Commercial real estate is among those asset classes that have the potential to offer stability of investment and competitive returns over the long term. While the general rule of thumb for any prudent investor is to stay invested for a longer duration, especially in commercial real estate, sometimes your goals might require you to invest in assets for shorter periods — a year or lesser.
Short-term investing, while not advised, can be done intelligently, while diversifying your portfolio as well. No matter what term or tenure you wish to choose to stay invested for, diversification is as important in commercial real estate as in any other kind of investment.
Here are the options available to an investor to diversify their commercial real estate investment portfolio.
Short-Term Vs Long-Term Investment in Commercial Real Estate
Before tackling the matter of diversification, it is important to understand what is called short term and long term with respect to commercial real estate.
Short-term investments in most asset classes are under a year, but for commercial real estate a short-term investment would mean a duration of two to three years, while a long-term investment typically means durations of five years and above.
Commercial real estate as an asset class is illiquid in nature and offers quantifiable returns only when long term investments are considered. That is the primary reason why it is advised to get into commercial real estate investments only if you are looking at longer tenures. Longer tenures help add on to the investment through capital appreciation by increasing the value of the asset over time. This translates to better returns for the investor over the investment period.
Capital appreciation is the difference between the purchase price and the selling price of an investment. Since real estate is immovable and properties generally tend to be long term in nature, time plays a crucial role in increasing the value of the asset. That is why the very method of investing in real estate becomes for a longer tenure than other contemporary asset classes.
For any commercial property, the investment period for two to three years can offer a return of 3% to 4%, while gross yields across investment periods of five years or more can be from 6% to 10%, as per the 2021 statistics shared by Knight Frank India.
Commercial real estate is a rather resilient asset class that stays insulated from sudden market changes, but at the same time is also quite responsive to positive trends in the market. The same can be observed by the quick comeback of the investment class even when the pandemic situation caused a lot of doubt and uncertainty in the market. Now that the differentiation between long- and short-term investments in commercial real estate is sorted out, let us look at how diversification can be achieved in commercial real estate .
Diversification in commercial real estate can be done in a similar manner for long-term as well as short-term goals. Let us outline the methods available for diversification –
Multiple transaction sponsors/investment firms
Multiple types of real estate
Multiple property classes
Multiple locations
Multiple Transaction Sponsors/Investment Firms To Diversify Your Investment
For investors who are looking to earn passive income, it is quite logical to approach different firms for investment. That will involve looking into the performance history of the firm and how well it has been delivering on the estimate of yields.
Be careful of “promised” yields, since that is not a way a proper investment firm should advertise their capability.
Look for the IRR mentioned on each asset listed by them and be clear about what the parameters are for arriving at the figure. Different firms will have different investment strategies and methods via which they seek out promising assets and how they assess the market.
Make sure you do a thorough research on every firm before going ahead with anyone. For example, if you want to invest INR 75 lakhs, you might choose to split that investment amount with 3-4 different firms/transaction sponsors based on how their investment strategies are.
Multiple Types To Diversify Your Investment
In India, there are majorly four types of commercial real estate that are recognized. They include commercial office spaces, industrial floors, warehousing, and mixed use. With every kind of real estate comes its own return rate, popularity, and susceptibility to the demand in the market.
Office spaces
These are the most known and easily understandable forms of commercial real estate. They are created to cater to the unique needs of running a business. It can be general purpose wherein it can cater to marketing, finance-related businesses. It can also be specifically created to fit the requirements of a laboratory, a doctor’s clinic, or the like. Investors in office spaces generally benefit from long term leases because it is rather costly to move a business once it has been established in an area.
The downside to such long leases is that rental increases might suffer a hit if the market is on a favourable trend. Secondly, based on the location of the asset, the office space might have to be outfitted with expensive add ons to entice newer and better-paying tenants.
Industrial floors
They can sometimes include warehouses – especially if you have encountered terminology from the US. In India, warehousing is generally treated differently from industrial spaces. Industrial spaces are mostly specifically built for the businesses frequenting the market in the area. Manufacturing units can be housed in such spaces, and they generally are in industrial hubs as well, with connectivity that allows for heavy transport commutation.
