Commercial and Residential Real Estate in NCR

Commercial Property

Commercial Property consists of any property which can be used for commercial purposes which generate income such as retail shops, office spaces, food courts, cineplex, parking structures, conference plazas, warehouses, factories, IT Data Centres, & other shops. They are different from property that may be used for residential or agricultural purposes that although may generate income, are primarily developed for personal, not industrial or commercial use.

From an investment point of view, there are several advantages of investing in a commercial property than a residential property in India. They include:

  • Commercial properties are generally developed after a lot of research. The developer takes into account things like cost of land acquisition, construction and other costs to derive their profit margins. The property is thus generally at a location that is easily accessible and well connected, amid a catchment area with few competing projects.
  • It is easier to lease commercial property for longer duration to corporates creating stable, assured rental income for life.
  • A large office space can be divided into smaller sections if need be, ensuring financial viability of the investment.
  • Property management in commercial properties can be managed by professionals and be paid by tenants ensuring reduced stress for the investor as compared to a commercial property.
  • The return on investment on a commercial property is generally between 9-21%, while for most residential property investments the returns are 1-3%.

Speaking specifically about the Real Estate Sector in the National Capital Region, the residential property rates are stuck at the 2013-2014 levels. There is massive inventory with the developers with some reports suggesting it might take over 4 years for the inventory to clear.

The commercial property sector meanwhile is faring much better with prices up nearly 45% from 2013 levels and vacancy rate below 5% in many micro pockets in Gurgaon. The demand of office space from corporates, ITeS, and retail are the key drivers of this phenomenon.

Residential Property

Residential property is should be the property one buys for their own personal needs. Various types of residential properties include Villas, Apartments, Luxury Condominiums, Bungalows, or plots of land which one plans to develop later. Generally, a person buys residential property only once or twice in their lifetime. Hence one should take their time researching about the property and do so with a clear picture of their current and future requirements in their minds.

Some requirements of residential property are:

  • It should be in a residential area. Buying a residential property in a commercial area makes little sense as one would be constantly disturbed by noises of vehicles coming and departing, of factory activity, and other commercial activities. From a security point of view too, a commercial area has a large floating population which is difficult to monitor.
  • It should be free from all claims and liens. Buying a property without doing due diligence is asking for trouble. At any point someone may stake a claim or raise objections which may take years to settle later and cost a fortune in legal fees.
  • It should be a quality construction. If buying built up property it is essential to check the builders previous projects and have an independent inspection of the property from professionals to assess quake resistance and take ample measures to prevent water seepage from cracks and joints.
  • It should be close to amenities. A recent research has found that most of the house buyers are young couples as their parents already have a house of their own. Independent nuclear families who plan to have children in the future and a big thing to plan for in India is the school where the children will go to. In fact people give more weightage to having a good school nearby than to markets, religious places, and even hospitals.
  • Other things to look for are the price of the property, law and order condition of the area, water and electricity supply to the property, & distance from work among others.

So we see that the two different types of properties cater to different people with their own needs. While the commercial property is bought with an aim to invest & perhaps either rent or sell later, a residential property is bought primarily for self. In both cases it is important to identify the needs or the reason for buying the property, doing due diligence, partnering with the right developer who is honest, has the expertise, and understanding of the local market to get you the best possible deal.

Why Road Frontage on Commercial Property is So Valuable

How many feet of road frontage does the property have?

This question is among the most important when assessing the value of commercially zoned property in a city or county. For some, the reason as to why this question is so important may seem rather obvious. However, there are multiple reasons why investors, developers, builders and business owners want to have large amounts of road frontage on their commercial properties.

For business owners, it is best for them to have their stores located conveniently to their customers. If they are on a main highway or road, they will have great visibility to the traffic going by. This can quite possibly bring customers into their stores that they normally wouldn’t see through their normal marketing. Also, a customer new to the location can find the store much more easily when in the line of sight. Visibility on major road frontage is a huge advantage for the business owners and their stores.

Another reason why business owners like to have their stores along major road frontage is because of the ease in which customers can enter and exit the property. If they are forced to drive through large parking lots, wind behind other major stores, and park on a land locked parcel, there is a possibility that the customer would go to a more easily accessible competitor.

Now, this may be pushing it a little, because a business should be able to bring customers in on its own through effective marketing and good business practices. However, it is definitely more pleasant to access a place of business that is right by the road, rather than search your way through parking lots, other businesses, and who knows what else. The easier the access, the more enjoyable the experience is for the customer.

The two main reasons for business owners to have their stores on major road frontage are visibility and ease of access. Let’s look at why investors, developers, and builders all want the properties they are involved with to have the greatest amount of road frontage possible.

These three people, investors, developers and builders, are the foundation for commercial real estate. They have the money; they have the vision, and they, ultimately, are responsible for building our communities.

More often than not, these people will choose properties to invest in that have the most amount of road frontage, or create the roads so that the office complexes, retail centers, and strip malls have the visibility and ease of access that business owners look for in a profitable commercial property.

