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  • Commercial real estate is the flavour of the season. Here’s why you should invest

    Published on September 14, 2022

    The best of both worlds: commercial real estate offers great returns consistently without being vulnerable to market swings.

    – Mr. Harrish Kumar Jain – Vice President of Brihanmumbai Developers Association (BDA)

    When Covid-19’s real world effects materialised in market sentiments, the biggest stock exchanges throughout the world observed their bleakest days. These staggering losses, estimated to be well above hundreds of billions were shortly followed by a quick upward bounce that saw most firms recuperate what they had so recently lost in market value. The past two years have been a series of turbulent ups and downs as markets react positively or negatively to major world happenings. One does not need to be an avid reader of a financial publication to infer this much. However, what has stood out from this noise of booms and busts is the robustness of the real estate markets compared to other more fragile assets and commodities. This has certainly been a surprise to some, but not to most that’re well aware of this basic doctrine that the value of land is more or less intrinsic to it and does not bend for fleeting public sentiments.

    The perfect asset class

    What does the investor want from the assets he or she invests in? The answer is rather obvious: consistent gains and a sense of security of its value. And where can this asset be found for the common investor? The answer to this is unfortunately not that simple. Considered to be the safest of all assets there are, real estate assets do not shake around much whenever the central bank changes its interest rates. But, young investors today look over real estate due to its low returns in the shorter time periods. The thing that makes real estate secure also makes it “boring”. This is broadly true but not necessarily for all types of real estate. Commercial real estate, overlooked for so long, has been picking up steam as and is currently the hottest thing in the real estate business. With all the safety inherent to real estate, commercial properties can rake in significantly larger returns than their non-commercial counterparts all the while being consistent with those returns over the years.

    How commercial real estate (CREs) make money

    A CRE is usually a property leased out to a tenant for the purpose of commercial activity, be it a car dealership, a boutique showroom or a startup office. The leases are generally signed for several years, roughly 3 to 5. For the duration of the set amount of years in the lease, the property brings in a consistent cash flow. This is an excellent stream of non-volatile cash income for investors who wish to reduce the market exposure of their stocks-heavy portfolios. When residential properties make a meagre 3-4 percent in a year, their commercial counterparts can garner as high as 9 percent per annum.

    How the small investor can get in on the action

    You do not need to have a capital of several crores for you to get the benefits from commercial real estate as Real Estate Investment Trusts (REIT) have made it possible for several investors to pool in their funds to acquire commercial properties. These REITs are firms that manage and invest funds in all sorts of real estate assets similar to what a mutual fund does in the stock market. An investor that grants funds to these REITs can earn income in the form of dividends without having to do any research or leg-work involved in picking and purchasing a CRE.

    The tax benefits lying in wait for you in CREs

    Unless you’re investing for retirement, there really is no way around paying capital gains tax on your money making portfolio. This is not the case when you invest in commercial real estate properties. Investors can defer or significantly lower the amount of tax payable by deprecating the value of the property when it actually grows over the years. On top of the Budget 2022 clarified that investors of Real Estate Investment Trusts are not required to pay taxes on the dividends received.

    CREs vs. the Future

    When thinking of the long-term, investors not only wish to beat the market but also make sure that their earnings beat the inflation rates. This is emphasised more now than ever when inflation is felt even in the more stable economies and not just in far off economic hell holes of Zimbabwe or Venezuela. If you didn’t get lucky with Bitcoin (which is true for almost everyone reading this), the consistent growth in real estate is the best and safest hedge against inflation out there. The rent for CREs rise proportionally to their base real estate values and also consistently over-perform them; enough to offset even the worst years of inflation.

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