Income

Residential Vs Commercial: Where to invest to get the best rental income?

Investment

oi-Sunil Fernandes

Through Atoul Ganga

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Recovering from the challenges posed by the coronavirus pandemic, India’s real estate sector is booming, positive and on course for a strong recovery. Despite a roller coaster ride in 2021 and the milder third wave of the Omicron virus, the residential and commercial real estate sectors in cities like Pune are optimistic about sustainable growth in the near future.

However, the ever lingering question of where to invest, residential or commercial, remains on the minds of investors. Here is a disappointment on the aspects affecting the return on investment (ROI) in both categories.

Residential real estate investment in 2022

There is no doubt that residential property investment is generally lower priced and many people think of investing in flats, apartments and residential properties for sustained rental income. Although investment may have taken a back seat over the past couple of years due to the challenges of the coronavirus, Pune’s residential sector remains a favorite with investors as the sector recovers from the challenges.

Residential real estate investment in 2022 will coincide with the recovery cycle and as offices/commercial establishments have started to call the workforce back to work, there will be a simultaneous recovery in the rental market.

Residential investment near major business centers, student accommodation, PGs and affordable apartments will remain in high demand. A robust investment trend in the post-pandemic scenario will be an increased affinity of real estate investors towards Tier II and Tier III cities. As real estate prices have not increased in the last couple of years, residential space could see a price spike in the second half (H2) of 2022. Residential space could see a price spike with a India’s growing economy which is expected to grow at 8-9 percent in the next fiscal year.

If the investor’s investment horizon is not too broad, it is better to invest in a residential property in Pune, for a sustained and gradually increasing rental income in 2022.

Commercial real estate investment in 2022

The onslaught of the Coronavirus has taken a heavy toll on commercial establishments and offices, workspaces and factories have been forced to remain closed for a long time. However, in the open scenario, the restrictions are lifted and the workforce is back in the offices.

In 2022, the commercial real estate sector faces significant demand as commercial expansions, halted for two years, are expected to materialize in 2022. Generally speaking, the rental return on investment (ROI) potential of the investment commercial space is still much better and more durable than residential space. Long-term leases and contracts ensure a steady stream of income for real estate investors.

According to recent industry reports, office space absorptions between July and September 2021 remained at 12 million square feet, a 168% increase over the previous year. Major markets such as Pune and adjoining regions, Noida, Delhi, Mumbai, Hyderabad and Chennai continue to attract commercial investors as they see bright prospect in their rental income yield potential.

In 2022, commercial real estate investments will focus on offices, co-working spaces and affordable retail. A growing trend in commercial real estate is fractional ownership. In this concept, instead of owning an entire property, the investor invests in part of the property and enjoys handsome returns. This trend towards co-ownership will remain strong in 2022.

Typically, if the investment horizon of the investor is broad and they are considering a long or very long term investment horizon, commercial real estate is the option to go for. However, factors such as location, availability of physical and social infrastructure, and connectivity should be considered when investing in a commercial asset.

In conclusion, the year 2022 will be a year of recovery and sustainable real estate growth in Pune and other cities. If the investor has a limited budget, residential real estate is the preferred option for a good rental yield. However, if the time horizon is long term, a commercial real estate investment can be considered.

Written by Dr. Atul Goel, MD, Goel Ganga Group & President (Elect.), NAREDCO Pune

Article first published: Friday, February 4, 2022, 12:43 p.m. [IST]