The Asian Age, Mumbai - February, 2005

Real estate investment has once again become an attractive alternative investment vehicle. This time however, there are fundamental differences in the type of investor mindset. In the past, real estate investments were only considered as options for capital appreciation. One still hears stories of investors who made huge sums of money on margin investments in real estate

Today, the scenario is different. With the changed rent legislation, drop in interest rates, bottoming out of the real estate prices, availability of finance for non-residential properties, customers are looking at investment in real estate with the expectation of rental income. Here, commercial properties are finding favour among investors that the commercial real estate market offers. In the medium term, one can expect that prices of real estate will go up if not by large amounts, then based on equivalence to inflation.

Besides the better yields, bringing the tax calculations into the equation increases the attractiveness to the investment option. For investors purchasing commercial property, the yield on their investment works out to 10 per cent to 12 per cent per annum. This is after taking into account expenses towards maintenance and property taxes. For example, Rs 15 lakh invested in an office property of 500 square feet would fetch a rent of about Rs. 15,000 per month in addition to a deposit (based on market norms) of Rs. 1.5 lakhs. Commercial property offers the option for depreciation at 10 per cent per annum, thereby reducing the total tax liability payable by the purchaser. A property purchased for Rs 15 lakhs will allow a depreciation of Rs. 1.5 lakh in the first year. This brings down the taxable income by Rs 1.5 lakh allowing a tax saving of Rs 50,000 at the 30 per cent tax bracket (excluding the surcharge).

If the property is shown as commercial premises, interest payable for purchase of the property is fully deductible from the business income brought in by it.

Other expenses such as those towards brokerage (if any), stamp duty and registration that are incurred towards the property are also deductible from the income of the buyer. With the changing housing finance scenario, a number of housing finance institutions are offering finance for non-residential properties. It is even possible to get finance for office premises for a 15 year term – something that was not available in the past. A second or subsequent property investment is now being made with a view to rent the property to a prospective tenant and use the funds to pay a part of the monthly installment to the bank/housing finance institution. This leads to a situation where a payment of 30 per cent to 35 per cent is made by the purchaser and the rest of the amount is taken as a loan which can be serviced entirely by the rental income from the property itself.

Also, rental agreements in the long term tend to have escalation clauses built-in. On the other hand, monthly payments payable to the housing finance institutions are fixed for the term of the repayment. It is quite possible to have a situation where the rent earned from the property is greater than the monthly installment that is payable to the housing finance company. This makes the investment option very attractive. In a number of cases, the housing finance institutions as well as banks are offering the option of discounting of rental income upfront. The rental discounting option is dependant on the tenant who is occupying the premises and the term of the lease.

If the tenant is a well reputed company, getting the rental income discounted is easier. On evaluation of the benefits of depreciation, interest deductions, finance options and the marginal investment that one needs to make for purchasing an office (in case of rent of the premises) – commercial property investment is definitely something to consider – especially to assess investment options in today’s market environment.