The Non Resident Indian (NRI) might as well remember 2011 as the year of the 'lazy investor'. For NRIs have gained 18% since August 2011, simply by remitting money to India; no effort at all. But as we approach 2012, NRIs must take stock of how best to use their remittances. The traditional favorite has always been real estate. But in this volatile market, how great an investment is it? Is this a good time to buy property in India? What kind of property is a good bet? Let's try to find answers.
Commercial property
Is it a good time to invest in commercial property in India?
"Yes," says Sanjay Dutt, CEO - Business, Jones Lang LaSalle India. "There are a number of reasons that come to mind. Firstly, India's growth story remains intact with just some relatively minor turbulence in the short term. Secondly, for NRIs, right now there is the straight advantage of exchange rate. The rate will eventually stabilize with Government intervention. Thirdly, property valuations, especially in the commercial space, have come down and are currently undervalued by 15-30%. Fourth, some of the developers are significantly leveraged (paying 13% interest rate for construction and 15% to 21% for land from NBFCs and private lenders). As a result they now want to take some cash out and invest in mid or low market fast moving residential. In short, there is pressure on developers. Lastly, vacancy rates in the office space are expected to be high. For instance, out of the 60 million square feet of supply that is expected to come in by the end of 2011, 25% is expected to be vacant. This will force developers to either lease cheap and/or sell cheap," he explains. "If you want sustainable yields and capital appreciation, this is the best time," Dutt concludes.
Having said that, Berinder Sahni Associate Director, Investment Services, India - Colliers International, advices that investors must stay invested in a property for at least the next 5 years to see a good return.
Which are the top cities for commercial real estate investment?
Sahni and Dutt, both list the following cities: Mumbai and Pune in the West, Delhi and NCR in the North and Bangalore, Chennai, and Hyderabad in the South.
What kind of commercial property should NRIs opt for? What are the potential yields?
There are 3 broad options in commercial property: front office space (like banks, MNCs), IT office space and high street retail space. The kind of property that you choose would depend on your budget and risk profile. "In the case of office space, a good quality unit in Delhi and Mumbai would come at a budget of at least Rs 15-20 crore. In other cities like NCR, Pune, Bangalore, Chennai and to an extent in Hyderabad, you would have to put in at least Rs 10-15 crore. These properties would generate a rental yield of 10.5-11%," says Dutt.
Sahni adds, "The minimum size for a good commercial office space will be 2500 square feet. IT office space may come at a lower purchase price but the risk in IT spaces is higher right now. We believe that commercial office space can give you rental yield of 8-9% pre tax while IT spaces can generate slightly higher yields of 10-11% because of the inherent risk. Also, as you go closer to prime locations like Central Business District (CBD) areas, yields for all kinds of properties will drop to around 7%. Retail properties are slightly easier to handle because it's easier to find a tenant. Therefore, yields also tend to be lower at 6-7%. Moreover you can buy smaller spaces, as small as 500-600 square feet, in retail properties."
You can also choose the property based on your risk profile. For instance, you can buy a space in an under construction or new unit where you will be able to buy for cheap but you will also have to put in efforts to find a tenant and lease out the property. "We usually recommend our NRI clients to invest in 'pre-leased' properties, that is, those properties that already have a lease agreement in operation. You might have to pay a little more as compared to under construction or fresh properties but you are assured of lease rentals. Pre leased properties usually have a 3-5 year lock-in with a lease term of 9 years. Even smaller office spaces will have a 3 year lease term," explains Sahni.
What is the kind of capital appreciation one can expect from commercial property?
Both Sahni and Dutt believe that the commercial market is depressed right now. According to Sahni, you can expect a total annual return (rental yield plus capital appreciation) of at least 12% from commercial property right now. Dutt believes that commercial properties that are currently undervalued by 15-20% would rise to fair value within the next 2 years.
Having said that, in the property investment game, everything depends on location. "Outer ring road in Bangalore for instance will do better than Whitefield in terms of capital appreciation. Lower Parel and BKC in Mumbai will do better than Thane," Dutt explains.
Residential property
Is it a good time to invest in residential property in India?
"Anytime is a good time to buy a residential property in India," says Poonam Mahtani National Director, Residential Services, India - Colliers International, and she is quick to add, "It all depends on the location, developer and your risk appetite." We will come to these 3 factors in the next few points.
What are the key locations for residential property?
"Suburban locations of every metro are great investment options. So for instance, you have Gandhinagar near Ahmedabad, Nalasopara, Dahisar, Panvel, Pen and Kalamboli near Mumbai," says Dutt.
