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Financial Independence Through Commercial Real Estate Investing
The motto among 21st century working professionals (ahem, millennials), is FIRE: Financial Independence & Retire Early. And in this pursuit, many individuals are exploring a lot of not so traditional investment avenues to diversify their portfolios.
One of these avenues, commercial real estate, is gaining popularity in the real estate sector in India, and here’s why:
As per Mordor Intelligence, the size of the India commercial real estate market is projected to be USD 40.71 billion in 2024 and grow at a compound annual growth rate (CAGR) of 21.10% to reach USD 106.05(!) billion by 2029.
Based on Knight Frank’s highly anticipated New Horizon 2024, there will be a surge in demand in the Indian real estate market, notably residential & logistical. And with a projected Compound Annual Growth Rate (CAGR) of 9.2%, the Indian real estate market is poised for sustained growth.
Commercial Real Estate Market in India
- Based on Mordor Intelligence’s CRE in India report 2024, the size of the India commercial real estate market is projected to be USD 40.71 billion in 2024 and grow at a compound annual growth rate (CAGR) of 21.10% to reach USD 106.05 billion by 2029.
- The size of the market directly co-relates to the new office supply being added to it. And as per JLL India, combined 59.3 million sq. ft. office supply is expected to be added to the metropolitan cities of Hyderabad, Mumbai, and Bangalore by 2025.
Commercial Real Estate for Passive Income
- Passive income connoisseurs can find hidden gems in India’s commercial real estate market.
- The country’s economy is growing, urbanization is burgeoning, and favourable demographic trends contribute to a rising demand for commercial spaces.
- Office buildings, retail outlets, and industrial warehouses comprise a spectrum of commercial properties that can present investors with a broad range of options for capitalization.
- For those striving to achieve FIRE, investing in commercial real estate presents numerous advantages: notably, the potential for passive income.
How CRE Can Make You Financially Independent, Retire Early
- According to Knight Frank, India saw a 33% Year on Year (YoY) increase in office leasing activities when it came to commercial real estate investment. Bangalore, Mumbai, and New Delhi took the lead in this.
- Unlike residential properties; commercial spaces usually demand higher rental yields – thereby supplying investors with a consistent cash flow stream. Commercial real estate offers a dependable avenue for passive income: it can either supplement or entirely replace traditional employment earnings.
- This can be done through the provision of either leased office spaces to businesses, or alternatively by renting out retail stores.
Ride Out Market Volatility
The primary appeal of investing in commercial real estate is that commercial leases offer longer term leases than their residential counterparts. Thus, even during periods of economic downturns, investors can be secure with stability and predictability in the eventuality of capital appreciation.
The implication is clear: reduced turnover and a diminished number of vacancies lead to consistent rental income over prolonged periods. Remember, historically, real estate has been the safest and most secure investment model.
Commercial Real Estate Rates of Returns
- Understanding the potential rate of returns is crucial in evaluating commercial real estate investments. Specific returns can vary based on a number of factors. These include: Property type, location, market conditions, demographics, and so on.
- Traditionally, commercial real estate investments in India have had attractive yields. Annual returns often fall within the range of 7% to 12%, up from 4-6% returns provided from residential and the housing sector.
- This is not accounting for capital appreciation. Your commercial property investment can multiple over time, with the right urbanisation and development around it.
- This is why location is key. This is particularly evident in rapidly developing urban centres where property values tend towards steady appreciation over time.
Investing in Commercial Real Estate for FIRE: A Case Study
- Consider this hypothetical scenario: Let’s say you want to invest in commercial real estate & have ambitious aspirations of achieving FIRE within 15 years.
- By identifying the right opportunity for you, such as fractional ownership of commercial real estate, you can invest in shared ownership of high end commercial values such as prime office spaces located in trophy commercial hubs.
- Investing in fractional ownership of commercial real estate is done through fractional ownership platforms (FOPs), such as Assetmonk. By making a minimum investment of 25 lakh INR into an attractive commercial property, you can substantially grow your initial investment.
- Combining rental income and capital appreciation, let’s say your investment yields an average annual return of 12% over 15 years. The next step would be to diligently reinvest profits, optimise and diversify your portfolio to achieve risk mitigation, and reap the benefits from your passive income.
- Thus, investing in commercial real estate for FIRE can allow you to attain financial independence and retire far earlier than anticipated.
