Pre-leased properties are those, which already have tenants and ensure fixed income or assured returns. Such properties come with several benefits like higher capital appreciation, regular income, and zero waiting periods. However, due diligence is a must before investing in these properties. Here is a brief guide on pre-leased properties and their intrinsic aspects.
Pre-leased properties have become increasingly popular, especially in the commercial real estate segment. To put it simply, pre-leased properties are the ones that are already leased out at the time of sale, and the investor continues with the lease to earn steady returns.
According to a research report, Ultra-High-Net-Worth Individuals (UHNIs) prefer investing in Grade-A pre-leased commercial units. This is because pre-leased properties offer fixed income from high-quality tenants, and investors can exit the market with capital appreciation. However, the rate of capital growth would be subject to the holding period and the market scenario.
Commercial properties mainly come in leasehold (from Government organizations like MIDC with 99-year tenures) and freehold (buyer gets the exclusive property and land ownership) avatars. Most pre-leased commercial deals take place in the freehold segment in India.
Pre-leased properties come with numerous advantages like the following:
Zero waiting periods: Investors do not have to wait for a certain period to earn returns on pre-leased properties. These properties already have tenants, and investors immediately start earning monthly rentals after the transfer of the lease deed.
Capital appreciation: Values of pre-leased units usually increase handsomely against vacant properties. Units in prime areas with great amenities and infrastructure may also offer higher appreciation. Hence, buyers with a longer investment horizon may benefit from a good appreciation of capital values.
Assured monthly income: When the investor gets the lease transfer on the commercial unit, the legal right to receive monthly rentals is part of the deal. Thus, these properties ensure fixed and assured income each month.
High liquidity: While finding a potential buyer may be challenging in real estate, pre-leased commercial properties are easy to sell. Many investors prefer these assets, thus ensuring higher liquidity.
Rental discounting facility: Lessors can apply for term loans at low-interest rates against the rental income of their pre-leased commercial unit. This will help lessors raise more money on the underlying value of the property and the discounted value of the monthly rentals.
Rental hike: With these investments, buyers do not have to worry about rental growth. Agreement renewals also ensure periodic rental increases.
Lower risk: Investors face lower risks in pre-leased properties as they offer guaranteed income and handsome returns. The chances of tenants vacating these properties before the expiry of the agreement are always slim.
There are some concerns that you should address before investing in a pre-leased property. These include:
Higher capital value: The market value of the pre-leased property is always higher than the vacant commercial unit. Buyers should review the price difference between these two properties and decide accordingly.
Tenant quality: Investors should assess tenant quality and credibility, including their financial position and credit history, before finalizing the deal. The purpose is to ensure that they pay rentals promptly.
Lease Duration: Checking the commercial lease term is a must since finding new tenants is a time-consuming affair. Ensure that the lease is for a longer term.
Taking professional advice is always the best option before choosing a pre-leased property. Also, check the lease duration, tenant details, and property values of similar properties in the area before putting down your hard-earned money. If you play your cards right, pre-leased properties can turn into rewarding investments in the future.
