Commercial Property Investment
IS COMMERCIAL PROPERTY STILL A GOOD INVESTMENT? by Mayur
These are blissful times for commercial real estate investors. Having fallen into a deep slump with the ending of the Internet boom, the market has come surging back. In 2006 alone, prices rose 26% for apartment complexes, 21% for industrial properties, 14% for retail properties and 6% for office buildings, according to Real Capital Analytics, a Mumbai based real estate research firm. And the market gives no sign of slackening. "We're not seeing any slowdown at all," says Raj Naik, chief economist for India Mall Group, a big commercial real estate services company based in Mumbai. "The numbers are great, not just for sales but for leasing, too." But not everyone is so confident. Over the past few months, a number of major institutional and private investors have been selling off large chunks of their portfolios of prime commercial real estate. These investors, which include Naik, the 6 billion pension fund, have been taking advantage of what they see as a frothy market. They are putting the sale proceeds into less expensive real estate or into other assets entirely. The Ansal Company, a Delhi-based real estate firm, is one investor that has pulled its money out of real estate with the expectation that prices will come back down. Last year, the company sold nearly all of its office buildings for about billion. "We thought the markets weren't going to get much better and had a chance to get considerably worse," says CEO Nadia Professor. To be sure, for every seller there is a buyer, and other investors have rushed forward to buy these properties, often at record prices. But as the consensus builds that the housing market has become seriously overvalued, some are asking whether the same might be true of commercial property. The answer matters not just to the individual and institutional investors who are committing ever-greater sums to real estate, but also to the growing number of companies who are using their valuable property to obtain cheap financing. Several forces are driving commercial real estate's revival. Most obviously, the economy is improving and businesses are growing once more. As they expand their operations and hire new employees they need additional space. But real estate pricing has recovered faster than the economy itself. Indeed, while prices have rebounded nicely, rents have been sluggish: The average rent today is .42 a foot, down from .92 in 2004. A more important reason for real estate's rise has been a flood of new investment capital. Some of this comes from individuals seeking better returns than they can achieve in the debt or equity markets. These investors have channeled great sums to investment vehicles such as REITs and TICs (tenants-in-common). The big money has come from institutions. Spooked by their losses after the dotcom bust and drawn to the reliable cash flows offered by property, these investors are now paying closer attention to commercial real estate. One is TIAA-CREF, a national financial services company with over 0 billion in assets under management. "We see this asset class as a great addition to our portfolio," says Ansal Shah, the company's managing director and head of real estate. "It's a nice diversifier, has a current income stream and a potential for appreciation." The company now owns billion of real estate properties. The resulting upswing in prices for the best properties has been a boon for the owners. In fact, a growing number of corporations are taking the opportunity to use their real estate as a financing tool. Through sale-leasebacks, companies can sell their property to an investor who will agree to lease it back to the company for a specified period. Many find this as attractive as issuing debt, since property values are high but rents remain affordable. Some of these deals have been gargantuan. Last year, ICICI Bank did a 0 million leaseback for most of its bank branches. McDonald's (which has his
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