Commercial Real Estate: The Rundown
- Properties designed for business purposes, such as office spaces, retail centres, industrial warehouses, and hospitality establishments fall under the umbrella of commercial real estate. Businesses lease these properties and this generates rental income for the property owners.
- Opting to invest in commercial real estate offers a distinct array of advantages: potential capital appreciation – an exponential increase in value over time & regular rental income that provides stability with consistent cash flow. Moreover, there are also tax benefits that come with investing in commercial real estate.
Why Commercial Real Estate over Residential?
Investors today are choosing to invest in commercial real estate for a number of compelling reasons.
Firstly, commercial properties are offering higher returns compared to residential properties. Businesses usually sign long term leases, provide a stable & predictable income stream.
Stability During Economic Downturns
Another important factor contributing to the popularity of commercial real estate is its resilience during economic downturns. Unlike residential real estate, which may be affected by fluctuations in consumer demand, commercial properties often have more stable tenants, reducing the impact of economic volatility.
As per real estate consultant CBRE, leasing demand for commercial properties is expected to remain stable during 2024. Demand will be driven through industrial & corporate sectors in Mumbai, Delhi NCR, Bengaluru, and Chennai.
Moreover, commercial real estate offers investors the opportunity to diversify their portfolios, reducing risk exposure to a single asset class. This diversification can act as a hedge against market uncertainties, contributing to a more robust and balanced investment strategy.
Tips for Financial Independence From Commercial Real Estate
Strategic planning and informed decision-making are paramount to achieving financial independence through commercial real estate. Let these key steps guide you on your investment journey:
Educate Yourself
Gain a solid understanding of market dynamics, property types, and potential risks involved. Knowledge is crucial before diving into commercial real estate investment.
Keep yourself up to date with real estate trends and market conditions. This will help you in making informed investment decisions and narrowing down the right property for you.
Define Your Investment Goals
Articulate your financial objectives and risk tolerance with clarity. If you aspire to secure regular income, pursue long-term capital appreciation or seek a combination of both: ensure that your investment strategy aligns specifically (and strategically) with these goals.
Explore Alternative Investments
Look for real estate investment platforms that specialise in alternative investments, such as fractional ownership. Fractional ownership models offer investors the opportunity to own a portion of a high value commercial property, which you might not have been able to afford on your own.
This model notable reduces the entry barrier to invest in commercial real estate. Assetmonk for example, has a minimum entry ticket of 25 lakh INR. It allows for accessibility and flexibility with high Internal Rates of Return (IRR).
Diversify Your Portfolio
Mitigate the risks inherent in commercial real estate or a specific region. This can be done by strategically diversifying your investments across various commercial property types and locations. Implementing this key strategy of diversification positions you for long-term success in real estate investment.
Maximise Returns Through Active Management
To achieve success, one must actively manage their commercial real estate portfolio: this necessitates regular assessments of market conditions; adjustments to lease terms, regular maintenance of the property, optimisation of operational efficiency, all of these are essential.
In fractional ownership models such as the one provided by Assetmonk, the management of the property and all maintenance work is done by the fractional ownership platform (FOP), saving time and energy of the investors.
Leverage Tax Advantages
Utilize the tax benefits that commercial real estate investment offers: deductions for property depreciation, mortgage interest, and operating expenses.
The amount of rental income you get for your property for the year is its “Annual Value.”
As per Income Tax regulations, owners of commercial real estate who rent out their property can deduct a standard amount of 30% of the yearly value for things such as insurance, repairs, electricity, water supply, and so on. This holds true whether or not you’re the one paying the cost.
Reinvest Profits Wisely
Make smart decisions by reinvesting your commercial rental yields & profits into additional properties or upgradation of the current property: This can lead to compound growth and can accelerate wealth creation. This will ultimately lead you on the right path to achieving your goal of financial independence.
Bottom Line
Talking about commercial real estate, JLL India Real Estate Market report for Q3 forecasted significant office space absorption of approximately 45 million square feet in 2024, easily exceeding the benchmark set in 2023.
Looking forward, India’s commercial real estate sector paints a picture of potential and opportunity. With its fractional ownership model, Assetmonk invites investors to become active participants in this story rather than passive observers.
Assetmonk is leading the line in providing fractional ownership models for commercial properties; ushering in a new era in the dynamic real estate sector in India. The minimum entry ticket is set at 25 lakh rupees. This deliberate choice ensures that both seasoned and growing investors can partake in the benefits of commercial real estate ownership.
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