Top Reasons for Commercial Real Estate Investing in India - Kotak Bank
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04 JANUARY, 2023

Real estate is one of the safest and most reliable investment options in India. It is considered a good investment option for the invariably upwards trajectory of prices on purchased property.

Land, residential and commercial properties are the three most popular and sought-after real estate investment options. Again this is mainly due to the substantial profits they promise.

In the past, people favoured investing in residential properties due to their accessibility, ease of management, and most crucially, lack of awareness about the outstanding potential of commercial property investment.

Now, outlooks have changed and people realise the value of the commercial real estate and its potential returns. Consequently, commercial investments have reached their apex in terms of strong ROI.

Commercial Real Estate Investing Factors

Yet still, only a few people know the high return on investment (ROI) of commercial real estate investing. This article explains the five significant factors that make investing in commercial properties a great bet. Continue reading to learn more.

1. Appreciation in Real Estate Value

For the projected period of 2022-2027, India's commercial real estate market is expected to expand at a CAGR of more than 13%. According to industry predictions, India might receive a 1 billion square foot investment in Grade-A office space as rental property investment from international investors by 2025. These projections reflect that real estate prices in India are likely to increase, particularly in urban regions. Consequently, anyone doing some  real estate investing in India will generate greater money over time, perhaps even generational wealth.

The value of a prudent real estate investment increases with time. Additionally, annual rent increases frequently, leading to increased cash flow.

Consider picking properties with high development potential, such as commercial spaces in urban regions, as they are likely to maximise your returns. Even if your future descendants may use this asset (property) you purchase today, you can request a loan against the property to meet short-time financial requirements.

2. Inflow of Cash through Rental Income

Commercial properties have tremendous pace when it comes to growth. Between January and March 2022, the amount of office space occupied in metro areas doubled from 5.43 million to 11.55 million square feet. These numbers demonstrate that the industry is prepared to fight the recession and likely provide investors with excellent investment opportunities.

Grade A office buildings

  • Office space, storage facilities, retail, industrial, and institutional real estate are all in high demand.
  • Offer sizable profits in the commercial real estate market.

The estimated returns for residential real estate are only expected to be 3-4%, compared to commercial assets, which are predicted to return 8–10%. Besides, office property rental income ranges from 5 to 11%, while residential property rental income is only between 2 and 4%. Additionally, in comparison to residential properties, office properties have a larger percentage of capital appreciation. These benefits reflect that commercial real estate investing is a wise selection to maximise cash flow.

3. Secure Investment Option

Commercial real estate is a safe investment option due to its -

  • Low borrowing rates and rapid cost appreciation - Generally, in terms of capital growth and security, commercial real estate is a good long-term investment.
  • Mixed-use developments - These multi-unit structures pose less concern during vacancy periods. There are multiple tenants, so you are not reliant on just one for your monthly income. Another element that lowers vacancy is that the lease for a company renting space is typically longer than in the residential market.

4. Tax Benefits of Commercial Real Estate

You are entitled to specific tax benefits set down by the Income Tax Department on commercial real estate purchased with a loan. You can claim tax benefits under two subheads, as detailed below:

  1. Standard Deduction: The most you may ask for rent is the "Annual Value" of your property. According to income tax law, commercial property owners who rent out their facilities may deduct a standard amount equal to 30% of the annual cost of maintenance, insurance, energy, water supply, etc. This is true whether or not you have to pay for it.
  2. Section 24: Under Section 24 of the Income Tax Act of 1961, commercial property owners who took out a loan to buy, construct, repair, or reconstruct their property are eligible for a tax deduction of Rs. 2 Lakh. The interest component may also include processing fees and any prepayment fees for commercial property.

Read Also: Best Affordable Places In India To Invest In Buying A Home

5. Taking Advantage of Leverage

In commercial real estate, leverage refers to using debt (loan) to raise the possible return on your investment in real estate. It is challenging to purchase a property with all cash.

To enhance your equity through capital growth and provide yield through the available cash flow, it is more likely that you will require a loan or other forms of leverage to buy the property.

Investors can use leverage to stretch their available funds across several properties or buy more expensive ones.

Enabling investors to buy more pricey but more lucrative assets raises the potential for high returns on commercial properties.

Wrapping Up

Real estate investing in India is a lucrative investment option. It offers high returns, lesser risks, and long-term value. Commercial real estate investing offers benefits like tax benefits, security, high appreciation rates, and continuous cash flow. These benefits allow investors to maximise their profits quickly, making investing in commercial real estate a wise step to ensure long-term gains and high profitability.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.