Why it interests property investors and how safe is this investment?
Property investors in India love to buy property which pre-rented or pre-leased. And if the tenant is a bank, then they consider it even better. Banks are considered as safe tenants and they are assured to occupy the premises for a longer period.
So why is pre-leased properties investors’ favorite and how safe is their investment when pre-rented to banks?
Investment in pre-leased properties or acquiring a property with specific intention to earn rental income with long term capital appreciation has always been an attractive proposition for HNI investors. In India, due to oversupply of investors’ properties in residential segment, the rental returns on residential properties are merely 2-4% p.a. However, investment in commercial properties offer returns in the range of 6-9% p.a. depending upon the quality of lessee and the asset.
Due to uncertainties and economic slowdown, investor looks for quality lessee and there has been fancy to grab properties with Banks as tenant, even if they offer much lower return of 6-6½% p.a. It is considered that Banks are safe tenants and they are assured to occupy the premises for a longer period.
With the changing economic scenario, increasing competitiveness and improved technology platform, this kind of assumption may not remain blindly true. Banks are moving to restructuring and optimization of their resources which may lead to close down and consolidation of their branches. With technological advancements, the banking transactions are also moving closer to tech-enabled self-service model. For example, take this recent announcement by SBI that they are planning to shut/ relocate 30% of its branches.
The investor must keep in mind that this presumption of safety may not hold for all the time and he should be extra careful and do more due diligence of a particular investment because if the bank tenant is lost, the investor may be stuck with property for which he has paid premium and have limited alternate market.
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