There are several important distinctions between investing in residential and commercial property. While they share the fact that they are tangible assets, they differ significantly in terms of risk, capital, income, and returns.
Residential Property in Gurgaon
Single-family homes, townhouses, and apartments are examples of Residential Property in Gurgaon. The property owner can either live in the property or rent out space and earn rental income. Families and individuals typically lease residential properties. As a result, because residential real estate involves renting individuals or families their primary place of residence, there is often an emotional component involved.
Commercial Property in Gurgaon
Non-residential uses of commercial property include hotels, office space, retail shops, industrial buildings, public facilities, etc. Similarly to residential property, the commercial property owner can run a business from it or lease some or all of the space to tenants. Because real estate is not their core business, many companies prefer to rent rather than own the property from which they operate their business. This allows them to free up capital to invest in their core business. As a result, commercial real estate is a significant investment market. Commercial property in Gurgaon is supported by underlying tenants who generate income by producing goods and services. This is not usually the case with residential property, which is seen as a non-productive asset.
What are the differences between investing in Residential and Commercial Property?
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Barriers to entry
Traditionally, commercial property has made it difficult for investors to obtain debt, and banks continue to lend at lower loan-to-value ratios than residential property. For investors, this entails putting more money into the project. Commercial LTV ratios range from 40 to 60 %, whereas banks lend up to 90 per cent on a residential asset. However, increased leverage entails increased risk for the borrower as well as higher interest costs. This high entry barrier has kept many investors out of the commercial real estate market. Even though companies like 100acress is giving all investors access to the once-inaccessible sector by lowering equity minimums on high-grade institutional, commercial property.
It could be argued that commercial property necessitates significantly more research before making an investment decision, which is another reason why investors are hesitant to enter the retail real estate market. Investors in both sectors must investigate the title, covenants, building reports, and market fundamentals. On the other hand, commercial property necessitates further investigation into seismic strength, underlying tenant covenants, operational efficiency, building services condition, outstanding warranties or consents, and so on.
Commercial leases are more likely to include specific terms under which the parent company will guarantee the lease if the tenant fails to meet its obligations. This is a valuable safeguard that is not commonly found in the home. Investing with a manager like 100acress allows investors to tap into the expertise of an in-house investment team, which conducts rigorous and thorough due diligence on every property brought to market, taking the headache out of commercial property investment.
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Returns Profile
Rental income growth is the primary driver of long-term capital growth. Commercial tenants typically sign long-term leases, with leases of more than ten years not uncommon. This is usually built into the lease for commercial property, with fixed and market rent reviews. Specific lease terms may include a mechanism that prevents the rental from falling below the previous level.
It is unusual to find this structure in residential leases, which reduces income certainty for a residential investor. In addition, commercial property arguably allows for more opportunities to augment rental growth through active and efficient asset management that releases value and enhances the returns on property.
Supply and demand constraints drive both the commercial and residential sectors. However, because households pay residential rents, rents are linked to household incomes, and wage growth in OECD countries has been a dismal 6.3 per cent since 2008.
The bottom line for investors is that you can charge more rent per square metre for commercial space than residential space, resulting in a higher return on investment. On average, commercial property will typically yield 5% to 8% per year, depending on location and supply/demand for retail space, whereas residential properties usually yield 1% to 5% per year.
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Risk Profile
In general, cash flows in commercial property are much more stable and secure than those in residential property due to the long-term nature of the leases. Residential tenants typically sign much shorter leases, usually six months or a year, with break clauses that allow them to leave the property with little notice. Compared to commercial property, this implies a higher risk profile of the underlying income stream for the investor.
In contrast to commercial property, the lease structure for Residential Property in Gurgaon typically requires the owner to be responsible for repairs and routine maintenance. It is common in commercial property for the tenant to be responsible for most property management, repairs, and regular maintenance; however, this varies depending on the lease.
Both sectors have historically been plagued by liquidity issues or the ability of an investor to withdraw funds from their investment quickly. The commercial industry has responded with listed property funds and REITs, which provide investors with indirect access to commercial property while also improving liquidity for participants.
Liquidity in direct commercial property, on the other hand, remains constrained within traditional property syndicators. The introduction of a secondary trading platform will significantly improve liquidity in the immediate commercial property space. 100acress is currently developing such a platform, which will allow investors to trade commercial property shares on a secondary platform. Because there are no established platforms that cater to the residential space, current investors must run a campaign through a real estate agent to exit their investment. This procedure can take anywhere between 30 and 50 days to complete.
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Valuation Methods
The residential market can exhibit somewhat irrational valuations, driven more by owner-occupier sentiment than by investor sentiment. Comparable properties influence further evaluations in the area, which are frequently beyond the control of investors. This can lead to increased volatility, as the residential market is arguably more directly exposed to movements beyond one’s control, such as changes in interest rates. Interest rate movements have varying effects on different sectors of the commercial market and over varying timescales. Fundamentals, such as the current value of future income streams, drive commercial property valuations much more.
Key Takeaways
Residential and Commercial Property in Gurgaon can be suitable investments when market conditions are stable, and property is managed correctly. Commercial real estate investment typically carries a higher risk but also a higher reward. Potential investors should consider the commercial and residential real estate sectors separately, or their investment strategy may become unbalanced.
100acress provides investors with the opportunity to own institutional-grade commercial real estate through an entirely digitised on boarding, accreditation, and subscription process for those interested in investing in commercial real estate without the hassle of managing physical property. 100acress also intends to provide a secondary market, allowing investors to sell their equity to other investors. This will provide investors with increased liquidity in a historically illiquid asset class.