Commercial Real Estate: Navigating the Pitfalls of False Promises and Poor Locations

Discover how false promises, legal gaps, and poor location choices can turn commercial real estate investments into financial losses. Learn from real-life examples and expert advice.

Commercial Real EstateInvestmentPropertyReal Estate InvestmentLegal IssuesReal Estate NewsJun 09, 2025

Commercial Real Estate: Navigating the Pitfalls of False Promises and Poor Locations

Real Estate News:Commercial real estate often appears lucrative, with projected rental yields of 6-7% compared to the 3-5% typical of residential spaces. However, these higher returns come with greater risks and challenges. One of the biggest hurdles is finding tenants. Even once-thriving shopping hubs can lose relevance, as seen with the rise of newer, better-located competitors.

When Bengaluru-based Ankush Mehrotra invested in two office units in a commercial complex in Greater Noida, he was promised attractive returns. He paid Rs.1 crore for the two blocks. But the reality turned out to be starkly different. Years later, both properties remain vacant, and his return on investment has dipped significantly. Despite not having a tenant, Mehrotra shells out Rs.75,000 per block annually as maintenance charges.

Such ghost malls are not isolated cases. According to a 2024 report by Knight Frank India, 75% of the total 125.1 million sq. ft. of gross leasable retail space in the country is currently classified as ‘ghost malls.’ Delhi-NCR alone accounts for 21 such shopping centres — the highest in India.

Steering clear of such underperforming commercial properties is key to achieving meaningful returns. With limited demand, offloading such assets becomes an uphill task. While papers may show capital appreciation, the actual realisation is often a fraction of that, if you are able to find a buyer at all. Mehrotra is currently facing this challenge. Even if he manages to sell, high transfer charges and taxes payable to the Greater Noida Authority would significantly erode his gains. “Assuming I get the current estimated value of about Rs.1.3 crore, I’ll probably be left with a loss of around 1-2%, despite holding the property for 10 years,” he says ruefully.

Many investors in similar situations find themselves stuck. Had the same money been allocated to a different asset class, returns could have been far superior without the burden of managing the property. If Mehrotra had invested his Rs.1 crore corpus in equity markets and earned an average of 10.5%, his investment could have grown to around Rs.2.37 crore, leaving him with a profit of Rs.1.37 crore post tax.

However, not all properties share the same fate. With due diligence, they can still be profitable. Location, for instance, remains the most critical factor. “Commercial investment should not be done in geographies where there is too much supply and too little demand,” says Ganesh Arunachalam, Vice President, Property Share. A favourable location ensures better tenant inflow and higher occupancy.

Even then, tenant retention can pose challenges. Businesses often vacate spaces if performance dips. Arunachalam suggests collecting a minimum of six months’ worth of security deposit and including a lock-in period in the contract to prevent premature exits. “Letting tenants carry out their own fitouts also increases their commitment and makes them less likely to leave,” he adds.

Investors should also transact through Real Estate Regulatory Authority (RERA)-registered brokers to avoid future disputes. A lack of transparency can prove costly, as Pune-based Rahoul Bondrre learnt. He purchased a shop based on a broker’s assurances, only to later discover that the property was in a collector’s zone — a government-owned area leased to individuals — making resale impossible. He had to pay Rs.5 lakh more to resolve the issue. “When I purchased the property, no one was aware of this law, and the lawyers said that the papers looked fine,” he shares. Compounding his troubles, the area was still underdeveloped, and it took seven years to find a tenant.

Misrepresentation by brokers is not uncommon. In Mehrotra’s case too, his broker promised a guaranteed lease and upcoming metro connectivity, none of which materialised. With no tenant and high maintenance costs, his asset turned into a liability. In extreme cases, some brokers offer to buy back the property, but only if the investor commits to another purchase using the sale proceeds. Buyers caught in such traps may have limited legal recourse, but there are still a few legal actions that can be taken.

