Want to buy Commercial Office Space - This is the right TIME Part-1

With the economic slowdown about to end, experts are suggesting people to invest more into Real Estate which is showing positive signs of comeback. If you want to buy Commercial property, then this is the right time. For just Rs 5 Lakh there are commercial office space available at one of the best corporate locales in India - "Nariman Point, Mumbai". The 30-40% decline in property prices(from peak levels), coupled with firming interest rates have resulted in private equity (PE) funds eyeing investment opportunities in real estate rental space. A few fund houses have already begun seeking investment commitments from investors, indicating 16% to 22% as annualised portfolio returns.

PE funds investing in real estate rental space follow a simple investment strategy. These funds are suited for investors who are risk-averse and prefer returns similar to those from fixed income schemes. According to PE industry officials, Milestone Capital Advisors, Xander Real Estate Partners, Indiareit Fund Advisors and an investment arm of Delhi-based real estate company DLF are planning to launch rental yield funds in India.

“Real estate rental funds are launched when property rates are close to their troughs. This helps funds to buy property at lower prices. Moreover, yields of investments increase in a rising interest rate environment,” said Ashish Joshi, managing partner, Milestone Capital Advisors, which raised money for a second fund investing in rental assets.

A ‘rental yield PE fund’ only invests in properties that are either occupied or under long-term lease or rent. In simple terms, the money collected from investors is used to buy out the property from the current owner. Once the property is acquired, the PE fund becomes eligible to receive rent from tenants. The rent portion is restructured or re-negotiated regularly in order to meet the return profile of the investor. The fund (and its investors) gain by way of rent recovery and appreciation in property prices. PE funds, normally, invest in commercial property. The managers route a major chunk of the pool into office properties and the remaining into IT/ITeS parks, shopping malls and warehouses.

“The segment looks good as rentals are likely to go up 10-15% over the next few months. Demand for commercial real estate space will go up as supply has come to a standstill post the economic slump. This will not only improve yield for investors but also increase overall commercial property value,” said Kamal Khetan, vice-chairman & MD, Piramal Sunteck Realty.

Rental returns from real estate investments have been traditionally higher in India compared to other Asian countries. This is mainly due to the restrained capital flows and the lack of an organised institutional investment market. According to real estate experts, a sharp correction in rentals during 2008 and first half of 2009 will result in rentals surging over the next few months. The rental market usually reacts to the surge in equity market with a 5 to 8-month lag.