29th February 2024 | By Admin

Buying or leasing commercial real estate – Which option is viable?

In recent years, India's real estate sector has experienced significant growth and transformation, attracting the attention of both domestic and international investors. Reports indicate that the depreciation of the Indian Rupee against the US Dollar has sparked increased interest among Non-Resident Indians (NRIs) in investing in the Indian commercial real estate market. With the ability to acquire more square footage of commercial properties and earn higher rental returns, NRIs are finding the market increasingly appealing.

Indian commercial real estate currently stands as the top choice for investors. Projections suggest that the industry will experience a Compounded Annual Growth Rate of 13% between 2022-2027. Reports also highlight commercial real estate's pivotal role in driving sectoral growth. Investors view this sector as a lucrative investment option offering high returns on investment, potential capital appreciation, and opportunities for passive income.

However, the question remains: Is buying commercial real estate better or leasing?

Buying Commercial Real Estate:

Pros:

• Higher rental yield: Commercial properties generally yield higher rental returns compared to residential properties. Investing in a well-located commercial property can ensure higher rental income due to the prime location and associated amenities.
• Quality of tenants: Commercial properties often attract reputable tenants such as corporate firms, banks, or retail chains, making it easier to manage and maintain the property while ensuring steady rental income.
• Steady income source: Owning commercial real estate provides a steady and regular source of income through rental payments.

Cons:

• High initial costs: Purchasing commercial real estate requires significant upfront investments, including down payments and ongoing expenses such as property maintenance and insurance.
• Lack of flexibility: Once you own a commercial property, it may be challenging to make changes or relocate according to your needs. Selling commercial property can also be a time-consuming process.
• Market risks: Commercial real estate values are susceptible to fluctuations in the real estate market, economic downturns, and changes in market conditions, which can impact investment returns.

Leasing Commercial Real Estate:

Pros:

• Lower initial cost: Leasing commercial real estate obviously means lower upfront costs. You only need to pay a security deposit to secure the property.
• Flexibility: Leasing offers flexibility. You can adjust the space as per your business requirements. You can easily relocate or upgrade to a larger space without the hassle of selling the property.
• Predictable expenses: There are no hidden costs. Lease agreements come with an agreement that states the duration of the lease term as well as the amount of rent. This helps make budgeting easier and forecast your monthly expenses.

Cons:

• Lack of equity: You own no ownership stake in the asset. You are a tenant paying rent to the property owner.
• Limited control: You have limited control over the property, which includes restrictions on modification or alteration.
• Rent escalation: Lease agreements generally come with a provision to increase rent on an yearly basis

Ultimately, the decision to buy or lease commercial real estate lies in the business needs, financial resources, and long-term objectives. If you value stability and are looking for investments, buying may be the right choice for you. If you prioritize flexibility, lower initial costs, and the ability to adapt to changing business needs, leasing might be more suitable. You can look for deals on lease properties that has lower security deposits and payment in parts option. See that the onus of maintenance is taken care of by the developers. So that the tenant can enjoy a lesser capital expenditure liability.

Source
https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
https://www.propreturns.com/resources/blogs/beginners-guide-to-commercial-property-investment
https://timesofindia.indiatimes.com/blogs/voices/right-time-to-invest-in-commercial-real-estate/