Tips to Buy Pre-Leased Commercial Property – By Dipakk Vadehra
Feb 26, 2019
By Dipakk Vadehra, Associate Director, Trueseed
February 18, 2019
Credit’s:- Originally Published on 99acres on 18-02-2019
Commercial real estate holds a healthy potential to grow in India owing to the fast-paced growth of the economy. As demand for office spaces spikes in the country, it is important for investors to take note of some important factors while buying a pre-leased property including location, rentals, and design of the property
With sustained incremental industrial manufacturing, Corporate Investments and increased disposable incomes among the middle-class, the World Bank estimates India’s GDP of 2.597 trillion USD to double by 2029. Currently, it is the sixth largest global economy with a conservative assumption growth rate of seven percent.
As per a survey conducted by “The Economist”, the Indian economy grew at a rate of 7.7 percent, YoY, in 2018, becoming one of the fastest growing economies
Commercial real estate remains one of the strong beneficiaries of India’s economic growth. Foreign & domestic companies incessantly continue to invest in India’s skilled labour. The growth in GDP is being triggered by the services sector, which continues to pilot the increased demand for office space in India. In such a scenario, investing in pre-leased or pre-rented commercial property is one which is already leased to a tenant and is sold in the market thereafter. In such a case, the lease gets transferred to the new owner along with the transfer of the property rights. The rentals also go to the property subsequently.
Here are a few tips to follow while buying a pre-leased commercial property in India.
- Location is the Universal Rule
Location demarcates everything. This includes the rentals, the capital growth and the future prospects of the property. Good location produces a lower vacancy rate, higher capital appreciation, and longer-term tenancies.
- Building & Structure
New and modern office parks command better rentals and long term tenancies. This is because of the fact they are much stronger, deep-rooted literally, better designed and more energy efficient. Glass Facades, Higher Energy Efficiency Ratings, Well designed Lobbies, More Elevators, and Ample Parking Spaces are all some of the major indicators of a Grade-A Office spaces.
- Demand & Supply
Detailed studies via research reporters of established brokerage houses such as a Knight-Frank, Colliers, JLL are always helpful. Moreover, in-depth research via local brokers always makes more sense to form an opinion regarding the micro markets of a particular city.
- Real and Made-up Rentals
Real estate rentals are derived from the last transaction that happened in an area or a building. An informed and savvy investor will always have these numbers already drawn up while doing the research. A difference of 5-7 per sq ft is always acceptable, but anything with a difference of Rs.10 per sq ft or beyond is a made up rental. A lower than average rental deal indicates low acquisition cost.
Tenant is the most important factor to determine any real rental income from a property, rest everything almost takes a back seat. Blue-chip Multinational Companies are the favorites amongst seasoned investors. Multinational Corporations not only pay rentals on time but they also increase the capitalized value of the property.
- Design & Fit-Outs Quality
Most of the deals offered in North India are fully furnished deals. The architecture and design of the demarcated carpet area, the type of fit-outs, i.e. high-quality chairs, and workstations, well-designed ceiling, high-quality flooring are a part and parcel of the capital expenditure costs which is borne by the investor at the time of purchase. Good Quality Fit-Outs make more sense even after the existing tenant has left.
- Lease Term, Security Deposit, Lock-In
These covenants constitute a lease deed’s basic structure. Lease Terms can be anything between 5-15years. However, longer lease are always a safer bet. Security Deposit is given to the landlord by tenant exhibits, the confidence and the steady cash flow of the tenant, Security deposit usually range from three to six months of rental value. Lock-In indicates the tenant’s strong business projections and commitment of lease. The deal becomes more justified with a high lock-in period.
Seasoned investors always ensure they are well versed with their researches and a deal to be considered good should have longer lease term with a minimum of 30% – 40% time as its Lock-In period leased out to a blue-chip multinational company who’s paid 6 months equivalent security deposit
The Author has 14+ years of rich experience in commercial & residential real estate sector
Specialty in Investment Strategies in Bull & Bear Markets, Flipping, Wholesale Buying & Retail Selling, Innovative & Strategic Marketing, Mid Size Acquisitions, Pre Leased Investments Property, Portfolio Building, Land Banking & Corporate Leasing. Is responsible for managing real estate assets worth $25 Million+. He holds transactional experience of approximately $100 Million++