For an experienced investor, a review of your current investment criteria may offer you valuable insights as you continue to expand your real estate holdings. As well as for a first-time investor, there are things to be considered before investing in Commercial Real Estate.
Even though the commercial property may provide a higher rental yield than the residential property, it is highly dependent upon factors such as:
- Affordability of the Property
- The cost and supply of utilities in the Property
- The cost of maintenance attached with the Property
- The cost of security
- Access to the Commercial Premises
- Defects in the Commercial Premises
- Approved blueprints or building plans
- Title Search
- Rental Yield
- Stamp Duty
Geographical location of the Property:
Certain regions or areas have been more affected by the economic downturn, which is why location is imperative. The location of the commercial space is generally affected by the tenure and type of property. Property values in metropolitan areas are more favorable as they are more resilient to economic fluctuations. Establishing the location first is crucial as it will help shape your future decisions such as renting out the property in the future. If so, the investor has to ensure the property has the potential to be rented out or sold at a profit.
Affordability of the Property:
One of the biggest mistakes that inexperienced property investors make is that they develop an obsessive attachment on the bond-repayment figure alone. Rates, penalties, utilities, security costs and maintenance cost all have to be factored in.
It is also very important to test various scenarios to consider if the investment is still affordable when interest rates increases or other costs increase.
Remember not to take the government or municipal rates that the previous owner has been paying as a given. The municipality government will adjust the rates according to the sales price as you register the purchase of the property.
The cost and supply of utilities in the Property:
Electricity and water supply is given in nearly all formal properties in most of the cities, and should no longer to be taken for granted. Conduct a careful study of the reliability of the supply, its costs and the availability of backup systems of the electricity and water supply respectively.
The cost of maintenance attached with the Property:
It is easy to underestimate the cost of maintenance, especially in older buildings which may initially seem like a bargain. Be sure to do an accurate survey of repairs and associated costs.
The cost of security:
As an investor, once you become the owner you may need to invest a large once-off installation such as an electric fence, fire alarms, closed aircuit television (CCTV) or add in the ongoing cost of around-the-clock security if the property is particularly vulnerable to crime.
Access to the Commercial Premises:
The key to making a commercial property or any property investment worthwhile is the ease of access to the property. Consider issues such as parking, and the road infrastructure nearby as well as the congestion and the proximity of public transport from the property.
Defects in the Commercial Premises:
Always ensure that there are no hidden defects in the property along with calculating the ongoing maintenance of a building and this is a very important element which must not be neglected.
Make a careful study of the water and electricity connections to the property, the state of the building itself, the infrastructure such as air conditioning, and nowadays, the fibre connections and cell phone coverage.
Approved blueprints or building plans:
It is advisable to request the approved blueprints or the building plans of the property before it is bought. Many investors have had the misfortune of buying a property, only to be slapped with a demolition order because the seller previously had constructed the premises without the requisite approval.
Make sure that the Title is clear and due diligence have been undertaken. Publish proper public notices if you are acquiring a complete commercial premises developed on an individual’s land.
The rental yield from commercial properties averages 7%, as compared to 2% – 3% for residential properties. Compared to residential properties, commercial property owners need to also consider the need for constant asset enhancement.
At the 33rd GST Council Meeting held on 24th February 2019, new GST rates have been introduced for residential real estate which will came into effect from the 1st of April 2019. The new GST rates on residential real estate transactions have been proposed as follows:
- GST to be charged at 5% without Input Tax Credit (ITC) on residential properties that are not part of the affordable housing segment.
- GST to be charged at 1% without ITC on residential properties that are included in the affordable housing segment.
- GST to be charged at 12% with or without ITC on commercial properties.
So, if you are planning to invest in under construction commercial property, you will have to pay 12% GST in addition to paying the valuation price for the property. If you own a company and are purchasing the property through your company, then you can consider being GST- registered to claim back the GST amount.
Also, GST of 18% is applicable on the rent which will be charged to the tenant.
The Stamp Duty is to be paid by the buyer hence, the Stamp Duty for shop/office/Industrial gala/basement is 5% of the market value or agreement value whichever is higher. The above amount does not include Registration fee which is 1 per cent of market value or agreement value whichever is higher subject to Maximum of Rs.30,000.
In case of commercial property which is let out, the profit on sale of such commercial property will accrue as capital gains. The same shall be long-term, if the property is held for more than 24 months it will be taxed at a flat rate of 20 per cent, irrespective of the quantum. However, if the property is sold before 24 months, the same becomes taxable as short-term capital gains and is taxed as normal income.