One of the most frequent questions related to commercial real estate investments that one might have, or come across is regarding the classification of Class A, B and C (we will be using class and grade synonymously until stated otherwise), and why are they classified separately?
To begin with, as these properties are identified on the basis of several factors including a combination of geographical and physical characteristics of a property, each class offers a different set of risks and returns. The grades are generally assigned after a detailed analysis of property on parameters such as the age of the property, possibility of appreciation, amenities offered, location rental income, etc.
Why does The Grade Matter?
“A rising tide floats all boats”, in a strong market all properties are valued, but when the market comes crashing down only the fittest survive the crush. A-Grade properties continue to perform well while the other two grades tend to get affected by volatile markets, C Grades being the worst hit of all.
As A-Grade properties tend to be highly lucrative and in demand, this makes these properties easy to sell off as well. Hence knowing which property belongs to what category is very important before you move forward with the investment.
Based on all the other factors properties are characterised as A, B and C where A is the best-performing property and C is generally the least performing of all.
Grade A
These are the best performing, highest quality buildings in their respective markets and locality. These are managed by professionals. As they have noteworthy architectures that conform to the latest design, efficiency and standards, they generally take up the centre stage and attract popular attention.
These also tend to demand the highest rents with minimal maintenance issues and great amenities such as HVAC (Heating Ventilation, Air Conditioning) and very safe elevators along with other outstanding services.
These are considered the best properties for investment.
Grade A properties are located in big cities and get famous corporates as tenants and often compete among each other for the biggest companies.
As Grade A properties are designed to serve all your needs, they have ATMs and other facilities located within the very building compounds, some also have nurseries and children centres for working parents.
In cities like Mumbai, Delhi and Hyderabad, due to the popular demand, Grade A property owners are also considering bringing some much-needed greenery in their design.
Grade B
One step down, these properties are generally older than A-Grade properties and the rental income here is typically lower than its A grade counterpart.
These are not really bad properties, but they might lag in some aspects. A well maintained property but located somewhere difficult to reach, sometimes these properties can be very well placed but in need of slight alterations and renovation. IN that case, these properties can be upgraded to a B+ or Class A property with some upgrading that might help raise its value in the market.
Buyers generally target this class of buildings for their potential value and challenge it offers. These properties are ideal for fixes and flippers as you can purchase them at the cost of a B grade property and resell it as an A-Grade property.
Grade C
Class C properties are generally older and located in less desirable locations. These can be very risky properties as some properties can need heavy reposting to be able to generate a steady cash flow. These properties can also need heavy renovations to make them desirable and to attract tenants as they lack infrastructure and other amenities.
Grade C properties are not very popular because these are not very popular, and rental income is also the lowest. We have seen the effects of the COVID pandemic on all properties, while all properties suffered at the hands of lockdown and economic crisis, C grade properties were the worst hit of all.
What do these differences signify for an investor?
The property grade that one chooses to invest in can greatly influence their investment in terms of stability, returns offered and risks they bear. Hence it is important for investors to understand the risk and return pattern of all these grades. Class A is the most secure investment option offered by CRE investment platforms such as Assetmonk.
While Class B is also a decent investment option, it is ideal for Fix and Flip investment but one must be very careful before moving forward with a Grade C investment.
Assetmonk is a real estate investment platform specialising in real estate fractional ownership and real estate crowdfunding investments. They also offer an annual IRR of up to 21% which is larger than most investment platforms.
As a WealthTech platform focusing on real estate investments, Assetmonk indulges in in-depth research before moving forward with one certain property and building. You can rely on Assetmonk for the best and most reliable long-term real estate investments with high returns.
Bottom Line
Real estate investment can be really profitable, but one must invest smartly to make the most of their investments. A very essential part of the investment is knowing what grade you are investing in and what do you expect to earn from it.
Looking for guidance in real estate investment? Feel free to approach our experts through the Assetmonk Q/A page.
