Real estate investing has no organized “Exchange” to determine the fair price. There are only two parties – An owner who owns a property and a buyer who wants to buy that property. Hence price may depend on many factors like development around, usage of property, etc. The most important thing to consider is the type of real estate investment.
For the right to own & use the property, the buyer is willing to pay consideration to the owner, which he/she thinks is fair, and if the owner thinks likewise the transaction happens and a price discovery takes place.
Thus, when an investor invests, it is important to consider the characteristics of the underlying real estate. In this article, we will cover some of the aspects related to that.
When an investor is looking at buying real estate, one of the most important criteria is the type of property. There are broadly five types of real estate properties that one can consider for investments, especially in the Indian scenario –
Types of Real Estate Investments
Residential, Commercial, Industrial, Retail, and Mixed use. Each one of them has a different set of factors influencing its performance. It may be incorrect to assume that one type of property will perform well in a market where a different type is performing well.
Likewise, one type of property cannot continue to be a good investment simply because it has performed well in the past. Let us look at the ‘property types’ in detail:
5 Types of Real Estate Investments in India
Residential
It includes property that serves as housing, vacation homes, & other multi-unit homes. However, buying multiple units of Residential properties of say 5, or more are often considered as commercial investments.
The typical rental yield in India in a leased residential asset lies between 2% – 3% p.a. and thus such investments have historically been evaluated more from a Capital appreciation perspective.
Commercial Office
Offices are the largest holdings for many real estate owners. They tend to be, generally high-profile property types because of their typical location in downtown areas and large suburban office parks.
Commercial property has been further classified in many states of India as Commercial property for IT (Information Technology) & allied uses and non-IT & allied uses. The typical rental yield in India in a Pre-leased commercial asset lies between 7%-10% p.a.
Industrial
Industrial property is sometimes confused with commercial property; as it has a commercial use as well. However, Industrial property would include factories and warehouses, power plants, or land located in industrial districts.
The yields in such properties are relatively higher as the cost of construction of an industrial shed can be as low as Rs 500-700 Per Square Feet (PSF) compared to a purely commercial property where the cost ranges between Rs 1,500 to even Rs 3,000 PSF, depending on the grade of the asset.
Retail
These properties consist of shopping malls, high-street retail, and other retail storefronts. In some cases especially with larger MNC brands, the landlord also receives a percentage of sales generated by the tenant store in addition to a base rent to incentivize them to keep the property in top-notch condition.
Many retail properties have an anchor, which is a large, well-known retailer. Such anchors would typically enhance the value of a property and make it more desirable for investment. Often, a retail outfit has one or more ancillary divisions containing smaller tenants. One of these small units is termed a commercial retail unit (CRU). Retail leases are generally longer and retailers are less inclined to relocate as compared to office tenants thus making those more stable than offices.
Mixed-use
They are those that combine any of the above categories into a single project. Many buildings in metros have a ground floor as Retail, a floor or two of Commercial offices, and the rest as Residential.
2 New Types of Real Estate Investments
RIET – Real Estate Investment Trust investment vehicles through which investors can invest in real estate & infrastructure projects.
REITs are investment trusts that own and manage income-generating real estate assets such as commercial real estate assets such as offices, hospitality assets, and malls.
A REIT raises money from unit holders by issuing units. Money is invested to purchase/invest in real estate assets (either directly or through SPVs). REIT generates lease rental/ other income through these real estate assets.
The income so generated is distributed to the unit holders. In India, units of 3 public REITs are listed and traded on the stock exchanges (NSE/ BSE) viz., Embassy Office Parks REIT (Embassy REIT), Mindspace Business Parks REIT (Mindspace REIT), and Brookfield India Real Estate Trust (Brookfield REIT).
REITS were first introduced in the US in the 1960s. REITS are now prevalent in more than 40 countries in the world.
Fractional Properties – Fractional Ownership is a Platform of Investing in which several Individuals Invest in a Particular (Individual) property, Equipment, Vehicles, etc. for a part or percentage of Ownership and get respective money in Return.
Hope you like this piece on Types of Real Estate Investment.
