Commercial Real Estate Vs Reits - Best Investing Option For You?

By Author: Mehak Chauhan
Total Articles: 1
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With the popular investment options like residential and commercial properties real estate has generated billionaires across the globe but it is just not that. Real has been transforming itself and introducing novel investment options like REITs, fractional asset, crowdfunding.

Though REITs started half a century ago, it has just stepped into India recently, yesteryear precisely. With its top performance by outperforming the stocks, it certainly has raised the expectations of the market and might have tickled the investors, as to choose where to invest.

Let us know and compare Commercial Real Estate, the most sought after real estate investment option, and REITs.

What are Commercial properties and REITs?

Commercial properties could be any property that is generally used for business activities like office spaces, warehouses, retail and industrial buildings. You get your returns through rental income and when the property appreciates.

REITs or Real Estate Investment Trusts are the corporations that own assets over many property sectors with the investor’s money. They pay back the profits ...
... to investors in the form of dividends. You earn through rental income and also when the capital appreciates. As your capital appreciates, your share value also increases. In simpler words, REITs work like Stocks in Real Estate.

Commercial real estate Vs REIT's Pros and Cons-

Minimum investment-

Investing in Commercial Real Estate requires a minimum investment of Rs.25-30 Lakhs. But REITs require an investment as low as Rs.50,000 through stocks or require a minimum of Rs2 Lakhs if invested through IPO.

So, REITs when compared to commercial real estate require a lesser investment. Of course, lesser investment is advantageous, only if it ensures a good cash flow. Let’s check the cash flow of commercial real estate and REITs.

High cash flow-

Commercial Real Estate investment though high, earns you a decent rental income along with some interest-free security deposit. It would be an add-on if you manage to bag a long-term lease on the agreement. It reduces the potential risk due to vacancy. Though the rental income is subjected to market risks, the yields are positive in long-term markets. Also, capital appreciation brings in substantial returns over a period of time. Commercial Real estate has an estimated ROI of 6-10%.
Real Estate Investing Trusts distribute the rental yields as dividends to the investors. The latest introduction of REITs in India has seen a splendid response with REITs’ ROI standing at 14% by outperforming BSE, according to a report by ANAROCK.

Diversification-

Commercial Real Estate investment blocks your resources in a single asset. If the market takes a toll, it affects your returns adversely. Commercial real estate investment wants you to put an eye on the dynamics of the industry. Though any fall in the demand is interim, as the industry gets into the recovery stages after every fall and reaches even higher scales. But, you have to sustain through that falling cycles.
Investing in REITs is not going to let you down as the diversified portfolio of the REITs investment assures you a positive cash flow in the form of rental income. It is therefore lesser prone to market fluctuations.

Liquidity-

The motive of any investment is to grow the wealth and serve the purpose of meeting the demand under exigencies. Commercial real estate fetches greater returns when compared to any asset but has low liquidity. It might take you a few months to find a buyer and get the transaction done. The downside is that your property prices are controlled by the market trends. Any shortfall in the demand or a negative trend in the assets affects your liquidity further.

On the other hand, REITs maintain a good track of liquidity. You can sell the shares as and when required and get your earnings into your account. It serves the purpose of helping you in time making it a credible investment.

Property management-
The commercial property needs all your attention. You have to keep up with the trends and get the renovation done accordingly, else you will just be left with an outdated property. The asset also demands repairs and regular maintenance. Property management forms a crucial part of your investment when it comes to commercial property. It means you have to invest your time and resources every now and then.
REITs come with the advantage of hassle-free property management. The company hires a property manager who generally looks after the activities related to the property like collecting rents, repairs and maintenance, addressing grievances, and so on. You can just sit, relax, and enjoy your dividends.

Bottom Line-

After getting to know about commercial real estate investment and REITs, it is at your discretion to opt for the one that suits your obligations and aspirations. A good investment paired up with research on the trends can lure you towards commercial real estate and seeks your attention. While a smaller investment with a hassle-free earning journey attracts you towards REITs. Both have their own set of benefits and implications, commercial real estate being one of the oldest investment vehicles and REITs - the recent introduction to India.
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