As an investment option, industrial spaces are closely linked to the business that require them. Unlike offices, a business will only increase its involvement in industrial floors if it is serious about expansion. Generally, the lease tenure is similar to that of warehouses, from mid to long term.
Warehousing
These picked up pace especially after the pandemic, with a rise of ecommerce. These are wide open spaces that are used to store goods, for manufacturing and industrial sectors, or as a waypoint in the supply and logistics chain of any business.
Of late, in commercial real estate, warehousing has been a much safer bet, even if the comparative rate of return is lesser than that of office spaces and industrial floors. Some warehouses can even be made special purpose and they can have a longer lease term – from 5 years, up to 10 years. While such spaces offer stable returns, rental increase can be stunted.
Mixed use spaces
These mean what they spell. They can be a combination of retail, warehouse, industrial purposes, while also allowing for dining, lodging, parking, and the like. Larger malls and shopping complexes can fall into this category.
The yield of such spaces is an aggregate of the businesses that occupy the space. In such cases, sub-leases can also be involved wherein the investment firm deals with different owners that sublet the space to different businesses.
The lease agreements of such spaces are multifold and rather complex. Based on the location and population density of the area, such spaces can have a great return on investment.
A mix of warehousing, industrial and office space assets is advisable for any portfolio, but you should also watch out for where the market is headed. That will help you allocate more funds to a particular asset type or pull back from another type.
Multiple Property Classes To Diversify Your Investment
If you have encountered advertisements for investing in commercial or residential properties, you might have come across terms like Grade/Class A, B, C, and D. Mostly, the C and D classes are not featured as prominently. It is important to understand what these grades are and how they affect your investment.
Grade A
These properties are mostly new, less than five years old and are built matching or exceeding the accepted norms or standards. They are located smack in the middle of business districts or industrial areas and have top notch connectivity to other commercial hubs in the region. They are the least risky and generally offer the most stable returns.
Grade B
These buildings are well-maintained, refurbished and might need some light renovations. They can be anywhere from seven years to 15 years old and are in or around the periphery of high commercial activity. The rents are comparatively lower than Grade A buildings but can offer higher return on investment as they are much more accessible to tenants.
The risk involved is higher than that with Grade A assets.
Grade C
These buildings are generally located away from business hubs and do not feature great connectivity. They could be up to 25 years old and will require moderate upkeep, maintenance, or repairs. Risk is higher, but it is also the class of buildings that might be vacant the least.
Special attention should be paid to the lease terms and the conditions for the increase in the rent upon renewal. While these buildings can offer high returns based on income and growth, the returns can also be variable from year to year.
Class D
These assets are something that most investors stay away from. Based on the boom/bust scenario of the market, these assets can either result in amazing returns or total loss on investment. They can require major overhauling to bring them back to market standards.
As an investor, a mix of Grade A and B assets can be good for an average portfolio, while only seasoned investors can venture into Grade C assets for growth opportunities.
Multiple Locations To Diversify Your Investment
The commercial real estate market is insulated from the stock or bond market but is dependent on the demand in the general real estate market and the associated businesses that require commercial properties. Thus, location matters a lot.
Stable office markets can be chosen from metros like Bengaluru, Mumbai, Pune, Delhi while growth opportunities can be picked from nearby suburbs where the working population is growing in numbers. Another way to stabilise a portfolio is to look at long term warehousing and industrial spaces where your investment can provide a steady inflow of passive income.
Bottom Line
Diversification is important in any kind of investment and the same holds true for commercial real estate as well. A planned diversified portfolio can boost returns and reduce whatever little risk is present in commercial real estate investments.
At the same time, you should also bear in mind that riskier opportunities can come with the hope of higher returns, but as an investor, you need to be clear about your goals and the time for which you can stay invested in an asset.
MONTREAL – Two Quebec real estate brokers are facing fines and years-long suspensions for submitting bogus offers on homes to drive up prices during the COVID-19 pandemic.
