Why do you earn higher yield in Commercial Rentals than Residential in India?

Investments made to get regular rentals are a common investment pattern in India. It started with residential properties but in the recent years there has been more interest in the commercial properties instead of the residential ones. There are three key ingredients to note when making an investment to get a good rental yield – location, possibility of capital growth and tenant demand. The standard benchmark for good rental yield is 8%. In India the rental yields for residential properties, even in prime location have been as low as 2-2.5%, hence making it hard to attract the investor community. The grade A commercial properties on the other hand have been known to yield rental values as high as 10%.

Aside from the obvious factor of the yield there are few more reasons why investors are turning to commercial property investments –

Lower Vacancy Rates

The advice for investing into commercial properties starts with the most basic of investing into a Grade A property. These properties are generally in prime locations with good construction hence making them the most in-demand properties. Thus, the chances that you have a property vacant is less.

Longer Tenures

Residential properties are generally leased for a period of a year and most face a high turnover. The tenure of rental for a commercial property is longer with most leases starting from 3-5 years as the minimum period. This gives more security for the investor.

Lower Risk

Residential properties have higher tenant turnover, more maintenance and lower returns. This makes them a risky investment. Commercial properties on the other hand have more predictable income streams with stable tenants over longer periods of time.

Professional Maintenance

Maintenance and upkeep of a residential property is more expensive when compared to the commercial properties. There are agencies than manage the day-to-day upkeep of commercial properties, making them more hassle free.

Higher Liquidity

The Real Estate Investment Trust (REIT) regulations, have now made it easier to create a portfolio of commercial properties than residential properties. Also, since investors generally look for Grade A properties to invest into for Commercial rentals, there is always a high demand for these as supply is limited. Thus, off-loading these kinds of properties would be a lot easier than a residential property.

Ease of Leasing

Commercial properties are leased against registered contracts to companies and thus are more secure. You can choose to lease as a fully furnished office space or just a bare shell space without investing into the interior works as well. This flexibility is not available for a residential property.

Keeping all these points in mind, before investing into a commercial property, it is important to examine the investment size, location, construction, and tenure before making the final decision.

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