Great Comeback for Commercial Real Estate in India!

These days, the demand for commercial spaces has been on the rise and is pushing the yields higher than any other prominent businesses in the cities across the globe. Prominent cities in India like Bengaluru, Mumbai and Delhi have topped the commercial property market in terms of annual rental yields. Reports have confirmed that, these three markets have outperformed all the other global hotspots with 9.5 -10.5% annual returns.

According to a recent global survey made by a popular property consultant firm, Bengaluru has topped the list with the annual rental yield of about 10.5%, whereas the cities like London, Singapore, New York and Hong Kong ranged between 2.5 – 7% at the highest. This is just an instance that proves Indian commercial real estate is back to form.

Bengaluru and Mumbai in Top 5 Global Cities’ List

Yes, Mumbai and Bengaluru are in the list of top 5 global cities for future rental growth and it is also expected to grow to 22% and 16% respectively. Also, 67% of the investments are flowing to Indian real estate market, which is highest among all the other countries. This clearly indicates the growing appetite of Indian commercial property market.

Healthy Traction Since 2014

With all the real estate happenings across India, it’s quite evident that the office space market has been in a healthy traction since 2014. India registered the office space transactions of about 18 million sq. ft. in the first six months of 2015, and by the end of 2015, the country completed the transaction of a whopping 40.21 million sq. ft. which is the highest since 2011. It also has to be noted that, out of 40.21 million sq. ft. area, the transactions of about 12 million sq. ft. was happened in Bengaluru.

Robust Demand for Office Spaces

It’s true that the yields have shown a robust growth, but the current office rentals in Delhi and Mumbai are still lower than the peak levels of 2007 by 19% and 17% respectively. Bengaluru is an outlier here also wherein the rentals are more by 8%. Currently Mumbai and Delhi are facing an acute shortage of quality spaces, which has created an upward pressure on office rentals.

With this being the scenario of Indian commercial real estate, the Real Estate Investment Trusts are expected to give a further push to the commercial real estate and is also estimated to have the investments worth $100 billion in the next few years. Even though the vacancy rate stands at 17%, investors and occupiers are still finding it difficult to get quality office spaces across prime districts.

Due to the robust demand for office spaces from start-ups and large organizations, rentals are experiencing a substantial surge leading demand to outstrip the supply. Looking at the demand for office space, we can say that commercial real estate market is making a strong comeback after being in dumps for about three years, having great deals in the pipeline and showing the signs of recovery.

How to Perform Proper Due Diligence When Buying Commercial Real Estate

There are three key factors that you must focus on when doing your due diligence in commercial real estate acquisitions. Fully understanding these three areas will enable you to be highly successful in acquiring properties.

These three areas are:

1. Verifying the reported income: It is imperative that you prove the reported income by examining each individual rental lease, doing a unit by unit inspection and engaging in a great deal of “sleuth work” utilizing the expertise of a solid management company. Every signed lease being reported by the sellers must be examined for legality and authenticity. If you determine that the current management has a “mom and pop” style, you shouldn’t even consider moving forward with the deal because the management transition would be far too drastic and increase the level of risk as the style of management that you would be putting in place will be highly professional and may alienate the current tenants…. unless you are really interested in buying yourself a job. One idea around this: Insist that the sellers place the property under third party management for a couple of months and then purchase the property based on the stabilized numbers reported by the new management company.

2. Verifying the expenses: Knowing the expense numbers of the sellers isn’t nearly as important as knowing the expense numbers that YOU will be able to run the property with. This is best determined by obtaining an average/unit expense number from several third party management sources in the immediate area of the property. It is also done by verifying each number that is being reported, including everything from insurance costs to lawn care. All numbers must be verified. Fortunately, most expense numbers that apply to running apartment complexes are fixed costs, such as property taxes, and insurance.

3. Verifying the physical condition of the property: Hire a third-party commercial property inspection company to perform a thorough inspection of the properties that you wish to acquire so that you can best determine what the current and future physical problems of the property may be. This is worth every penny and there is no short-cut around it.