Christine Girouard has been suspended for 14 years and her business partner, Jonathan Dauphinais-Fortin, has been suspended for nine years after Quebec’s authority of real estate brokerage found they used fake bids to get buyers to raise their offers.
Girouard is a well-known broker who previously starred on a Quebec reality show that follows top real estate agents in the province.
She is facing a fine of $50,000, while Dauphinais-Fortin has been fined $10,000.
The two brokers were suspended in May 2023 after La Presse published an article about their practices.
One buyer ended up paying $40,000 more than his initial offer in 2022 after Girouard and Dauphinais-Fortin concocted a second bid on the house he wanted to buy.
This report by The Canadian Press was first published Sept. 11, 2024.
MONTREAL – The Quebec Professional Association of Real Estate Brokers says Montreal-area home sales rose 9.3 per cent in August compared with the same month last year, with levels slightly higher than the historical average for this time of year.
The association says home sales in the region totalled 2,991 for the month, up from 2,737 in August 2023.
The median price for all housing types was up year-over-year, led by a six per cent increase for the price of a plex at $763,000 last month.
The median price for a single-family home rose 5.2 per cent to $590,000 and the median price for a condominium rose 4.4 per cent to $407,100.
QPAREB market analysis director Charles Brant says the strength of the Montreal resale market contrasts with declines in many other Canadian cities struggling with higher levels of household debt, lower savings and diminishing purchasing power.
Active listings for August jumped 18 per cent compared with a year earlier to 17,200, while new listings rose 1.7 per cent to 4,840.
This report by The Canadian Press was first published Sept. 6, 2024.
In the quest to find cities where renters can enjoy the best of all worlds, a recent study analyzed 24 metrics across three key categories—Housing & Economy, Quality of Life, and Community. The study ranked the 100 largest cities in Canada to determine which ones offer the most to their renters.
Here are the top 10 cities that emerged as the best for renters in 2024:
St. John’s, NL
St. John’s, Newfoundland and Labrador, stand out as the top city for renters in Canada for 2024. Known for its vibrant cultural scene, stunning natural beauty, and welcoming community, St. John’s offers an exceptional quality of life. The city boasts affordable housing, a robust economy, and low unemployment rates, making it an attractive option for those seeking a balanced and enriching living experience. Its rich history, picturesque harbour, and dynamic arts scene further enhance its appeal, ensuring that renters can enjoy both comfort and excitement in this charming coastal city.
Sherbrooke, QC
Sherbrooke, Quebec, emerges as a leading city for renters in Canada for 2024, offering a blend of affordability and quality of life. Nestled in the heart of the Eastern Townships, Sherbrooke is known for its picturesque landscapes, vibrant cultural scene, and strong community spirit. The city provides affordable rental options, low living costs, and a thriving local economy, making it an ideal destination for those seeking both comfort and economic stability. With its rich history, numerous parks, and dynamic arts and education sectors, Sherbrooke presents an inviting environment for renters looking for a well-rounded lifestyle.
Québec City, QC
Québec City, the capital of Quebec, stands out as a premier destination for renters in Canada for 2024. Known for its rich history, stunning architecture, and vibrant cultural heritage, this city offers an exceptional quality of life. Renters benefit from affordable housing, excellent public services, and a robust economy. The city’s charming streets, historic sites, and diverse culinary scene provide a unique living experience. With top-notch education institutions, numerous parks, and a strong sense of community, Québec City is an ideal choice for those seeking a dynamic and fulfilling lifestyle.
Trois-Rivières, QC
Trois-Rivières, nestled between Montreal and Quebec City, emerges as a top choice for renters in Canada. This historic city, known for its picturesque riverside views and rich cultural scene, offers an appealing blend of affordability and quality of life. Renters in Trois-Rivières enjoy reasonable housing costs, a low unemployment rate, and a vibrant community atmosphere. The city’s well-preserved historic sites, bustling arts community, and excellent educational institutions make it an attractive destination for those seeking a balanced and enriching lifestyle.