The underlying advantage for these investors to develop and build properties with major road frontage is the fact that these commercial properties, known as out parcels, are far more valuable than the land locked in parcels behind them! The difference between these property values can be quite drastic.

For example, recently I was assessing a 56 acre raw tract of land in Rome, GA. It had over 2,000 feet of road frontage on a major highway! The front of the property was zoned commercial, while the back was zoned multifamily. After speaking with the broker and looking at comps (comparable sales), it was clear that the out parcels would be valued at approximately $600,000 an acre developed. (They could be worth more if we were able to get national brand stores on the property). However, those in parcels, without the road frontage, would only be valued at $225,000 per acre. This is a $375,000 decrease in value simply because those in parcels are a few hundred feet away from the actual highway.

This news greatly cut into my overall profit margin.

Not all cases are this extreme. However, it is always true that an out parcel will be more valuable than an in parcel. That is why investors, developers, and builders all want property with major road frontage. It is simply more valuable!

Business owners and investors alike will gladly choose a property with major road frontage over a land locked parcel, or a parcel with little to no road frontage. Use this important fact when you assess properties and the value that they hold.

What to Do When You’re Turned Down For Your Commercial Real Estate Or Development Loan

What alternatives do you have when you are turned down for your commercial real estate loan by your bank or other lender? Your property has an appraised value, and you have equity in it that you’d like to cash in, or you’re trying to buy a new property and can’t get a lender to give you the purchase money loan. Maybe you’re a real estate developer who is used to getting your loans approved because of a successful track record, and can’t even get a meeting now. Or maybe you’ve been approved for a loan, but can’t stomach the rates or terms.

We’ve all heard more than we’d ever want to know about the liquidity and credit crisis, but what may not be as obvious is that there is plenty of money out there–for the right deal. Change creates new opportunities, and when the traditional financial institutions can’t or won’t take on more risk, there are many lenders and investors who will. It’s all about taking another look at your existing assets, both in real estate and in liquid or paper assets, and making the best choice available. The following is a simple list of ways to create alternative financing possibilities:

  • 1 Which institutions have turned you down, and why? Knowing what has not worked can turn you in the right direction, so make sure to ask as many questions as possible when you’re turned down, including asking if they can direct you toward a lender who might be able to do your loan. While most of the following criteria usually play some role in qualifying for a loan, some lenders focus most on CLTV or LTV (combined loan-to-value or loan-to-value), some on DSCR (debt servicing coverage ratio), some on IRR (Internal Rate of Return), some on Cap Rate, some on credit, and some on the overall financial strength of the borrower. Knowing this is often the key to getting to the right lender.
  • 2 If your loan was approved but you didn’t like the rates and terms, see how much room there is for friendly negotiation, and don’t delay. It’s vital to keep on good terms with anyone willing to loan money these days–don’t burn a bridge if you can help it. I personally know many developers with “sticker shock” who expected to return to the approving lender several weeks or even months later (after they shopped around and couldn’t find anything better, or were turned down by everyone else), only to be turned down this time because the lender starts to wonder if there’s something wrong with the project that they didn’t see the first time, or because conditions have changed.
  • 3 You may have to put more cash down if you’re making a purchase. Risk-averse lenders want a much more attractive LTV loan-to-value before they will step in with the rest of your purchase money funds. If you’re refinancing, remember that a risk-averse lender is very cautious about appreciated value and would rather see more of your own cash in the property.
  • 4 If you don’t have the additional cash, take stock of your other assets. There are lenders who will loan against many different types of assets such as merchant accounts, future cash flow, marketable securities, other financial instruments, cross-collateral real estate, insurance settlements, and factoring receivables. For certain types of projects, such as energy and green-type projects, as well as films, there are tax credits, carbon credits and various types of bonds and partnered participation sponsored by municipalities and states.
  • 5 When considering a purchase, or perhaps if you are designing a new project to build, you may want to look at which property types lenders are looking to finance before you make an offer. Even if you have talent, a niche, tons of experience, or a crystal ball that works, why swim against the current when you could go with the flow?
  • 6 If you’ve gone through all your regular banking relationships, you may want to consider working with a licensed broker. Although you pay for the broker’s services, remember that a broker is keeping up with many more lenders and investors than you generally could, and they can help steer you toward those whose guidelines you fit.
  • 7 One resource that can work well (if done with the right institution) is a leased financial instrument, such as a SBLC or a CD. Some larger real estate transactions can be closed either with this kind of credit enhancement, or with funds deposited in escrow when other funds will be available at closing. It’s also sometimes possible to run a useable line of credit against a certain type of leased instrument when the financial institutions on both ends agree to the terms. Be very careful to have approval from the bank providing the credit line prior to making any payment.

It’s important to be creative as well as realistic when trying to get a commercial real estate loan, and to be willing to accept the changing financial terrain while being open to new suggestions. Look for solid professional advice to improve your own personal and professional goals. Sometimes when you look at things differently, the solutions to the problem become much clearer and perhaps better than the plan you first had.

Colleen Zaruba copyright 2009