An Introduction to Commercial Property Leasing in India

When you are starting a new business, getting a place to set up your office or shop is one of the first considerations.

Now, at this stage, you may not be able to afford to buy a property altogether.

This is where commercial leasing comes into play.


So, let us understand the definition, types and process of commercial leasing in India.


What is Commercial Leasing?

Leasing refers to a contractual agreement under which the owner of a property gives the rights to another party (lessee) to use the said property in exchange for money, subject to certain terms and conditions.

A ‘Commercial Lease’ is one under which the property is leased for commercial purposes such as business, office space, retail space, individual shops, etc.

Unlike residential leases which are quite easy to understand, a commercial lease can be a little more complex as it comes with several terms and conditions.

Also, commercial property on rent out not only to individuals but also to entities such as a sole proprietorship, HUF, or corporates.


Types of Leasing Structures in India

On a broad level, there are two main types of a lease in India-

1 Operating Lease.
2 Financial Lease.

difference-between-operating-lease-and-financial-lease

1. Operating Lease

Under an operating lease, the legal ownership of the property lies with the property owner.

The owner only extends the rights to use his property for economic uses or business purposes for a pre-defined period of time.

Once the lease duration ends, both properties can decide whether to extend the lease allowing continuous usage of the property to the lessor or to terminate the contract.

The ownership, however, lies with the true owner throughout.


2. Financial Lease

In case of a financial lease as well, the property rights remain with the owner during the lease period.

However, at the end of the lease, the tenant party is given the option to purchase the said property by paying the residual amount.

This amount is usually pegged at 10% of the value of the property or less.

You can see this type of lease as a loan. The tenant will keep paying the lease rent (such as EMIs) and, in the end, pay the residual sum, and own the property.


Comparison: Financial Lease Vs. Operating Lease

FeatureFinancial leaseOperating lease
Legal ownershipLessorLessor
Right to economic usageLesseeLessee
Responsibility for insuring assetLessor or lessee depending on contractLessor or lessee depending on contract
Responsibility for maintenance of assetLesseeGenerally lessee; some leases may offer bundled contracts with maintenance by lessor or lessor appointed agency
Transfer of ownership at end of leaseLease agreement will typically offer a renewal or purchase at a price considerably lower than the fair market rental/ price of the assetThe asset is returnable to the lessor; lease contract may offer a purchase option at a price usually based on expected fair value of the asset
Choice of vendorLesseeLessee, but subject to greater involvement of the lessor

So, before you sign on the dotted line, one of the major considerations is to see which type of commercial property lease you are offered and the terms and conditions that it entails.

Being a smart property seeker will always work in your favor and save you from future problems and regret.

Why should you invest in commercial property in India?

These are uncertain times for all industries and people are reconsidering their investments.

However, even under these circumstances, real estate is still considered a safe haven by many investors.

Also, the property rates have reached the affordable mark for many and developers are rolling out several deals and discounts which makes it even better to invest in commercial real estate.

So, if you are wondering whether you should invest in commercial property in India, here are a few reasons why your answer should be ‘yes’.

1.       Higher Returns on Investment

Multiple times, it has been stated that commercial real estate offers better return on investments than residential real estate.

This is because of its direct connection with the country’s economy. Rising demand for offices, retail spaces and warehouses have always driven the appreciation in the value of commercial properties.

Depending on the location of your property, you can expect year-on-year appreciation anywhere between 3% and 7%.

2.       A Source of Regular Income

Commercial properties not only offer better appreciation in the long run, they also give you regular rental returns.

If you have taken the property solely for investment purpose, you should look for the right location and the type of office/retail spaces in demand.

If you choose the right commercial property, the rental returns could help you reach its costs in only a few years.

3.       More Organized

With the coming of Real Estate Investment Trusts (REITs) and Real Estate Regulatory Authority (RERA) in India, the real estate market has become a lot more organized.

The affects are seen majorly in the commercial real estate segment.

Previously, people were apprehensive about such investments but now the confidence is developing in the market.

4.       Lesser Maintenance Burden

Though there are maintenance costs associated with residential as well as commercial properties, most of it is borne by the tenant in case of commercial ones.

So, despite facing the cost of maintenance, you can pass it on to the tenants and relieve yourself of the burden.

5.       Greater Liquidity

 


Depending on the location of the property, commercial buildings like office spaces and retail spaces enjoy better liquidity.

This is because of the high demand for such properties in areas that have good connectivity and easier access to resources.

On the other hand, residential properties may lie vacant for a long time and even if leased get a lower rental value.


So, these were the 5 main reasons why investing in commercial real estate is a good idea.

When looking for a commercial investment, location should be the first thing to consider. Do not choose a property just because it is within your budget.

Try to understand the future prospects of the property as well as the location. If a location grows into a business hotspot, you will get tremendous returns.