Commercial property in India can offer higher rental yields (6–9%), long leases with built-in escalations, and diversification from equity/retail real estate. The trade-offs are high ticket sizes, illiquidity, tenant/vacancy risk, and ongoing capex/compliance. For many investors, REITs deliver similar income with better liquidity and governance, while direct ownership suits those who can underwrite assets deeply and manage them professionally.
What counts as “commercial” real estate?
- Office (Grade-A parks, strata floors)
- Retail (high street, malls)
- Industrial & Logistics (warehouses, last-mile, cold storage)
- Specialised (data centres, hospitals, co-working/managed offices, hotels under lease)
Each subtype has a different risk–return profile and capex intensity.
Advantages (Pros)
1.Higher income yield vs residential
- Typical gross yields: 6–9% for Grade-A offices/warehouses; high-street retail may exceed this but with higher risk.
- Leases often include 5% annual or 15% every 3 years escalations, helping your real rent keep pace with inflation.
2.Longer leases, better visibility
- Corporate tenants, multi-year lock-ins, and security deposits provide some income stability.
3.Institutionalisation tailwind
- Growth of REITs, professional property managers, and standardised leasing improves transparency and exit options.
4.Tangible collateral & leverage
- Assets can be mortgaged; if the cap rate > interest cost, leverage can enhance equity returns.
5.Portfolio diversification
- Low correlation to equities; rental income can act as a semi-bond-like cash flow.
6.Tax efficiency of rental income
- Commercial rent is taxed under Income from House Property with a standard 30% deduction for repairs/maintenance (actual rules can change; consult your CA).
Disadvantages (Cons)
1.High ticket size & concentration risk
- Quality assets in Tier-1 markets can demand ₹10–50+ crore; a single vacancy can hit cash flows.
2.Illiquidity & long exit timelines
- Sales can take months; distress sales may require price cuts.
3.Vacancy & tenant credit risk
- Downgrades, business exits, or sector slowdowns (e.g., start-ups, co-working) can disrupt rent.
4.Capex drag & obsolescence
- Fit-outs, retrofits (green certifications, tech upgrades), and refurbishments reduce net return.
5.Compliance & operating complexity
- Lease registration/stamp duty, property tax, GST applicability on commercial rent, fire/NOC compliances, and facility management.
6.Interest-rate sensitivity
- Rising rates can turn positive leverage negative, compressing equity IRR (see DSCR chart below).
How to evaluate: the essential metrics
1) Gross Yield
Gross Yield=Annual Rent (Contracted)Purchase Price×100\text{Gross Yield} = \frac{\text{Annual Rent (Contracted)}}{\text{Purchase Price}} \times 100
2) Net Yield
Net Yield=Annual Rent−Vacancy Allowance−Opex/Taxes/InsurancePurchase Price×100\text{Net Yield} = \frac{\text{Annual Rent} – \text{Vacancy Allowance} – \text{Opex/Taxes/Insurance}}{\text{Purchase Price}} \times 100
3) Capitalisation Rate (Cap Rate)
Often used synonymously with net yield at acquisition.
Cap Rate≈Net Operating Income (NOI)÷Purchase Price\text{Cap Rate} \approx \text{Net Operating Income (NOI)} \div \text{Purchase Price}
4) Debt Service Coverage Ratio (DSCR)
DSCR=NOIAnnual Debt Service\text{DSCR} = \frac{\text{NOI}}{\text{Annual Debt Service}}
Aim for DSCR ≥ 1.25 to absorb shocks.
5) Break-Even Occupancy
Break-Even Occupancy=Opex+Debt ServicePotential Gross Rent\text{Break-Even Occupancy} = \frac{\text{Opex} + \text{Debt Service}}{\text{Potential Gross Rent}}
Lower is safer.
6) Equity IRR (levered)
Depends on entry cap rate, rent escalations, vacancy/renewal, exit cap, and loan terms.
