With the advent of US and Europe-based outsourcing companies, the real estate sector has emerged as the most lucrative choice for investors
India's commercial real estate sector has witnessed significant growth since the outset of the new millennium, a watershed moment for the service sector and the genesis of US and Europe-based outsourcing companies in India. Subsequently, the introduction of REIT regulations in 2014-15 made investment more accessible to retail investors. The first REIT listing in 2018 allowed investors to own a fraction of commercial real estate. Today, in its exceptional growth phase, commercial real estate offers guaranteed and higher investment returns than other financial instruments, making it a valuable choice for retail investors.
Heydays for sector
India's commercial real estate market is expected to grow at a CAGR of over 13% from 2022-2027. By 2025, India could receive 1 billion square feet of Grade-A office space as rental property investment. Between January and March 2022, office space in metro areas doubled. Over $4 billion in private credit was flown into India in the first half of 2023, with over 50% going into real estate. Rising real estate prices, particularly in urban areas, could lead to greater wealth generation.
Propellers of growth
The commercial real estate sector in India is experiencing growth due to a variety of factors such as rising entrepreneurial spirit, industrial expansion, business parks, and economic zones. NRI investments are also driving demand, with IT companies and startups seeking workspaces and e-commerce boosting warehousing demand. To reap benefits from the bullish realty market, reputable builders are leveraging technology to maintain the pace.A CBRE study manifests a 97% increase in lease activity in the Indian office market, with technology driving 34% of lease growth in Bangalore, Chennai, and Delhi-NCR. On the other hand, the Indian government's focus on infrastructure development, such as industrial corridors, smart cities, and special economic zones, has further amplified the demand for commercial real estate.
Investment benefits
Commercial real estate is an asset with a solid intrinsic value, offering consistent returns and multiple income streams. It is a safe and secure investment due to its consistent returns and the ability to generate income even when tenants leave. Commercial properties can yield income more steadily than shares, stocks, and bonds, providing income stability even in volatile markets.
Equity, the amount an investor builds over time, can be built up quickly with commercial real estate properties, yielding steady and relatively high returns. Real estate investors also avail tax benefits for commercial real estate purchased with a loan are available under two subheads: standard deduction and Section 24 of the Income Tax Act of 1961. The standard deduction is 30% of the annual cost of maintenance, insurance, energy, and water supply, regardless of the ownership of the property. Section 24 also allows for a tax deduction of Rs. 2 Lakh for commercial property owners who took out a loan to buy, construct, repair, or reconstruct their property.
Points of considerations
Investing in high development potential, like urban areas, can maximize returns. Even if future successors use the property, a loan can be requested to meet short-term financial needs.
Thereby, before investing in commercial real estate, it's essential to conduct thorough research, build a team, understand risks, have a clear strategy, consider financing options, and be patient. One should also research the local market, property types, and historical data to assess potential appreciation and cash flow to avert unforeseen risks. Moreover, a detailed analysis of financing options like traditional bank loans, private lenders, or crowd-funding platforms simplify the future course of action and minimize investment cost.
(The writer is MD of Yugen Infra Pvt Ltd, views are personal)
