A recent industry survey highlighted that almost 34% of NRIs are inclined towards commercial real estate investment due to higher returns, while almost half (48%) cite other convenience reasons
One out of two or 52% of non-resident Indians (NRIs) or overseas Indians prefer investing in commercial real estate (CRE), states a survey report by SBNRI published two months ago. That’s not all. CRE has also emerged as one of NRIs’ most preferred asset classes. Though representing a small group, these findings show increased interest among the Indian diaspora in commercial real estate assets.
NRIs have predominantly been driving investment in real estate with high double-digit growth for nearly one-and-a-half decades. Residential real estate so far has topped the list of asset types. But with low returns on rental and capital appreciation, consistent uncertainty due to macroeconomic situations and the pandemic, residential assets evidently became unimpressive for many. In sync with the post-pandemic revival, the Indian Commercial Real Estate Market is projected to achieve a valuation of $67.08 billion by 2023, thereby exhibiting a remarkable compounded annual growth rate (CAGR) of 27.19%, and is anticipated to further soar to $223.25 billion by 2028. The phenomenal growth of CRE can be attributed to rapid infrastructural growth, global business headwinds toward the economy, and governmental support. Recently, the segment has been attracting a sizable global capital inflow, apart from domestic investment.
Renewed global interest from the Indian diaspora
Superior returns and consistency have made Indian CRE a preferred choice of investment over residential assets for the Indian diaspora. Indian real estate has always been the favourite investment avenue for NRIs from different countries. In fact, investment in assets in India has always been driven by more than just future returns or secured retirement income: emotional connection. With the rising opportunity in commercial assets, the Indian diaspora’s dual purpose of investing in India and contributing to overall economic growth has been strengthened.
According to recent data by IBEF, foreign investors took the lead in overall real estate investment during FY 2022 with a share of 57%. Investors from Canada topped the list with a 40% share, while US investors ranked second with 15%.
The emergence of fractional ownership
Another key factor that is wooing high net-worth individuals and even retail investors toward commercial property investments is the rise of innovative products such as REITs (real estate investment trusts) and fractional ownership. The rise of these products has lowered the humongous ticket size involved in CRE investment, significantly aiding the entry of a larger investment pool in the sector. While REITs have been one of the popular and low-ticket-sized avenues to invest in CRE, the lack of absolute asset control and the risk of dormant assets have been challenging for certain investors.
However, fractional ownership has enabled a large section of aspiring investors to fractionally own a premium ‘Grade A’ commercial asset starting at Rs. 25 lakhs. Although this route involves higher investment, fractional ownership, unlike REITs, gives you complete freedom to choose the asset as per your preference, goal, and risk appetite. Along with asset control, fractional ownership offers investors a pre-decided rental income and a projected capital appreciation over the tenure.
CRE investment surpasses RRE as a growing trend
Commercial real estate has been outpacing residential assets for many NRIs during the past year. This has been largely due to the rising demand for state-of-the-art commercial premises, lucrative returns, favourable policy, streamlined investment process, easy access to suitable properties, etc.
A recent industry survey highlighted that almost 34% of NRIs are inclined towards CRE investment due to higher returns, while almost half (48%) cite other convenience reasons.
The survey also mentioned that only 9% of the NRIs chose residential real estate as a diversifying investment avenue, while 18% preferred investment in commercial properties.
Factors driving CRE growth
India’s robust economic growth has resulted in an increased demand for retail spaces, shopping malls, and entertainment centres, driven by rising disposable incomes and consumer spending. Additionally, there has been a noticeable shift in corporate and company expansion beyond saturated metro markets, leading to a rise in demand for Tier II cities as commercial and manufacturing hubs across various sectors. The Indian government’s favourable policies, including initiatives like “Make in India” and the “Smart Cities Mission,” have further attracted both domestic and international investors, promoting investments in commercial real estate projects and facilitating infrastructure development. Moreover, the growing popularity of co-working spaces and flexible office solutions has given rise to shared workspaces in major Indian cities, catering to the needs of start-ups, freelancers, and small businesses seeking cost-effective and flexible arrangements. Furthermore, technological advancements have played a significant role in the commercial real estate sector, with the adoption of smart buildings and digital platforms for property management attracting businesses in search of modern and tech-enabled workspaces.
Fuelled by the rapid economic growth, favourable policy reforms, and India racing to become a global manufacturing hub and an epicentre of APAC business, the future of the commercial real estate segment looks brighter than ever. Opening the doors to investors from across the globe, the sector could become one of the most promising investment avenues for long-term wealth creation.
(This article is authored by Sudarshan Lodha, Cofounder & CEO, Strata)