There are still good investment ideas out there. If you need assistance in locating some investment opportunities, please visit our website at http://www.invesco.info and leave your contact information so we may respond to your request.

What is a Commercial Mortgage?

A commercial mortgage is similar in principle to a residential mortgage except it is used to purchase a property or to raise capital for commercial purposes rather than domestic purposes. As with residential mortgages, the lender

retains rights to the property until the loan is repaid in full.

What would you use a commercial mortgage for?

The types of property that people might purchase using a commercial

mortgage could be anything from hotels, restaurants, shops and

takeaways to office buildings, factories, warehouses and farms.

Sometimes people might buy the business and property at the same time

if the two are intrinsically linked, such as a hotel or restaurant.

When properties are purchased to be used as business premises, the

mortgage is known as a commercial owner-occupier mortgage.

Alternatively, a commercial mortgage could be used for refinancing.

People might want to unlock capital from their existing business

property to expand or improve their premises or facilities, or to raise

cash for any other business purpose.

There are many other uses for a commercial mortgage, such as buy-to-let

mortgages, where people purchase a property (perhaps residential) as an

investment and let it out, or commercial development mortgages, where

people purchase a property to develop it and sell it on for a profit.

Why purchase premises rather than rent?

Taking on a commercial mortgage is a major leap for your business and

must be carefully considered before entering into the commitment.

However, it can be an excellent investment and owning the business

premises that you occupy can bring many advantages to your business:

In most circumstances the proceeds of the loan are not considered

to be taxable income and the interest payments are tax deductible.

You’ll have a clear repayment plan, with terms and rates tailored

to suit your needs. (See below for more details on this.) This means

that you can manage your cash flow more easily.

Mortgage repayments can be cheaper than rent.

Any property purchase is an investment. Your asset could

appreciate a great deal in value, thereby increasing your capital.

You have the potential to make money by subletting. For example,

you might have space in your property that you don’t currently need,

and could make money on it by letting it out to another business until

you need it to expand your own business.

Why use a commercial mortgage to raise capital?

If you already own business property and need cash for your business

for any reason, unlocking the capital in your property by refinancing

or remortgaging is an effective solution. Think of it as a loan that

could be used for any business purpose – not just expanding or

improving your premises. There are many benefits in doing this:

Commercial mortgages can be easier to obtain than business loans,

especially for small businesses, as the property provides security to

the lender.

Unlike many business loans, which tend to have a short repayment

term, commercial mortgages cover a long period – anything from 15 to 25

years, depending on the lender and the financial circumstances of your

business.

In most circumstances the proceeds of the loan are not considered

to be taxable income and the interest payments are tax deductible.

There are two ways in which you might use a commercial mortgage to

raise capital for your business:

1. Refinance your current commercial mortgage to include the loan

amount that you wish to borrow.

2. Release the equity that has accumulated in your current property,

i.e. the current value of the property minus any outstanding mortgages

or debts tied to it.

What are the costs and repayment options for commercial mortgages?

Repayment plans tend to be similar to residential mortgages. The main options are either fixed rate or variable rate repayment mortgages or interest only/endowment mortgages.

Unlike residential mortgages, however, the interest rates for

commercial mortgages tend to be higher as business lending is perceived

as more of a risk. The rates will vary depending on the circumstances

of your business, but generally speaking, the higher the risk, the

higher the interest rate. For the same reason repayment terms also tend

to be shorter than residential mortgages – typically 15-20 years.

It’s likely that you’ll also need to raise a deposit, as most lenders

won’t provide 100% loan-to-value mortgages – i.e. they won’t provide a

mortgage for the full purchase amount and will expect a down payment

from you as a form of security (typically 20-30% of the purchase price,

although some lenders accept as little as 5%, but with a higher

interest rate for repayment).

Other expenses to consider are the setup costs involved in arranging a

commercial mortgage, such as legal charges, surveys and broker fees.

