Should investors give in to the office space buzz?
PLAN Experts do not advise retail investment in physical commercial real estate—shop, office or land—at the moment
Recently, finance minister Nirmala Sitharaman said in a conference that several important indicators have emerged in the recent past pointing towards green shoots in the economy. She talked about seven such indicators, one of which was the fund flow coming from outside the country. The minister said that global sentiment was in favour of India and the country received foreign direct investments (FDI) of $24.4 billion from April to November 2019 compared to $21.2 billion in the corresponding period of the previous year. According to various estimates, commercial real estate attracted a significant portion of the total FDI.
“The year 2019 concluded with private equity (PE) investment volumes being recorded at healthy levels of ₹43,704 crore ($6.2 billion) in real estate, a 3% year-on-year increase. Foreign investors made up a significant share (72.9%) of the overall investment inflows during 2019,” according to data compiled by Cushman & Wakefield India, a real estate consultancy.
Though inflows to the commercial real estate sector remain strong, the residential segment is not as popular as it was a decade ago with investors, developers and financiers alike.
A decade ago, demand for the residential segment was high, which has waned now with the market facing various challenges, including stalled project and delays. Most buyers are now sceptical of investing in residential real estate for returns and are only looking at buying for end-use, which is what experts suggest as well.
Those interested in investing in the real estate sector are more optimistic about the commercial segment instead. But does it make sense for retail investors to buy commercial property? Read on to find out.
THE DEMAND
Despite the slowdown in the country, various reports indicate continuous improvement in commercial real estate—be it supply, absorption or increase in rentals and capital values. But mostly the demand is not from domestic companies. “Commercial real estate in India is driven by demand from large multinational corporations who have set up development centres, back office operations and research facilities in cities like Bengaluru, Hyderabad, Pune and Gurugram. Steady demand for large office spaces from these tenants has led to significant growth in office supply and stock in these cities,” said Kunal Moktan, chief executive officer and co-founder, Propshare Capital, a tech based commercial real estate investment platform.
Multinationals occupying office space in India for their back-end work is the reason commercial real estate is doing well despite the slowdown, said experts. “A slowdown in the Indian economy is not correlated to office demand as most of the tenants are international companies who do not earn revenues from India. Today, tenants like CISCO, Goldman Sachs, JP Morgan, Merrill Lynch, Amazon and GE have their largest offices outside of their home countries in Indian cities,” added Moktan.
Anshuman Magazine, chairman and CEO (India, South East Asia, Middle East and Africa) of CBRE, a real estate consultancy firm, agreed. “The demand was largely driven by tech corporates, with multinationals accounting for more than 70% of the overall space take-up by these firms,” he said.
THE SUPPLY
There are different types of commercial properties you can invest in—a small shop in a neighbourhood housing complex or a mall, or a small office space, or even a joint investment in a bigger office space. Each of these should be looked at from different perspectives—the investment amount, tenant profile, returns, exit options and the associated risk.
However, right now, the supply of office spaces is higher as they are in demand. Within this, Grade A or premium office spaces comprise the chunk of the supply. Grade A properties are those that are located in central business districts and are also well-managed.
For investing in such commercial spaces, an investor needs to have deep pockets. “Commercial real estate has been a very difficult asset class to invest for retail investors by virtue of their large ticket sizes, sophisticated understanding of lease structures and the need for active asset management. Ticket sizes range from ₹20 crore-100 crore for Grade A assets with multinational tenants, which is usually beyond what ordinary investors can afford,” said Moktan.
WHAT SHOULD YOU DO?
Experts do not advise retail investment in physical commercial real estate—shop, office or land—because it requires high ticket sizes as well as proper due diligence in terms of legal and future market outlook which may be difficult for you to manage. Also, maintenance of such properties is a tough task. At the same time, physical real estate is an illiquid asset—there may not be enough demand for the asset when you need to sell it. It also involves dealing with practical issues like transacting with agents and lawyers, besides paying high transaction costs such as brokerage, stamp duty and legal fees.
“As a concept, investing in commercial real estate is a better idea, but it’s a very risky asset. For instance, there are very few malls which are running successfully; in fact, most of them are struggling. Maintenance of commercial real estate like managing the tenants, collecting rent, paying property tax on time and so on, is also cumbersome,” said Rohit Shah, founder and chief executive officer, Getting You Rich, a financial planning firm.
But if you still want to invest in commercial real estate to diversify your portfolio, first assess your risk appetite, investment horizon and the purpose of investment (rental return, longterm investment and diversification).
One way to reduce the risks is investing in real estate investment trusts (REITS) instead of physical assets. Though these instruments come with their own risks, they help you address the challenge of dealing with large ticket sizes and are transparent.
“India’s first listed REIT, Embassy Office Parks’ REIT, was successful in the commercial office sector and reported a 15% increase in revenue from operations for the quarter ended September 2019 over the previous quarter,” said Shishir Baijal, chairman and managing director, Knight Frank India, a real estate consultant.
BRINGING NATURE IN
There’s enough evidence, the more natural light you bring into your work-spaces, the happier everyone is. Designers are now finding ways to counter the negative physiological and psychological impact of blue light from all our laptops and mobile screens with Biophilic design. These are systems that mimic natural light and regulate our circadian rhythms and are a smart solution for countries not blessed with as much sun as the tropics are.
There are firms specializing in biophilic garden environments that improve productivity and wellness. You can do it as well by opting to build in and around trees, designing gardens on walls, green breakouts zones within the office and outside in the campus and lots of indoor potted plants.
THE “THIRD SPACE”
The nature of the workforce is changing. We’re entering a decade of digital nomads and gig economy. This new workplace model challenges us to think of design as the new cool “third space” where lines between home and work, personal and professional are blurred. Third spaces will allow people to bring their laptops, who will then choose to work alone or in a group. They will meditate, ideate, collaborate, workout or grab a bite. They will go there when they feel like. The rest of the time, they will work out of home, in an uber or metro, or even in the cloud. It saves them expensive real estate costs. Rethinking work-spaces to align
THE IMPACT OF TECH
From densely packed desks to cubicle format to informal, open plans and now third spaces, offices are evolving. And each of these changes has been matched by even faster developments in technology, enabling communication & collaboration across time zones and geographies. What’s next? Plenty.
Augmented reality tools and devices which allow people to collaborate in real-time from across the globe using all five senses will be the next big thing in workplace collaboration. From AI transforming boardrooms into multimedia platforms to digital whiteboards enabling video-enhanced collaboration, workplace technologies will revolutionize our lives, creating a more productive and efficient world. Your workplace design today must keep in mind the coming of age of this technology and combine it with office layouts which transform team collaboration. This is the future of work. And there are challenges too. Security, privacy and confidentiality are the biggest one of the shared spaces.
MULTINATIONALS OCCUPYING OFFICE SPACE IN INDIA FOR THEIR BACK-END
WORK IS THE REASON COMMERCIAL REALTY IS DOING WELL DESPITE THE SLOWDOWN
SUSTAINABILITY
For a number of millennials and Generation Z, the climate crisis is the most pressing issue. It’s no longer cool to have a workplace that is not sustainable or environmentally conscious. In the 100s of ways that you can make workplaces truly sustainable, being energy efficient and saving 20-30% of your energy costs, is only the beginning.
The truly caring workplaces will keep sustainability at the center of designing or retrofitting an office.