A commercial property owner can rest at night without worrying about late-night calls from the tenant for concerns regarding repairs or the misplacement of the key. Moreover, most commercial properties have digital security systems. So, if anything goes wrong at night, the alarm company informs the proper authorities.
6. Portfolio diversification
Commercial real estate helps in portfolio diversification and mitigates an investor’s portfolio risk to a great extent. One can choose to invest in different types of assets, including retail, office, mixed, etc., depending on the budget and resources available. Similarly, one can expand geographically in multiple cities to benefit from the rates in different markets.
Even in a regular portfolio consisting of stocks and bonds, adding commercial stocks can introduce the portfolio’s resilience. Compared to bonds and stocks, commercial realty is not very susceptible to market risks and shocks.
Making a real estate investment decision is difficult, especially when one has to pick between a residential property and a commercial property. Most new investors feel investing in commercial property is for seasoned investors and renowned businessmen only.
However, the trends and preferences are shifting, and investors are seeing commercial real estate as a sophisticated way to earn elevated yields. The sector is growing, making it a good time to invest in retail real estate for steady rental income, attractive capital appreciation, and portfolio diversification.
Disclaimer- This article is based on the information publicly available for general use as well as sources mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.