The real estate sector is facing tough times for some time now, but the commercial segment is still doing well and also getting the maximum attention of investors. In fact, 2019 saw a total PE inflow of $970 million into Indian retail, and commercial realty attracted the maximum private equity investments, totaling nearly $3 billion in the first three quarters. In the retail sector, vacancy levels have come down to 14 per cent in the calendar year 2019. Approximately 7 million square feet of retail space is expected to enter the market in the year 2020, thereby contributing to the overall robust growth of the real estate sector in India.
Growth in this segment is good as investors show great interest in commercial and recently NRIs have also started investing in this segment mainly because of lucrative returns. When we compare the investment in commercial with residential, then it can be said that returns from commercial are better. An increasing number of private equity funds showed interest in the commercial office space in 2018, which was followed by the same in 2019. And now with news of India's first REIT trickling in, the trend of commercial office space having an upper hand in real estate assets will stay. There is likelihood of further infusion of liquidity in commercial property and developers will come up with more projects in this segment.
This segment, which includes industrial, retail and frontier segments such as co-living, is doing well because of good returns in the short and long term.The investors with real estate know-how diverted their attention towards the commercial real estate. Commercial office stock is likely to cross 600 million sq ft and office space leasing in major cities is expected to cross 100 million sq ft by 2020. Co-working spaces in major cities has seen a sharp increase as it reached around 3.44 million sq ft as compared to 1.11 million sq ft in 2017. With the government taking necessary steps for fueling the economy, the sector is likely to bounce back and continue with its good run.
The ease of doing business initiative by the government will have a positive impact on the market and things will improve soon. When we compare the investment in commercial with residential, then it can be said that returns from commercial are better. With the residential real estate becoming end-user driven, the commercial real estate has emerged as a more attractive investment proposition for individual investors as well as institutional funds. Due to the investment potential of commercial spaces, developers are also responding to the demand, which will automatically generate demand for residential. So the symbiosis of commercial and residential bodes very well for the real estate market. A good commercial property gives the average rental yield of 6%-10%, while the rental yield from residential property is 1.5% – 3.5%. The same holds true for capital appreciation in the current market scenario.
(By Sanchit Bhutani, CFO, Bhutani Infra)