Saguenay, QC
Saguenay, located in the stunning Saguenay–Lac-Saint-Jean region of Quebec, is a prime destination for renters seeking affordable living amidst breathtaking natural beauty. Known for its picturesque fjords and vibrant cultural scene, Saguenay offers residents a high quality of life with lower housing costs compared to major urban centers. The city boasts a strong sense of community, excellent recreational opportunities, and a growing economy. For those looking to combine affordability with a rich cultural and natural environment, Saguenay stands out as an ideal choice.
Granby, QC
Granby, nestled in the heart of Quebec’s Eastern Townships, offers renters a delightful blend of small-town charm and ample opportunities. Known for its beautiful parks, vibrant cultural scene, and family-friendly environment, Granby provides an exceptional quality of life. The city’s affordable housing market and strong sense of community make it an attractive option for those seeking a peaceful yet dynamic place to live. With its renowned zoo, bustling downtown, and numerous outdoor activities, Granby is a hidden gem that caters to a diverse range of lifestyles.
Fredericton, NB
Fredericton, the capital city of New Brunswick, offers renters a harmonious blend of historical charm and modern amenities. Known for its vibrant arts scene, beautiful riverfront, and welcoming community, Fredericton provides an excellent quality of life. The city boasts affordable housing options, scenic parks, and a strong educational presence with institutions like the University of New Brunswick. Its rich cultural heritage, coupled with a thriving local economy, makes Fredericton an attractive destination for those seeking a balanced and fulfilling lifestyle.
Saint John, NB
Saint John, New Brunswick’s largest city, is a coastal gem known for its stunning waterfront and rich heritage. Nestled on the Bay of Fundy, it offers renters an affordable cost of living with a unique blend of historic architecture and modern conveniences. The city’s vibrant uptown area is bustling with shops, restaurants, and cultural attractions, while its scenic parks and outdoor spaces provide ample opportunities for recreation. Saint John’s strong sense of community and economic growth make it an inviting place for those looking to enjoy both urban and natural beauty.
Saint-Hyacinthe, QC
Saint-Hyacinthe, located in the Montérégie region of Quebec, is a vibrant city known for its strong agricultural roots and innovative spirit. Often referred to as the “Agricultural Technopolis,” it is home to numerous research centers and educational institutions. Renters in Saint-Hyacinthe benefit from a high quality of life with access to excellent local amenities, including parks, cultural events, and a thriving local food scene. The city’s affordable housing and close-knit community atmosphere make it an attractive option for those seeking a balanced and enriching lifestyle.
Lévis, QC
Lévis, located on the southern shore of the St. Lawrence River across from Quebec City, offers a unique blend of historical charm and modern conveniences. Known for its picturesque views and well-preserved heritage sites, Lévis is a city where history meets contemporary living. Residents enjoy a high quality of life with excellent public services, green spaces, and cultural activities. The city’s affordable housing options and strong sense of community make it a desirable place for renters looking for both tranquility and easy access to urban amenities.
This category looked at factors such as average rent, housing costs, rental availability, and unemployment rates. Québec stood out with 10 cities ranking at the top, demonstrating strong economic stability and affordable housing options, which are critical for renters looking for cost-effective living conditions.
Québec again led the pack in this category, with five cities in the top 10. Ontario followed closely with three cities. British Columbia excelled in walkability, with four cities achieving the highest walk scores, while Caledon topped the list for its extensive green spaces. These factors contribute significantly to the overall quality of life, making these cities attractive for renters.
Victoria, BC, emerged as the leader in this category due to its rich array of restaurants, museums, and educational institutions, offering a vibrant community life. St. John’s, NL, and Vancouver, BC, also ranked highly. Québec City, QC, and Lévis, QC, scored the highest in life satisfaction, reflecting a strong sense of community and well-being. Additionally, Saskatoon, SK, and Oshawa, ON, were noted for having residents with lower stress levels.
For a comprehensive view of the rankings and detailed interactive visuals, you can visit the full study by Point2Homes.
While no city can provide a perfect living experience for every renter, the cities highlighted in this study come remarkably close by excelling in key areas such as housing affordability, quality of life, and community engagement. These findings offer valuable insights for renters seeking the best places to live in Canada in 2024.
