Before analyzing whether to invest in commercial or residential property, it must be understood that property is a long term investment. Any investment which is done on long term horizon must provide for at least two things:
1. Regular Income
2. Capital Appreciation
Over the past decade or two, investment in residential property has given high capital appreciation while fetching very poor annual rental returns. Residential rental returns are in the range of 2.5-3% pa while bank interest rate is 8-9%. But whether investment in the coming future will continue to fetch high capital appreciation is a big question mark. With rentals remaining poor in residential property, it’s doubtful whether investment in residential property will remain attractive.
The growth in housing prices has slowed down for the sixth consecutive quarter in India if one considers the RBI’s housing price index which was recorded with lowest growth in 2016-17. If we look at Mumbai in particular, Knight Frank published a report in July 2016 according to which although housing project launches have been at 3-year low in top 8 Indian cities because of huge unsold inventory, but 29% increase was posted for new launches in Mumbai in this period.
Commercial property being barometer of economy follows the economy indicators. Weak economy results in subdue property prices resulting in poor capital appreciation. But commercial rental returns are relatively better @ 6-7% though lower than the desirable rate of 8-9%. This scenario seems to be changing with new laws and investment instruments like REITs being put in place. With economy also expected to show upturn, it’s expected that commercial property will give better rental returns with reasonable capital appreciation possibilities.
Demand for Grade A offices has increased in prime Indian office space markets including Mumbai’s Bandra- Kurla Complex, New Delhi’s Connaught Place and Bengaluru’s MG Road. In fact, HNIs and rich investors are increasingly showing interest in high-ticket office space in India which gives them high rentals and good appreciation. Low vacancy rates in these prime markets are expected to cause further growth in rentals.
To conclude, in the coming time, it may be better to invest in high quality commercial property.
Spacio Realtors is the Mumbai residential and commercial property specialist. The company’s core function of Buy-Sell-Rent is accompanied with consultation in real estate investment opportunities, managing client property investment portfolios and even tax & legal advice on property related matters.