In terms of responsibility for repaying the mortgage, this depends on

the type of business. If you’re a sole trader the responsibility will

lie with you and you may also be personally liable should you default

on the repayments – meaning that you could lose personal assets as well

as the commercial property that is mortgaged. If you’re in a

partnership, the responsibility and liability apply to all partners. If

it’s a limited company, the responsibility and liability belong to the

business, although personal security may be required to approve the

mortgage depending on the profitability of the business.

How do you obtain a commercial mortgage?

When applying for a commercial mortgage, you’ll need to do your

homework and build a strong business case to demonstrate your company’s

ability to repay the mortgage. Be prepared to undergo a thorough

examination of your finances, including:

business history of your company: financial statements, profit

and loss accounts, balance sheets, past and current cash flow, all

certified by an accountant

future projections for your company: long-term business plan,

intended use of the property, earnings potential, projected cash flow

personal finances: the financial histories of yourself and all

other key stakeholders in the business, such as credit worthiness and

past earnings

All of these factors will determine the lender’s perceived degree of

risk in lending you the money, which will in turn determine the term

and interest rate of the loan that they are willing to give you.

The obvious first step to many people applying for a commercial

mortgage is to approach their bank or business lender, with whom they

already have an established relationship. However, for this very reason

it’s unlikely that you’ll receive a competitive deal.

The best way to get a commercial mortgage is to use the services of a

specialist independent mortgage broker, who can help you get a good

package to suit your needs whatever your circumstances. Even if your

credit isn’t great, it doesn’t mean that you won’t qualify for a

commercial mortgage. Having a broker to represent you will really

strengthen your case. They have access to a wide range of lenders and

understand their criteria for lending, as well as your specific needs.

They can therefore undertake a targeted search, increasing your chances

of finding a suitable loan. In fact, the broker may even be able to

obtain several different options from various interested lenders, which

provides the scope to negotiate a fantastic deal for you.

Money isn’t all that you’ll save. Imagine if you tried to apply to

several lenders yourself – think of the time taken to complete all the

applications, and the time wasted in applying to unsuitable lenders.

The independent advice and specialist knowledge that a broker provides

are invaluable.

How to Select a Commercial Real Estate Company

Selecting a commercial real estate company can be a challenging process. You want to hire someone who is knowledgeable, skilled, experienced and can match your goals and ideals. This is easier said than done. One company may offer you some of these features while others have the remaining characteristics you desire. There is no lack of the number of commercial real estate companies out there, which claim to possess peerless knowledge and skill. So, how do you go about selecting a commercial real estate company?

The secret lies in finding a real estate company that suits your needs and criteria. Yes, there are some overlaying concerns that also need to be considered like appropriate documentation. However, when you are looking for one of the best real estate companies for your needs, you need to do more than just scratch the surface. Here are some tips outlined below that can be useful in helping you during this process.

Let’s take a look at them:

Look at their experience

Commercial real estate is a blanket term and this business can be multi-faceted and highly nuanced. Therefore, you cannot just hire any real estate company for your needs. You have to start looking for one that suits your criteria. For instance, if you are interested in buying or selling properties in strip malls or shopping districts, you shouldn’t hire a company that deals in offices and residential homes. You want someone with a background in the kind of real estate you are focused on or else the company will be of little use because they will be out of their depth.

Assess their reputation

One of the best ways of spotting the best companies is by taking a look at their reputation. How can you do that? There are certifications, customer reviews as well as awards that are readily available due to the magic of the internet and the culture of open communication. If you find a commercial real estate company that seems appealing, you can do some research and discover if they do stack up. This step can be immensely helpful in allowing you to dodge a bullet.

Go over client’s opinions

The greatest problem with reviews is that they are mostly from satisfied customers. Unhappy customers either don’t post or their reviews are removed. Therefore, it is recommended that you ask the commercial company to provide you with a list of their past clients. This allows you to do some homework of your own and identify any weaknesses or problems that a previous client encountered.

Meet the representative

Last, but very important; don’t hire a company over the internet. Always meet their representative in person and see if they understand your needs. Open communication is vital in this business and if you are not comfortable with them, there is no point in starting a relationship.

Use these pointers to pick out one of the companies for your realty requirements.

