Real estate investing, considered one of the most significant capital appreciation channels, has emerged as a secure, sensible, and profitable alternative for many, providing many types of diversification. Commercial spaces, including retail and office, are in great demand for investment as a supplementary source of income in the commercial real estate category.
Commercial real estate may be regarded as a costly affair due to the significant investment required and is best suited for UHNIs, HNIs, or corporates. However, this is not the case. Property investing has grown in popularity and attracted the attention of professionals alike throughout the years, and this investment is now well within their grasp. Rents and leases in a commercial property are significantly higher and longer than in a residential space, the most common type of investment. As a result, the initial investment and returns are substantially higher than the old equivalent. Not to mention, advantages like reliable earnings, tax benefits, and property owners all contribute to the desirability of business space in a prominent location.
According to JLL India research, pre-leased commercial real estate properties in the range of Rs 5 – 50 crore scattered throughout the country’s top six cities, followed by tier-2 towns, are on the radar of investors. Growing potential in pre-leased buildings is being viewed as an appealing asset class, particularly by high net-worth individuals (HNIs), who are pursuing a greater slice of the Indian real estate market, especially commercial real estate. A pre-leased property is leased to a firm and then sold to a client with the rent included. The buyer of a pre-leased property is guaranteed a fixed ROI (Return on Investment) from the first day. As the lease act is also conveyed to their name, the ROI has been designed in the form of rental revenue.
Better profits, plus a mature and transparent market, are among the elements that have attracted investors to the country’s commercial real estate. With the commercial real estate segment remaining the most preferred among all asset classes, high-net-worth investors and the ultra-rich are increasingly looking with optimism at pre-leased assets, mainly office properties.
But, firstly, what are pre-leased commercial real estate properties?
Properties that have been pre-leased or pre-rented already have occupants and a set rental income. The primary advantages of these assets are consistent income, no waiting time, and increased capital appreciation. Pre-leased properties are those that are already rented out and earning rent from the tenant at the time of sale, and the investor proceeds with the lease to receive consistent returns.
The Perks of Pre-Leased Commercial Real Estate Property
- No waiting period for the investor: When an investor purchases a pre-rented commercial property, he acquires the prior owner’s rents and tenants. Investors in pre-leased property do not have to wait for a tenant because it is already rented, and they may begin receiving monthly rentals on the first day after the sale deed is transferred. As a result, the investor does not have to wait to locate a suitable renter for the property.
- Capital Appreciation: A pre-leased property has a good chance of capital appreciation over time since the value of pre-leased property often rises when compared to unoccupied properties. Commercial properties in great locations with good locations, features, facilities, and infrastructure may appreciate. As a result, purchasers with a longer investment horizon are more likely to receive a decent return on their investment.
- Liquidity is very high: Pre-Leased property is a profitable alternative in terms of return on investment. So, while finding a potential buyer in the real estate market may be difficult, pre-leased commercial properties are simple to sell. Many investors choose pre-rented homes because they provide greater liquidity.
- Risk reduction: Purchasing a pre-rented home is always a secure investment because the property is rented for a certain period. Pre-leased properties provide fewer risks to investors since they provide assured rental income with high returns. The leasing deal is typically for nine years, with a three-year lock-in term. The chances of renters leaving these homes before the lease expires are always slim.
- Hike in Rent: Buyers of pre-rented houses do not have to be concerned about the rental increases. Renewal of lease agreements also ensures periodic rental rises. If the lease is for nine years, the rent will usually be increased by 15% every three years. For example, if you pay Rs 50,000 per month for the first three years, a 15% rise in rent will pay Rs 57,500 for the next three years, and a 15% increase in rent would pay Rs 66,125 per month after six years.
- Loan Based on Rental Income: Term loans against the rental revenue of a pre-leased property can help investors raise more money on the underlying value of their commercial property.
- Stability: Pre-rented commercial properties are the healthiest and most secure investment since they provide more stability and medium to the low risk to investors. With speedy saleable routes available, demand for Grade-A homes is at an all-time high, with pre-leased properties delivering an average return of 12-18%, combining capital gain and rental rise. Demand for pre-leased commercial buildings is also predicted to increase within the next year.
Some Safety Measures When Purchasing Pre-Leased Commercial Property
Before investing, the buyer should conduct the necessary due diligence to guarantee that the property and its tenant are safe to inherit. Before investing in any pre-leased property, investors should address a few problems.
- High Capital Value: The buyer must evaluate the vacant capital value of a pre-leased property since the market value of the pre-leased property is always greater than the market value of the unoccupied property. Buyers should consider the price difference between these two houses before making a purchase decision. The market value of the pre-rented property should ideally be no more than 15-20% more than the market value of a vacant property in that location.
- A Tenant’s Credibility: Before closing the transaction, the investor must examine the tenant’s credibility and creditworthiness. The main goal is to ensure that the tenant pays the rent on time and does not quit the leased premises before the contractual period expires. Do not miss the Difference Between Residential Real Estate Tenants vs Commercial Real Estate Tenants.
- Lease Period: An investor should also look at the lease’s terms. It is essential to match the business lease period. Finding new renters after a contract expires is usually a time-consuming task. Make sure the lease is for a longer period; otherwise, you may experience rental loss and dwindling returns.
An investment in a commercial real estate property is a safe and lucrative avenue providing multiple benefits, such as capital appreciation, regular income, secured property, and compliance information.
However, a trustworthy expert plays a vital role in taking commercial investment decisions ranging from a single property to a curated collection of many assets, besides strategic support through all phases of transactions, including legalities, documentation, and the transfer process.
Assetmonk is India’s premier and preeminent commercial real estate investment organization, with a presence in three cities. It provides a full range of tailored and end-to-end commercial investments and advisory services to its clients, backed by its experience in real estate and market information. Assetmonk allows you to invest in commercial real estate via fractional ownership starting at Rs. 25 lacs. IRRs range from 14 to 21%. To learn more about how we may assist you with your commercial real estate investing journey, please click on the link above.
Pre-Leased Commercial Real Estate Property Investment Is Trending Right Now – And The Best Investment FAQs
A pre-leased property was already rented out at the time of selling.
A lease agreement is entered into between a landlord and a potential renter to engage in a lease at a later period, subject to the fulfillment of specific criteria.