Mahtani places her bets on GST road, Porur and OMR in Chennai, North Bangalore largely Hibbal, Saha Shivnagar, Sarjapur Road and Whitefield in Bangalore, Dwarka Expressway in Gurgaon, Bandra East, Goregaon, Panvel in Mumbai and certain select developments in Lower parel, Mahalaxmi and Parel in Central Mumbai.
What kind of residential property should NRIs invest in? What are the potential yields?
"Under construction properties are great bets for those investing in residential property. There are risks of delays and often these delays are beyond the control of the developer. For instance, there may be policy changes or genuine raw material shortages. But if you choose a reputed developer and are mentally prepared for a delay of about 24 months, I assure you, the returns will be handsome," Mahtani says.
Yields from residential property are not high, "Yields can be as low as 3% but in the case of residential property, the important thing is capital appreciation," Dutt explains. Mahtani agrees, adding, "In residential property, giving your house on rent will be for reasons other than great returns. Your house will be maintained, your EMIs if any would get covered."
What is the capital appreciation one can expect?
Mahtani gives us an interesting matrix that explains the risk return paradigm.
The above would vary depending on location of the property, developer reputation and overall economic sentiments.
Other options
For those with lower budgets, a real estate fund maybe a good option. These are similar to mutual funds but are usually close ended. That is, investors can enter only at the time of launch of the fund and must stay locked in for the duration of the fund. They have a minimum ticket size of at least Rs 25 lakh. Apart from lower entry price, these funds also offer the benefit of diversifying into various real estate properties and that too, with the help of a professional manager.
To sum up
Another important thing in property investment, whether residential or commercial, is to buy from a developer of repute who has all his approvals in place. Secondly, it is best to appoint a lawyer to check all these approvals. Sahni also adds, "Commercial property needs greater active management as compared to residential. So make sure you are prepared to put in the time and efforts."
Investing in property can be a challenging task, apart from being high ticket. It is best to consult a professional before taking the plunge. Dutt sums it up aptly: "Location, Title, Development - Mid and low segment residential or Office (IT or Corporate office) with financial closure and marketing ability of the developer, lower rental, covenant of the lease for tenanted property and tenant profile and finally 'timing' all add up to a 'good investment decision."
Commercial property
Is it a good time to invest in commercial property in India?
"Yes," says Sanjay Dutt, CEO - Business, Jones Lang LaSalle India. "There are a number of reasons that come to mind. Firstly, India's growth story remains intact with just some relatively minor turbulence in the short term. Secondly, for NRIs, right now there is the straight advantage of exchange rate. The rate will eventually stabilize with Government intervention. Thirdly, property valuations, especially in the commercial space, have come down and are currently undervalued by 15-30%. Fourth, some of the developers are significantly leveraged (paying 13% interest rate for construction and 15% to 21% for land from NBFCs and private lenders). As a result they now want to take some cash out and invest in mid or low market fast moving residential. In short, there is pressure on developers. Lastly, vacancy rates in the office space are expected to be high. For instance, out of the 60 million square feet of supply that is expected to come in by the end of 2011, 25% is expected to be vacant. This will force developers to either lease cheap and/or sell cheap," he explains. "If you want sustainable yields and capital appreciation, this is the best time," Dutt concludes.
Having said that, Berinder Sahni Associate Director, Investment Services, India - Colliers International, advices that investors must stay invested in a property for at least the next 5 years to see a good return.
Which are the top cities for commercial real estate investment?
Sahni and Dutt, both list the following cities: Mumbai and Pune in the West, Delhi and NCR in the North and Bangalore, Chennai, and Hyderabad in the South.
What kind of commercial property should NRIs opt for? What are the potential yields?
There are 3 broad options in commercial property: front office space (like banks, MNCs), IT office space and high street retail space. The kind of property that you choose would depend on your budget and risk profile. "In the case of office space, a good quality unit in Delhi and Mumbai would come at a budget of at least Rs 15-20 crore. In other cities like NCR, Pune, Bangalore, Chennai and to an extent in Hyderabad, you would have to put in at least Rs 10-15 crore. These properties would generate a rental yield of 10.5-11%," says Dutt.
Sahni adds, "The minimum size for a good commercial office space will be 2500 square feet. IT office space may come at a lower purchase price but the risk in IT spaces is higher right now. We believe that commercial office space can give you rental yield of 8-9% pre tax while IT spaces can generate slightly higher yields of 10-11% because of the inherent risk. Also, as you go closer to prime locations like Central Business District (CBD) areas, yields for all kinds of properties will drop to around 7%. Retail properties are slightly easier to handle because it's easier to find a tenant. Therefore, yields also tend to be lower at 6-7%. Moreover you can buy smaller spaces, as small as 500-600 square feet, in retail properties."
