Advantages of Investing in Commercial Real Estate

1. High Returns

Private real estate investments offer attractive double digit annualized returns (IRR). In India commercial property has grown at 16% CAGR over the last 5 years (2016-2021)(Source: Mordor Intelligence Report) when compared to the prevailing rates of 5 year (2016-2021) investment in fixed income and Stock each provide 7.25% (average of 5 year returns on corporate bond funds)  and 18% (Sensex Total Return Index including dividend).

2. High cash distributions

Unlike bank deposits, where you wait for the investment to mature to access earnings, CRE guarantees monthly cash flow through rentals which further increase through contractual escalation clauses built in the lease agreement with tenants. Commercial Real Estate offers annual cash yields in the range of 8-10%. In bank deposits, you get nil real returns (considering inflation) and you need to wait for the investment to mature to access earnings. For bonds, you get have coupons of ~7% but returns are capped as there is no appreciation.  Whereas for stocks, returns are high but volatile and with low annual cash distributions as dividends. CRE is the only asset class CRE is the only investment offering high returns with high annual cash flows . Commercial real estate investment opportunities in  RESTACK offer, high annualised returns of up to 16% including consistent annual cash yields up to 10%.

3. Capital Appreciation

Constant infrastructure developments and population growth in cities lead to appreciation of real estate including CRE due to limited availability of land. Those who had early access to CRE investing opportunities have built considerable wealth over time through it.

4. Stability of cashflows

Larger part of the return in CRE is driven by rental income. Rents are guaranteed through long leases of 5 to 10 years with tenants with further renewal terms of similar periods, thereby providing steady cash flows. These rents are further secured by lock in  periods  of around 3-5 years on leases, during which the lessee(tenant) cannot vacate the premise or pays the remaining rent for the lock-in period in case of exit (one should refer to respective lease deeds of the investment). Grade A tenants such as Listed Companies, rated companies and multi nationals ensure creditworthiness to the rental income.

5. Low Volatility

CRE is an investment where prices don’t waver daily which makes it a stable investment unlike stocks which can have huge swings in the price and hence there is a constant need to track them.

6. Principal protection characteristics 

CRE is an asset class that has significant intrinsic value due to its use case nature, offices to work out of and warehouses for storage and manufacturing. The land and the building make it a hard asset. If something were to happen to the structure, the land is available to rebuild or sell. This is more reassuring to investors than buying shares in company that may cease to exist.

7. Diversification and inflation hedge

Over the long term, real estate has been proven to provide an effective hedge against inflation and a major factor is that property rents can be adjusted with inflation which is different from bonds and FD’s where inflation can yield diminishing returns. Investors warrant an alternative asset class to hedge volatility of stock market and economic cycle fluctuations. Commercial real estate is uncorrelated to public markets making it an excellent diversification tool with added stability to the portfolio due to lower volatility.

Similar to stocks, the logistics of commercial real estate investment can make diversification challenging.  Traditionally, commercial real estate investment required a substantial investment, Fractional ownership has made commercial property accessible to retail investors. Platforms like Restack provide thoroughly vetted investments through their team of professionals.  The platform offers complete transparency in dealings with an investment scorecard detailing property stats and a portfolio dashboard that can be accessed online from any location.

2 thoughts on “Advantages of Investing in Commercial Real Estate”

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