The article has been written by Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India. To read more by him and other real estate experts, visit www.joneslanglasalleblog.com/realestatecompass.
Investment into residential projects is currently the preferred route for investors, since the demand for homes in the metros and Tier II cities is virtually limitless. Commercial and retail spaces also present potentially lucrative investment propositions, especially in the larger cities.
The returns in the residential sector are significantly lower (4-6%) than those in commercial spaces (10-12%). Residential space investment is comparatively low risk/low return options, while retail is a moderate risk/returns option. However, capital values are higher in commercial and retail spaces, so they represent larger investments. Moreover, it is more difficult to exit in the case of commercial spaces.
In commercial spaces, it is best to invest in existing, fully-leased assets by reputed developers. The best cities for commercial space investment are Mumbai, Bangalore, Pune, central Delhi and Gurgaon and Noida in the NCR region. Projects in the CBD areas of the prime cities are obviously the most lucrative in terms of ROI, but office properties in these areas are extremely cost-intensive.
For investors with more moderate budgets, the secondary business districts are more realistic options.
Nevertheless, it is inadvisable to invest into any commercial property without first getting at least two expert opinions. This is especially true with under-construction projects, because many developers are cash-strapped on account of the current liquidity crunch. Projected completion dates may not materialize.
In residential, the focus should be on properties that have potential for assured rental yields and capital appreciation. This includes residential projects close to workplace catchments, industrial hubs and locations with high aspirational value. The Tier I cities of Mumbai and Delhi and Tier II cities such as Bangalore, Pune and Chennai are seeing the highest demand by investors. In broad terms, the configurations in greatest demand are 1 and 2BHK flats in the central areas as well as the suburbs, while 3BHK flats in good township projects on the outskirts are also a good option.
As with commercial real estate, investors need to take informed decisions on under-construction residential projects, regardless of location and developer. The same negative financial dynamics that are compromising completion dates of many office buildings hold true for residential projects, as well. If an investor decides to avail of the lower rates of an under-construction residential project, he should ensure that at least 50% of the available units in the project are already sold and that construction has progressed according to schedule is at least at the 50% mark.
Luxury and super luxury housing should be treated with caution as an investment route for at least a year, since demand for such units in many cities is at low ebb at the moment. Investors can take an informed call on certain projects in high-value locations, since there is always a core group of HNI buyers who would purchase units in such projects.
However, such a call must be taken only on the basis of extensive local market research.