Direct Ownership vs REITs vs Fractional: quick comparison
| Feature | Direct Ownership | REITs | Fractional/Strata |
|---|---|---|---|
| Minimum Ticket | Very high (₹ crores) | Low (₹100s–₹1,000s) | Medium (₹10–50+ lakh typical) |
| Liquidity | Low | High (stock exchange) | Low–Medium (platform-driven resale) |
| Diversification | Single/ few assets | Portfolio across cities/tenants | A few assets |
| Governance | Owner-managed | SEBI-regulated, institutional | Platform-driven; diligence required |
| Yield (cash payout) | Net yield depends on asset | Dividend yield linked to portfolio | Target yields; check fees/vacancy |
| Control | Full control | No control | Limited/committee |
| Effort | High | Low | Medium |
Related reads: “What is a REIT and How to Invest?”, “Fractional Real Estate: Risks and Rewards”, “How to Evaluate a Real Estate Project”.
Practical checklist before you invest
- Asset quality & micro-market: Grade-A vs B; vacancy in competing buildings; upcoming supply pipeline.
- Tenant profile: Credit rating, business stability, parent guarantees, lease lock-ins, and security deposit sufficiency.
- Lease terms: Escalation schedule, CAM (common-area maintenance) pass-throughs, fit-out ownership, sub-leasing, early termination clauses.
- Technical & legal due diligence: Title search, RERA (where applicable), building approvals, fire/structural certificates.
- Costs beyond price: Stamp duty/registration, brokerage, fit-outs, initial vacancy, property tax, insurance, ongoing capex.
- Financing: Fix vs floating rate; prepayment penalties; covenant headroom (DSCR/LTV); EMI vs rent seasonality.
- Exit strategy: Likely buyer (HNIs, family offices, funds), hold period, and exit cap rate assumption.
- Tax: Classification under “Income from House Property” (30% standard deduction), city-specific property taxes, GST on commercial rent (consult your CA), and TDS provisions for rent/interest as applicable.
Pros & cons by sub-segment (at a glance)
- Grade-A Office:
- Pros: Institutional demand, long leases, predictable escalations.
- Cons: Large ticket sizes, cyclical absorption, capex for retrofits (ESG, tech).
- High-Street Retail:
- Pros: High yields, strong locations can be defensible.
- Cons: Tenant churn, format risk, higher downtime between leases.
- Warehousing/Logistics:
- Pros: Rising e-commerce demand, often simpler fit-outs.
- Cons: Location-specific; rental growth linked to infrastructure corridors.
- Data Centres/Healthcare:
- Pros: Long contracts, mission-critical use.
- Cons: Specialist diligence, heavy capex and utilities risk.
Who is commercial property suitable for?
- HNIs/Family Offices seeking stable, inflation-linked cash flows and willing to commit capital long-term.
- Investors comfortable with due diligence, vacancy buffers, and engaging professional property/facility managers.
- Those who prefer liquidity and regulated governance should consider REITs first; add direct assets selectively for enhanced yield or specific theses.
FAQs
1) Is commercial property better than residential for income?
Usually yes—net yields are higher and leases are longer. But vacancy risk is also higher, and capex can be material.
2) What is a “good” cap rate in Tier-1 Indian cities?
It varies by micro-market, building grade, and tenant quality. Focus less on absolute cap rate and more on cap-rate vs interest-cost spread, DSCR ≥ 1.25, and realistic vacancy/renewal assumptions.
3) How do rent escalations work?
Common patterns are 5% every year or 15% every 3 years. Check if escalations apply to base rent only (not CAM/parking) and whether they reset on renewal.
4) How do taxes work on commercial rent?
Rental income is generally taxed under Income from House Property with a 30% standard deduction; GST may apply on commercial rent. TDS rules may also apply. Always confirm with a chartered accountant for current provisions.
5) Should I buy directly or through a REIT/fractional platform?
If you want liquidity, diversification, and low effort, start with REITs. Consider direct purchases only when you have a clear edge (superior sourcing, asset management capability) and can withstand vacancy/capex cycles.
Key takeaways
- Commercial property can be a compelling income asset in India but requires professional underwriting.
- Returns hinge on entry cap vs cost of debt, tenant quality, lease terms, and capex discipline.
- Many investors should start with REITs; graduate to direct ownership after building expertise and a buffer for vacancy/capex.
Disclaimer: Educational content only. Market regulations, taxes, and yields change. Consult a SEBI-registered investment adviser and your CA before acting.