You can also choose the property based on your risk profile. For instance, you can buy a space in an under construction or new unit where you will be able to buy for cheap but you will also have to put in efforts to find a tenant and lease out the property. "We usually recommend our NRI clients to invest in 'pre-leased' properties, that is, those properties that already have a lease agreement in operation. You might have to pay a little more as compared to under construction or fresh properties but you are assured of lease rentals. Pre leased properties usually have a 3-5 year lock-in with a lease term of 9 years. Even smaller office spaces will have a 3 year lease term," explains Sahni.
What is the kind of capital appreciation one can expect from commercial property?
Both Sahni and Dutt believe that the commercial market is depressed right now. According to Sahni, you can expect a total annual return (rental yield plus capital appreciation) of at least 12% from commercial property right now. Dutt believes that commercial properties that are currently undervalued by 15-20% would rise to fair value within the next 2 years.
Having said that, in the property investment game, everything depends on location. "Outer ring road in Bangalore for instance will do better than Whitefield in terms of capital appreciation. Lower Parel and BKC in Mumbai will do better than Thane," Dutt explains.
Residential property
Is it a good time to invest in residential property in India?
"Anytime is a good time to buy a residential property in India," says Poonam Mahtani National Director, Residential Services, India - Colliers International, and she is quick to add, "It all depends on the location, developer and your risk appetite." We will come to these 3 factors in the next few points.
What are the key locations for residential property?
"Suburban locations of every metro are great investment options. So for instance, you have Gandhinagar near Ahmedabad, Nalasopara, Dahisar, Panvel, Pen and Kalamboli near Mumbai," says Dutt.
Mahtani places her bets on GST road, Porur and OMR in Chennai, North Bangalore largely Hibbal, Saha Shivnagar, Sarjapur Road and Whitefield in Bangalore, Dwarka Expressway in Gurgaon, Bandra East, Goregaon, Panvel in Mumbai and certain select developments in Lower parel, Mahalaxmi and Parel in Central Mumbai.
What kind of residential property should NRIs invest in? What are the potential yields?
"Under construction properties are great bets for those investing in residential property. There are risks of delays and often these delays are beyond the control of the developer. For instance, there may be policy changes or genuine raw material shortages. But if you choose a reputed developer and are mentally prepared for a delay of about 24 months, I assure you, the returns will be handsome," Mahtani says.
Yields from residential property are not high, "Yields can be as low as 3% but in the case of residential property, the important thing is capital appreciation," Dutt explains. Mahtani agrees, adding, "In residential property, giving your house on rent will be for reasons other than great returns. Your house will be maintained, your EMIs if any would get covered."
What is the capital appreciation one can expect?
Mahtani gives us an interesting matrix that explains the risk return paradigm.
| Stage | Level of completion | Capital appreciation | Time to completion |
| I | Developer has just acquired land | Minimum 50% absolute returns until completion; | 5-7 years |
| II | Plans are in place but approvals are not | Minimum 35-40% absolute returns until completion | 3-5 years |
| III | Approvals in place, project is launched | Minimum 25-30% absolute returns until completion | Up to 3 years |
| IV | Ready property | Minimum 10-15% year on year capital appreciation |
Other options
For those with lower budgets, a real estate fund maybe a good option. These are similar to mutual funds but are usually close ended. That is, investors can enter only at the time of launch of the fund and must stay locked in for the duration of the fund. They have a minimum ticket size of at least Rs 25 lakh. Apart from lower entry price, these funds also offer the benefit of diversifying into various real estate properties and that too, with the help of a professional manager.
To sum up
Another important thing in property investment, whether residential or commercial, is to buy from a developer of repute who has all his approvals in place. Secondly, it is best to appoint a lawyer to check all these approvals. Sahni also adds, "Commercial property needs greater active management as compared to residential. So make sure you are prepared to put in the time and efforts."
Investing in property can be a challenging task, apart from being high ticket. It is best to consult a professional before taking the plunge. Dutt sums it up aptly: "Location, Title, Development - Mid and low segment residential or Office (IT or Corporate office) with financial closure and marketing ability of the developer, lower rental, covenant of the lease for tenanted property and tenant profile and finally 'timing' all add up to a 'good investment decision."