In today’s dynamic world, where various opportunities are spanned across different markets, investors do not hold their position in a lull market for long. Instead, they exit from their holdings and invest in other lucrative opportunities. The same trend is visible in the present real estate market where the residential sector has been sluggish and investors as well as developers are moving towards the growing commercial market.
Indian commercial market is relatively new and has not completed more than 1 -1.5 cyclic market movements. It had seen a boom around 2004-07, a downfall around 2013-14 and again a revival around 2016-17. Nowadays, the attractiveness of commercial markets is cemented by better cash flows as well as higher return on investments due to the availability of long term lease. Developers are witnessing considerable demand for commercial properties in contrast to the residential market. This makes exiting a commercial property easier for both developers and investors unlike the current residential market. Moreover, the construction cost and time per square feet for developing commercial property is comparatively lesser than residential property.
Owing to this trend, some developers in Mumbai, with a portfolio of approximately 20% and 80% in commercial and residential market respectively, have increased their exposure to commercial market and now have holding of approximately 30% and 70% respectively. Developers like Piramal Group in Mumbai and Embassy Group in Bangalore have also increased their investment in the commercial office space recently.
The significance of this trend is apparent in Noida too, as some real estate agents who had 70% residential dealings and 30% commercial dealings have completely reversed their position and are now catering to just 30% residential and 70% commercial demand. This is due to the current slump in the residential market as a consequence of multiple regulatory and policy factors which has been triggered by the bankruptcy filed by renowned names in the sector.
The prosperity of any sector is gauged by the extent of investments made in it. With the advent of REITs in India, the real estate sector is expected to witness a boom. Retail investors are likely to enter the real estate market through these REITs which will give a much needed impetus to the sector. Investors in commercial REITs have opportunities of better income dividends, diversification as well as capital appreciation and that too at a lower risk and increased transparency.
It is also anticipated that the residential market will pick up after the impact of RERA settles down. Nevertheless, with the introduction of REITs in India, investment in the commercial real estate is expected to increase in a medium to long term. Hence, this trend of increase in the investment by developers towards the commercial real estate is likely to continue at a moderate pace.