How to Do a Sales Pitch in Commercial Real Estate

In commercial real estate, you will undertake a variety of presentations, in a variety of circumstances. Most of them are business-like in nature, focusing on the needs of the tenant, the property buyer, or the property seller.

Get to the core issues

Each of these groups has unique property requirements and points of focus. It is their needs which must be identified and clearly addressed in the sales pitch or presentation. Many successful commercial real estate agents will have a preliminary meeting with the client or customer so that they can identify key issues and concerns. This allows the commercial agent to return to the client or customer in a few days with a well structured proposal that addresses the needs of the customer or client.

It’s all about THEM, not YOU!

When you design an investment or commercial property proposal for presentation, the document should be 90% regards the property and the client. Frequently you see this rule disregarded or broken with the proposal document being largely regards the agency and the personnel.

Rarely is the property transaction a simple matter of the property rental, the property price, or the physical elements of the property. In most situations, it is the combination of these things which must satisfy a fundamental equation of need that the customer or client has. In getting them to this fundamental need, you will identify an element of pain that the customer or client is experiencing. This is what you focus on.

They are Experienced

It is interesting to note that many clients and customers in commercial real estate are reasonably comfortable in circumstances of business negotiation. This means they may not tell you the total big picture or all the elements of a transaction until they are ready. Conversation and connection in the presentation process should be biased towards the client or customer using well selected questions which allow the agent to interpret the body language coming from the client’s response.

When you believe you have identified the element of clients pain related to the property transaction, you start to magnify the problem in terms of today’s market, then offering stable and logical solutions that your real estate agency business can provide to the client or customer. Invariably, the commercial real estate transaction in today’s market centres on financial matters such as:

  • High vacancy factors
  • Other property choices and chances are available
  • Underperforming leases
  • Unstable cash flow
  • Unstable tenancy mix
  • Tenanted conflict
  • Escalating building operating costs
  • A shift in demographics which exposes the property to a unstable future
  • Mortgage payment pressures
  • Age of the asset
  • Needs for refurbishment or extension
  • Competition properties attracting tenants away from the subject property

This type of information and interpretation requires your intimate knowledge of the local region. This is by both property type and by location. This is the higher value that you bring to the customer or client. Being able to distinctly define local market awareness is a major advantage in any commercial real estate presentation or sales pitch. You must be seen as the best knowledgeable solution to the problem.

From Experience

After many years working exclusively in the commercial real estate industry, I found that my unique skill was in market knowledge and the display of that in any formal presentation to the client. Being able to talk about market trends and financial performance in a solid and sound way will help the client understand that they need your services. Coupling that with your extensive and relevant database of enquiry clearly shows the client that they need you.

A fantastic commercial real estate presentation is a function and balance of lots of things. Things like:

