4 ways commercial real estate can turbocharge your rental income

Commercial leasing activities are once again picking up stemming from a robust economic outlook. Most large corporates are now implementing back-to-office programs. Pent-up demand in the market is also fuelling growth.

Traditionally commercial leasing is a better investment option than residential markets as it can ensure recurrent rental income. Consequently, the investor fraternity is once again aggressively betting big on the Indian commercial market, which comprises a wide range of assets such as office premises, fractional ownerships, co-working spaces, retail stores, etc.

However, just like any other form of investment, there are a few ground rules, which need to be taken care of in the case of commercial investments. This can ensure higher rental ROIs and reduce the overall risks.

Here is a list of 4 such steps that can turbocharge the rental outputs in commercial investments.

High Demand Locations: Always look out for locations with high demand. A location with high demand will give better returns. The demand is rooted in a host of factors such as the availability of business parks & IT clusters, mass transit systems such as metro and suburban railway stations, shopping malls & high street retail in the vicinity, etc. Similarly, airports and large convention centers also fuel commercial activities and can render profitable lease terms to investors. The role of social infrastructure which includes schools, colleges, healthcare facilities, banks & ATMs, etc. can also enable the investor to reap higher returns.

Invest in high-quality properties: Just like location, the quality of the property is also very critical. Even within the same location, different properties can post varied rental returns. A good quality project will always attract better clientele and have lesser chances of cancellation. Hence it is important for investors to scrutinize the property types. Some key parameters that should be examined include elevators & escalators, fittings, lobby & gallery areas, building viewpoints, etc. Likewise, one should also look into certifications such as LEED (leadership in energy and environmental design.) etc.

Lease Terms: In commercial real estate popular lease periods are 3+3+ 3 or 5+5+5 (within a period of 3 or 5 years, leases are renewed). There are also lease terms such as lock-in periods (within the lock-in period the tenant can’t cancel the deal. Likewise, there are client-specific deals, wherein a tenant can cancel before the lease term expires. While drafting the lease agreement, an investor should look for a favourable deal. Generally, extended lock-in periods are advisable, as it will give the landlord a certain edge.  Meanwhile, one should also be careful about the needs of the tenant and include them in the agreement terms. A better landlord-tenant relationship is the cornerstone of prudent commercial leasing business.

Reputed Tenants: If a tenant is a large-sized business with good cash flow, then it will ensure a hassle-free business alongside a constant rental income without any hiccups. Tenants that include reputable companies and popular start-ups can be a good bet. Meanwhile, with smaller enterprises, there is a risk of poor cash flow that can also impact leasing. Moreover, bringing in a large enterprise such as a blue-chip company in the premise can increase the overall brand perception of the building and help in attracting a few other good deals.
 
Authored by:
Nakul Mathur, MD, Avanta India