If you are a real estate investor, chances are you may have considered adding commercial property to your portfolio. If you are an entrepreneur or a businessperson, investing in a shop, a storefront, a workshop, or an office space may be a good way to save on exorbitant rental expenses while creating an asset at the same time. Like in the case of residential property, however, the decision to invest in commercial property may also require careful consideration of the pros and cons of buying under-construction property vis-à-vis a ready-to-move office.
Let us take a look at the advantages of investing in commercial real estate and the applicable GST on under-construction commercial property.
Advantages of buying an under-construction commercial property
- One of the most important reasons investors prefer to buy commercial property in the launch phase or when under construction is the cost of acquiring the property. Commercial real estate is considerably more expensive than residential property. When investing in commercial property, investors look at prime locations, which further drives up the cost. Investing in an office space, a showroom, or a warehouse when the project has been launched or is under construction, the buyer can save up to 20 per cent on the price of the property.
- If you are an investor looking to buy a floor in a commercial building or an office complex with the intention of renting or leasing it out, an under-construction property may be a good choice. Despite the waiting period, the property will gain value as the construction progresses, and additional ROI can be generated in the form of rental income when the construction is completed.
- Another major advantage is the location of the property. For example, if a new mall or a large office complex is coming up in areas like Andheri, CBD, or Lower Parel, investing during the launch or construction stage is a good idea. This is because the availability of commercial property or office space in the busy business districts of major cities can be a challenge.
Financial details to consider when buying an under-construction property
One of the main financial considerations when buying commercial property is financing. Investors typically look for loans from banks and financial institutions to buy commercial property. The nature of the loan will depend on the purpose of buying the shop, office, or commercial premises.
Most banks and financial institutions offer loans for buying commercial properties. Your loan eligibility, as in the case of residential property, may depend on your ability to repay, income, and credit score. However, the LTV (loan to value) ratio is lower in commercial properties than residential real estate. You may be able to obtain a loan for 70-80% of the property value in the case of a flat or apartment, but in the case of a commercial property, it may be about 50-55%. The remaining must be financed by your or your business. The interest rates on loans for buying commercial property are also higher than for home loans.
GST on under-construction commercial property
The Goods and Services Tax (GST) implications of purchasing an under-construction property must also be considered when calculating the total cost incurred by you. In the case of residential apartments, a 5% GST component is added to the under-construction property (other than affordable housing). In contrast, no GST is added to a ready-to-move property. However, according to current guidelines, a 12% GST on under-construction commercial property is levied during the sale. The builder or developer is responsible for filing GST in this case. The resale of commercial property or the sale of a fully developed commercial property attracts no GST.
As a buyer, you may want to compare the price of a commercial property in the same location with a completion certificate and an under-construction property to understand if you have an advantage when investing in an ongoing project.
In Conclusion
Buying a commercial property for setting up your own business or for earning a lease or rental income is a wonderful idea. It is a very lucrative investment, particularly in major cities like Mumbai and Delhi. As an investor, however, it is very important to consider if an under-construction property is the right choice.