Gaurav Dasgupta, Partner, Khaitan & Co., explains, “A broker has a fiduciary duty towards the buyer, as the buyer relies on the broker’s information, expertise, and knowledge to make the property purchase and pays brokerage accordingly. If the broker provides a misleading or false rental yield promise, it constitutes a breach of that fiduciary duty.” Alay Razvi, Managing Partner, Accord Juris, explains, “If a buyer wants to take legal action, there must be a written contract clearly stating the returns that were promised. Agents often make false claims to influence the sale, but just not getting the returns you expected isn’t enough to take legal action, unless you can prove the broker misled you.”

Also, if the project and the broker are registered under RERA, and an allottee believes that the broker gave inflated or misleading rental yield projections, a complaint can be filed with the respective state’s RERA authority. The regulator has the power to impose penalties and interest on the agent.

In Bondrre’s case, it was mentioned in the agreement that the property fell under the collector’s zone. “It should have raised a red flag. Buyers should always engage competent lawyers to conduct a thorough title investigation and to draft contracts that go beyond formality and address actual risk,” says Rishabh Gandhi, Managing Partner, Rishabh Gandhi and Advocates.

However, Dasgupta cautions against assuming that a legal redress is easy. “Practically speaking, taking a successful legal action against the broker might be quite difficult. The burden of proof, to a large extent, is on the purchaser to show that the broker’s misleading statements directly caused him to invest. A lot of these conversations about rental yield with the brokers are one-on-one or verbal, and ascribing liability on the broker becomes practically difficult in the court,” he says.

That’s why having a well-drafted contract with complete disclosures is essential. For added safety, investing in Grade A properties is recommended, as these often come with better tenant profiles and regulatory compliance. However, the ticket size of such assets can be steep, often in the range of Rs.10-15 crore, putting them out of reach for most middle-class investors.

SM REITs (Small and Medium Real Estate Investment Trusts) and traditional REITs are some other ways to invest. They invest your money in Grade A properties, and you may get a reasonable return on your investment. Unlike traditional REITs that pool investor money into large-scale, diversified real estate portfolios, SM REITs focus on smaller, professionally managed, income-generating commercial properties. These vehicles offer access to premium assets with a lower entry barrier, starting at Rs.10 lakh and are gaining popularity among retail investors looking for more curated exposure to commercial real estate.

However, Ashish Chadha, a registered investment adviser based in Gurugram warns, “Most investors prefer global REITs as Indian options may not be attractive yet. Liquidity can also be a concern sometimes.”

Srikant Bhagavat, Managing Director, Hexagon Capital Advisors, says, “Right now, SM REITs have limited use cases. But traditional REITs offer a promising future. They allow investors to gain exposure to specific segments of real estate, like malls, office spaces or residential projects.” Basically, lack of options in the REITs space means there are negligible options at the moment, till this space develops. So, whether you’re investing directly in commercial real estate or through REITs, due diligence and a clear understanding of the market dynamics are crucial to avoid turning a potential asset into a liability.

Frequently Asked Questions

What are the main risks associated with commercial real estate investments?

The main risks include finding tenants, potential legal issues, and poor location choices. These can lead to lower rental yields and difficulty in offloading the property.

How can investors avoid false promises from brokers?

Investors should transact through RERA-registered brokers, have a well-drafted contract with complete disclosures, and engage competent lawyers to conduct a thorough title investigation.

What are the benefits of investing in Grade A properties?

Grade A properties often come with better tenant profiles and regulatory compliance, which can lead to higher occupancy and better returns. However, they are often more expensive.

What are SM REITs and how do they differ from traditional REITs?

SM REITs (Small and Medium Real Estate Investment Trusts) focus on smaller, professionally managed, income-generating commercial properties, offering a lower entry barrier. Traditional REITs pool investor money into large-scale, diversified real estate portfolios.

What legal actions can investors take if they face false promises from brokers?

Investors can file a complaint with the respective state’s RERA authority if the project and broker are registered under RERA. They can also seek legal recourse if there is a written contract clearly stating the returns that were promised.