India’s commercial real estate (CRE) sector continues to hog the headlines. Even as the residential market continues to struggle, commercial spaces continue to see large investment inflows, a steady rise in rentals and falling vacancy levels - all backed by extremely robust demand. To this contrasting backdrop of asset classes, a significant trend being seen in the commercial office space is the growing popularity of strata sales with both investors and developers.
No doubt, the model of the leased space remains the mainstay course for office space developers, since it assures them of continued hold on their most cost-intensive properties. In the past, strata sold office spaces were primarily associated with lower-grade projects and developers who adhered to a 'build it, sell it and forget it' philosophy. Today, even India's leading office space developers consider strata sales in select under-construction and completed commercial projects - including Grade A developments - a viable means to monetise their value.
In fact, with demand for commercial developments picking up, developers are open to selling not just large office spaces but smaller spaces as well. Simultaneously, they seek to maintain a wholesome balance. While leased spaces allow them to retain control of their holdings, the strata sales model not only helps raise considerable capital quickly but also minimises the financial and logistical challenges of managing and maintaining leased buildings.
This is far from a new business philosophy. The trend of strata sales is, in fact, deeply entrenched in mature Asian markets such as Singapore and Hong Kong. The fact that it now finds resonance in Indian commercial hubs such as Bengaluru and Mumbai should come as no surprise; a healthy balance between leased and sold commercial assets is indicative of a maturing market wherein transparency and product quality are no longer areas of concern.
Demand from SMEs and Entrepreneurs
End-users and investors of all persuasions now see the benefits of buying strata office units. Family offices and small and medium-sized businesses increasingly prefer to own their office spaces to combat the volatility of office rental cycles. For this reason, more and more successful entrepreneurs keen to maintain financial predictability during their growth phase now invest in smaller office spaces which can be sold quickly when the time comes to scale up. Occupiers are, of course, perpetually focused on smaller spaces to gain visibility in key business districts while keeping finances in rein.
Against falling vacancy levels and consistent demand, office rents in major markets such as Bengaluru, Mumbai and Gurugram have nowhere to go buy further up. Investing in an office strata unit locks in long-term operational costs, protecting the occupier from rental escalation risks during the lease renewal period. Long-term occupancy of an owned office space also helps associate companies with certain locations - which, as we have seen in many cases, can be a peerless branding strategy.
Singapore's Emphatic Endorsement of Strata Sale Offices
The office strata market in high-visibility Asian business cities like Singapore is more or less perpetually of both local and foreign investors. In fact, strata sales are an integral part of the commercial property market in this city where wealthy, family-owned businesses opt for such asset as they allow them to preserve their capital. Apart from that, large corporates from the construction, financial and commodities sectors also have a clear predilection for owned office spaces.
Such companies display a distinct preference for increasing their footprint in the city primarily via strata unit purchases. Simultaneously, Singapore's low-interest-rate environment attracts investors towards strata offices because of their good yield and potentially high capital appreciation. Past and present CRE trends clearly indicate that commercial properties sold either individually or in bulk reap considerable capital appreciation on resale.
Meanwhile, even smaller businesses in Singapore are switching from office tenancy to outright ownership. Consequently, institutional investors' demand for strata units remains robust and Singapore is witnessing a consistent uptick in strata sale office market transaction volumes.
Hong Kong's Strata CRE Scenario - Growing on Shifting Sands
In neighbouring Hong Kong, the strata-sales market is dominated by local investors, particularly HNIs with an eye on the future of this city's increasingly space-starved office districts. Still a developing market, Hong Kong is witnessing a shift in players as well as demand dynamics. The spiralling political unrest along with coronavirus scare has shifted investors’ focus from Hong Kong’s commercial strata market to other Asian cities such as Tokyo.
On the back of the small but visible market fundamentals and investment momentum leading up to the 2020 Tokyo Olympics, investor demand for commercial assets has witnessed a sharp spike in Tokyo. Opportunism is very evident even as Hong Kong's investor focus remains firmly on owned office assets wherever the mid-term and long-term potential is strongest.
The Indian Market’s Maturing Strata Sales Landscape
Back home, the investment climate of India’s commercial real estate market has not attained the maturity levels of Singapore and Hong Kong. However, the changing dynamics are strongly indicative of an ongoing overhaul. While HNIs and NRIs continue to rely on the Indian real state sector, their investment preferences are changing.
The Indian luxury housing segment fetched handsome returns in the 2000-2009 period. Today, only commercial office and retail assets can match those ROI levels. As per ANAROCK research, the average rental yield for residential properties continues to languish at an uninspiring 3%. In sharp contrast, Grade A commercial properties generate 7-9% yields while non-Grade A assets potentially deliver 9-10%.
Today, the Indian strata sale market is becoming increasingly attractive even for smaller investors. A well-chosen CRE play in a tier 2 city can begin at as low as INR 10 lakh. The upper limit for investing Grade A assets in the metros is, of course, somewhere in the stratosphere. However, HNI investors have sensed that these properties are the Next Big Thing on the Indian real estate investment horizon and are moving in even as leading developers have begun putting as much as 25-40% of their commercial stock up for strata sale.
Given these trends, it is safe to say that Indian strata-sale CRE will soon be playing in the Big League of Asia's hottest commercial markets. The horizons have changed, but the sky is still the only limit for opportunities in Indian real estate investment.