Commercial real estate has the lion’s share, and it is anticipated to contribute 13% to the country’s GDP by 2025. Under the commercial real estate market, growth has been recorded in retail and hospitality, which further provides India with its much-needed infrastructure developments. The commercial reality market is expected to be accelerated by large-scale investments made by institutional investors.
The government has also made keen efforts to ensure development in the commercial real estate market by introducing schemes and programs such as Make in India. The government has also improved the regulation activities on property investment by raising the Real Estate Regulatory Authority (RERA). Thus, the increased transparency and competence in the transaction have further led to increased foreign direct investments (FDI) in the commercial estate.
The commercial property investment in Chennai has increased rapidly as there have been small start-ups and prominent IT players that find Chennai to be their hot market. It has been recorded that the development in commercial property has increased by 10-11%.
Some of the prominent factors contributing to the increase in the demand for commercial property are IT sectors-ITES, retail, consulting, e-commerce, and industrial developments. Chennai has been a prominent market for commercial properties due to increased IT parks and infrastructure, offering better access to the different parts of the cities. The REITs expect an increase in demand in manufacturing and IT-related institutions due to the better pricing and growth opportunities that the city provides.
Why invest in commercial properties?
Several real estate players have stated that investing in commercial property yields higher returns than residential properties. The commercial realty market is also growing at twice the rate every year. Several new commercial spaces have been opening up due to the increase in demand from software services, electronic manufacturing, and healthcare. These are not just sectors that drive the commercial markets in Chennai but India as a whole. The primary factor for the increasing demand for commercial properties stems from the fact that it has a diverse economy and is dependent on the automobile industry and its ancillaries and the evolving services sector such as the IT/ITeS along with the electronic hardware sector.
Office space
Chennai office vacancy has hovered around 25%. Some of the preferred locations for commercial realty investments include Mount-Poonamallee Road, Guindy, and pre-toll OMR, and the rent in these areas rose from 5% to 10%. An increase in the supply of commercial buildings has been observed in these regions as well. A pre-leasing agreement by multinational companies was observed in Ramanujan IT city, which possesses 2 million square feet, and SP Infocity, which is 1 million square feet. The commercial property in Chennai has recorded gross absorption of 4 million square feet of office space approximately on an annual basis.
The economic activities of Chennai have enabled the developers of office spaces to provide space to various other industries, and these include automotive and semiconductors industries apart from the sectors such as IT and ITeS. Some of these significant investments consist of Chennai’s investments by Flextronics, FL Smidth, Saint Gobain, Michelin, Renault, and Nissan.
Warehousing
The warehouse leasing activities have seen a healthy rise of 3.4 million square feet due to the manufacturing industry’s demand. The pandemic has an adverse effect on the warehousing market. A 53% demand has been recorded in Chennai’s warehouse lease in the Sriperumbudur – Oragadam cluster, the largest manufacturing hub of Chennai. Chennai’s warehousing market is concentrated in the south-west, the northern belt, and the southern region. Investing in warehousing spaces can be beneficial as it amounts to almost 22% growth every year.
Data Centers
The data center in Chennai has been recorded as the highest occupiers of Chennai’s commercial real estate spaces. The high rate of digitization and data consumption post the pandemic has further led to increased demand for data centers, thus increasing demand for commercial spaces in Chennai. The National Data Centre Policy is expected to increase the data centers’ demand as it offers better infrastructure status, assistance in setting up Data Centre Economic Zones (DCEZs), and single-window clearance. All these factors, along with the impending rollout of 5G technology, are expected to boost the demand for commercial spaces in Chennai.
Ambattur and Siruseri micro-markets have emerged to be the key players for the data centers and cloud hotspots. Several prominent national and international players, such a Netmagic, Adani, and Yotta, have also set their foot in Chennai.
Emerging Trends in the Commercial real estate market
The commercial real estate market in Chennai in the year 2018 saw absorption of 2.5 million sq. ft. and in the year 2019 by 6mn sq. ft. The year 2020 saw absorption of 2mn sq. ft. in the first half despite the pandemic. Businesses ranging from small start-ups to big companies and MNCs have led to increased demand for commercial spaces. Since Chennai has been easing the lockdown restrictions imposed, the demand is expected to take its place and become robust in OMR, Mount-Poonamallee, and CBD in the next few months.
The commercial real estate sector’s emerging trends are for different kinds of spaces, such as Flexi-spaces in Chennai. Several small occupiers have started to opt for flexible workspace for the short and medium-term as it helps them save costs and allows them to opt for flexible lease structures in times of uncertainties. The majority of the occupiers prefer a grade-A campus that offers a good ecosystem. The proximity to tech to tech parks and public transportation are some of the most common factors driving any commercial office development. Ever since the emergence of the pandemic, the priorities have also included health and safety factors.
The pandemic also saw an increase in e-commerce facilities in Chennai. This has led to the rise in demand for warehousing spaces. Investing in warehousing can be beneficial as more and more people, from different industries such as boutique, are going online to sell their products. Thus the demand for warehousing properties will increase in the future.
As already stated, the data center market is also on a roll post the pandemic as everything is slowly turning online. All the documents for governmental and office purposes have been digitized, which has led to the increase in data centers in the city. They currently hold around 2 million square feet of Chennai’s commercial real estate space, which is expected to increase further in the future.
Bottom Line
The trends followed by the commercial real estate market in India vary from market to market. However, the recent pandemic and lockdown induced a ‘work-from-home culture which has led to the decrease in demand for commercial real estate properties. The lockdown also saw reverse migration which further affected the construction activities. However, as the lockdown has been relieved, we find many commercial institutions reopening and going back to the ‘work from office’ model. This is thus expected to boost the demand for commercial real estate properties in Chennai and around India. Assetmonk is a smart investment platform that assists in investments and property selection in cities globally. They also offer various investment options such as residential, commercial, high yields with an IRR of 21%. Contact us to know more.
Frequently Asked Questions on Commercial Property Investment in Chennai:
In case you are planning to purchase a commercial building, you may be required to pay 20-30% of the building’s cost to have cash, 3% for closing costs, and some initial capital to settle bills and carry repairs on the building if required.
Yes, investing in commercial real estate is rewarding in terms of money in income or byways of appreciation. Income can be generated by leasing out the property to other commercial set-up and taking payments for the same. On the other hand, appreciation can be earned by selling the property over time as the property value increases.
Some tips to start investing in the commercial real estate sector include keeping a record of your finances, getting pre-approval from lenders that you know, charting your goals, and realizing the risk you are taking, preparing, or starting budgeting, creating an investment plan, and following trends. You may also obtain professional help in tapping the best property at the best price.
The monthly rent charged on a property is calculated based on a percentage of your property’s actual value. By applying an aggressive thumb rule, rent may be charged about 1% of the property value. However, it may be more realistic to charge 0.5%- 0.8% depending on the location and amnesties provided.
The average rental yield on commercial property lies between 5-10%, and it is considered good and robust.