HNIs’ exposure to realty jumps to 23%

Steady returns from commercial property retain investors' interests, says report

HIGH-END residential real estate does not seem to interest the high net worth individuals (HNIs) and the emerging HNIs anymore. The focus has already shifted from chic farmhouses to corporate office parklands.
    The HNIs and emerging HNIs are now moving towards pre-leased or leased out commercial space, according to industry sources. And that may explain why HNIs' exposure to real estate has not dwindled as yet. In fact, the Asia-Pacific wealth report stated the HNI exposure to real estate had increased from 17% in 2005 to 23% in 2007 and the prime reason for that are steady returns from commercial real estate. "Returns and income stream are more stable in commercial real estate. On the other hand, residential real estate has seen a decline in speculative investments and also a lack of genuine buyers, post March," says Amit Mookim, director, Strategic and Commercial Intelligence, KPMG.
    SundayET spoke to Krish Arora, a 40-year-old CEO of an HR firm who recently sold off his high-end residential property in DLF phase-I to invest in a leased out commercial office space on Sohna Road. "I know juggling my money like this will bring about a higher incidence of tax, but attractive rental yields ranging from 8.5-10% were a strong incentive for me to do so," he said.
    Industry experts estimate that around 30% of the country's real-estate growth during the last one year, has been in commercial space. The demand for commercial real-estates has been phenomenal during this period despite the negative sentiments reining in the global economy. "Current rentals might be low at the moment in the new business zones but they are poised to emerge as central business districts and capital appreciation is bound to happen," says Deepraj DP, AVP, Real Estate Advisory Services, Moneybag, Investcare.
    Among the reasons pointed out by analysts for falling demand for residential real estate are high FSI (floor space index) costs, increase in construction cost, high borrowing cost etc. "With correction in the real estate prices especially high-end real estate developments, people with excessive prelaunch or soft launch exposure got stuck with their investments as there were no buyers at a higher price," an official from iTrust, a financial advisory firm, said.
    The slump in the residential real estate sector is being made worse with quality supply and scope of capital appreciation in the commercial real estate segment and a sense of brand association among the retail investors creating a win-win situation for them. "High end residential real estate is the worst affected. The market index indicates a 35% slow down in purchasing activities for the high end segment and it is unlikely to regain the momentum for next 2 years," says Mr Deepraj.
    The slowdown in the demand for residential real estate sector is rapidly spreading to tier-II and tier-III cities. Short-term investors have burnt their fingers as they are struggling to find end-users in the market. Either they are stuck up with the investment or booking losses and hence causing them to exit. "In fact, the investment in pre-leased commercial real estate is primarily taking place in tier-II cities as the ticket size and transaction quantum for metros are still large," says Mr Mookim. According to Mr Deepraj, "The lower investment range products are commanding the highest marketability. The lower ticket size also seems appropriate for an investor who wants to take a comfortable exposure in commercial projects."
    shobhana.chadha@timesgroup.com