Commercial Real Estate

Commercial real estate comprises of all the properties that yield a return either in the form of capital or rental (which is incurred when the land is leased). The different types of property that can be included in this category are malls, factory, warehouses, research laboratories, etc. the inclusion of hotels in this category is still ambiguous.

In more recent times, niche properties are hot cakes in the eye of investors. They are specialty commercial real estate. Investors also aim at proper infrastructure facilities like airports, railway stations, garage, prisons and courts.

Most investors look for properties which are free from legal disabilities like land ceiling actor lack of capacities. They various types of investments, according to the risk the investors are ready to bear, are as follows.

1. Core properties: this involves minimum risk. The internal return rate of such properties is less than 10%. We can cite an example of a fully leased building in a strong market.

2. Core plus properties: The internal return rate is between 10 to 13%. The risks involved in such properties, is slightly less as compared to core properties. As in the above case, the building instead of being fully leased, it is 90% occupied.

3. Value added properties: They grant an internal return rate of about 14-17%. For example, a buyer, leases an old office building and then invests a sky-rocketing amount in its reconstruction. It can then be leased at much higher rents.

4. Opportunistic properties: The internal return rate is about 18%. The property is bought from a seller undergoing financial crisis or is on the verge of bankruptcy.

Many different kinds of investors invest in commercial real estates. For example, foreign investors, who invest in another country. Banks, endowments and foundations are examples of institutional investors. Many a times, private investors are involved. Family or mainly trusts and sometimes a church or a religious organization own properties. They can then lease the land at their desired rent. They can then claim the ownership when the term of lease expires.

Funds and loans are available to the investors, which enable them to invest in properties. The fund operators demand a share in the profit when minimum rate of return is achieved. Funds are run by either private companies or by banks or large financial institutions. Sometimes, developers develop a particular piece of commercial real estate and then sell once the construction is completed. They may or may not have their private fund. In the latter case, a loan may be taken for commercial real estate.