Can commercial real estate investment serve as a hedge against inflation?

Like other Asian societies, real estate comprises a major portion of overall investments in India. It is traditionally believed to be a tangible, safe, and risk-mitigated investment. It is in fact considered to be a safe haven to park your capital. In terms of investment, it was housing that was preferred during earlier days. The pivot towards housing was rooted in multiple factors such as easily available options, general suggestions from friends and family, limited hassle in managing the property alongside a dearth of knowledge about commercial real estate. 

Ankit Aggarwal, MD, Devika Group, said that in the past 5-6 years, trends are shifting with Indian investors now realising the importance of commercial real estate as a sophisticated asset class to make elevated yields. He said that commercial real estate can be instrumental in hedging against inflation as property prices and rental rates are mostly in sync with the general rise in consumer prices. 

He said that there is growing interest in office stocks, retail units, shops, etc. to make recurrent rental income along with attractive capital appreciation. 

The last decade was marked by the economic Bull Run in India, with the country also transforming into one of the fastest-growing emerging economies across the globe. While the international spotlight started turning to the South Asian economy, back in India people realise the importance of commercial real estate as a viable investment option, he said, adding that buyers and investors started becoming aware of how commercial assets can outmanoeuvre their residential peers in terms of ROIs. 

“When it comes to making smart returns, commercial is a much more attractive option to deal with. It helps you to build steady cashflow with attractive rental returns,” Ankit said. 

In metros, the rental yield from residential properties is mostly in the range of 2.5-3 per cent. In contrast, offices in IT parks/ business zones give returns in the range of 6-8 per cent. Commercial offices in many sought-after CBDs can give a higher yield of 7-9 per cent. Shops in malls and shopping complexes can give a yield of up to 9 per cent. Other assets such as warehouses can also give a competitive return in the range of 5-6 per cent.

Likewise, as the demand for commercial properties is on an upswing, they also offer lucrative capital appreciation in the midterms. Lease terms are also for larger time periods in commercial assets, which makes them more stable in the longer run. 

“Commercial real estate also helps in investment diversification and mitigates risk to a greater extent. One can invest in multiple types of assets such as office, retail, mixed, etc. subject to the budget available at hand. Likewise, one can diversify geographically in multiple cities to reduce risk and reap benefits from markets that are doing good,” he said. “Compared to stocks and bonds, commercial realty is less susceptible to market shocks and risks.”

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