Commercial versus Residential property

In the last 25 years of my experience in Real Estate, this is the first time I have experienced a situation so unique wherein the commercial properties as in office premises are CHEAPER than residential premises. The demand for commercial premises is primarily based on the large corporates, be it the large Indian corporates or the international companies setting up their base in India. In the last 5 years with the major slump in the international markets there has been a huge drop in the business sentiment deterring most corporates from any kind of growth or expansion for the time being. The purchase or sale of commercial properties by investors who lease out the same to such corporates is primarily based on such demand for lease, otherwise the demand is for smaller units for self consumption by professionals, self employed and slightly larger units by exporters and small and medium sized Indian Companies who do not mind investing or ploughing back their profits in Real Estate and creating an asset for themselves. 

Typically commercial offices are at least 25-30% higher than the residential premises in the same location, but today because of the International Business environment, the economic slump and the lack of demand on lease for the first time in the history of Real Estate commercial office property is available at the same price as residential properties if not cheaper. So gone are the days when an investor would prefer to invest in commercial premises over residential property. Today even though residential premises do not offer more than 2-3% rental return as against 8-9% return p.a by commercial premises, the capital appreciation in Residential Properties have more than adequately compensated for the rental return.

The huge population, the economic progress in the last few years and the nuclear family concept of our country has contributed to the massive demand in Residential premises and even though with the current policy changes (FDI in retail & aviation) there will be a demand in commercial premises, but it will not be able to match up with the Residential Properties.

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Is this the right time to Invest in real estate?

 With the recent phenomenal appreciation in capital values of Real Estate, I have been frequently asked by manya people ‘Is this the right time to invest in Real Estate? Are these prices going to last? Have I missed the Bus?’

Well all I can say is Real Estate of any country, state or region primarily depends upon 2 factors

(1) The Economy  

(2) The Population

Fortunately we have both in our favor, no wonder that real estate prices have appreciated more than 600% in the last 6 years. Besides we Indians are very emotional. Unlike people in most developed countries, a roof above our head a Home to call your own means a lot to us. Hence we beg, borrow, liquidate all our investments, take huge loans on our future earnings and forgo & compromise with all our comforts and luxuries to buy that house or your ‘DREAM HOME’ even though we have the option of renting that same house for a fraction of the cost of that apartment, or to be precise just 3% p.a or 0.25% per month of the capital value of the apartment. For example a 3 Bedroom apartment approx. size of 2000 sqft costs anything between 6 -7 crores in Bandra, a residential suburb in Mumbai and the same apartment is available for approximately Rs. 1.50 lacs rental per month against the very minimal Bank interest of 9% p.a. A straight saving of 6% p.a which can be substantial savings and if invested smartly with tax savings instrument with the correct blend of prudence can help you leverage against inflation.

So if you are not an overly emotional person and can manage your finances, opt for a Rental apartment for atleast 2-3 years, leverage your capital and keep your eyes and ears open for an opportunity to invest in Real Estate, rest assured opportunities are there for the seekers.

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