  1. A well established pre-planning process is a strategic advantage for every commercial real estate presentation. Strategy is everything in commercial real estate. Every property presentation requires planning.
  2. Making sure you are asking the right questions of the client or prospect. Plan your questions relative to the subject property so that you help the client think about opportunity and changes that are possible.
  3. Using your market knowledge and giving good answers. Have a variety of market facts and trends available to call on. Feed them into your presentation; facts are always useful. They can also be used as a channel to direct the discussion when the client is forcing you to justify your approach or your experience. Confidence and control must be the basic rule of your property presentation. When the client takes control of the presentation you have lost.
  4. Using your experience in the marketplace so that you are telling relevant stories of success in similar properties. Stories of other properties will always interest of the client.
  5. Making sure your personal presentation is optimised for the connection in the presentation. It can be that you are using a combination of the proposal document, the marketing document, and computer slide presentation, samples of your database, photographs of the subject property projected on to slides, and photographs of comparable properties projected on to slides.
  6. Choosing the placement of people at the table or strategically positioning them in the room is always important. Much has been written about where you should sit relative to the client. The basic rule is adjacent to the client rather than across an area of barrier such as a table. Being within arm’s reach allows you to pass documentation to the client at the appropriate time. Documentation should not be provided to the client until you are ready for them to review it; otherwise it is a distraction of their attention.
  7. Make sure that your proposal is simple and yet well directed with a clearly defined outcomes of sale or lease. Many proposal documents in commercial real estate are much too wordy so the main messages are lost and not clearly defined. The best proposals are less wordy and more illustrative. The best balance of a commercial real estate proposal is a mixture of 25% words, 25% pictures, 25% graphs, and 25% white space. This becomes a document which is clearly read and understood.
  8. Combine good illustrations and photographs of the subject property into the proposal or presentation so that any lengthy descriptions or paragraphs are broken up. This will keep interest of the client in your documentation.
  9. Make sure that your marketing package is value for money, and yet reaching the target market that the property serves or needs to attract. All too often, we see examples of generic marketing by the commercial real estate agent to the broader and less specific marketplace. Showing the client that you clearly know and will attract best the target market will always help your conversion to a potential listing. Be very specific about the target market and how you will reach it.
  10. Ensure that your commission costs are fair and reasonable for the location. In most circumstances, discounting your commission should not be an option as it will make you poor and remove or detract from your enthusiasm for the sale or lease. ‘Cheap’ means ‘cheap and without focus’ and the client needs to know this. The property deserves better. You are not cheap because you are the best and you do a great job. A fair commission is always paid for a positive property outcome.
  11. Always provide testimonials that are relevant to the property transaction. When you combine relevant history and details of happy customers into your presentation you will make the client feel more comfortable.
  12. Always display clear and sound market knowledge that impresses the client relative to their property. This will include extensive awareness of comparable properties that compete with the subject property. You should be able to talk solidly about property prices, comparable rents, rental growth, returns on investment, changes to the future demographics of the area, and properties in the immediate precinct of relevance. In many cases, it pays to walk around the local area just prior to any property presentation so that you bring immediate and clear pictures of the precinct to the discussion. Many times this has been of significant advantage in my presentation processes. Talking about neighbouring properties localises the client and their thought processes.
  13. Come up with a variety of ways to serve the client. Innovation and relevance will always impress. In today’s market, this is relatively easy considering the marketing opportunities and tools provided by the internet & technology. Be proactive in your property promotion processes so that the listing for sale or lease stands uniquely different in its marketing campaign from the others in the area. This does not have to be expensive to the client or to your office, given that the internet and electronic technology is historically cost effective. In today’s market, the traditional methods of publicising the property in the property pages of the local paper, is becoming much less important in the marketing campaign. Most commercial property buyers and tenants research the market from the Internet first and foremost.
  14. Almost every property agency will say that they have excellent communication and connection skills to support the property promotion process. From experience, this is largely incorrect and typically the average commercial salesperson or leasing person will exercise ordinary communication channels with the client. Put yourself in the shoes of the client. They expect and deserve frequent updates on the promotion of the property even when nothing is happening or when the adverts are producing little response. When a property campaign is not producing the results, it is important that you act or adjust with alternative recommendations and strategic changes to the promotional campaign for the client to consider. Rarely would you get to the property campaign correct in the first week. It is in this time that you must consider fine tuning the promotion process so that the target market is being reached in a timely and effective way. This means that every property enquiry generated from your promotions must be tabulated so that you understand what channels of marketing work most effectively with the property in question.
  15. When addressing the client or the client group in a formal property presentation, the answers and information you give must be delivered well and provide relevant solid property knowledge, in a practiced and professional delivery. Any sales or presentation tools relative to the property must be relevant and you should know how to use them with exceptional skill. Fumbling and faking information is not tolerated by the client.

So there you have it. These are some of the key skills to use in a commercial real estate presentation. Whilst many real estate agents think that they are the best alternative in the market to promote sell and rent commercial property, the reality is they do not get the message across when it matters most in front of the client.

To be the best commercial real estate agent in your area, you must show that you are just so, and you do this in the first 10 minutes of the time that your presentation takes. The client will have formed an opinion by then.

Be prepared to walk away from any demands for discounting that the client or customer demands. In this market they need a great commercial real estate agent providing a great job; discounting is not an option. Show pride in your services and walk away when the client demands discount in marketing or lower commissions.