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      Impact of Government Policies on Commercial Real Estate

      • 5 min read
      • Last Modified Date: December 28, 2023
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      • Commercial real estate has always been a hot commodity, and right now due to the current economic climate, it is more important than ever for investors to understand the role that the government plays in the commercial real estate market. 
      • In India, Real estate prices can be significantly impacted by government policies. In particular, the cost of purchasing and selling real estate in the nation may be impacted by the introduction of new laws, adjustments to taxation, investment incentives, and infrastructure projects. 

      Markеt Ovеrviеw: A Glimpsе into Q3 2023

      • Fresh signs of recovery were observed in Q3 2023 by the Indian real estate market, which demonstrated resilience in the face of global economic uncertainties. There’s a shift in purchasеrs’ tastеs, with a grеatеr еmphasis on affordability and connеctеdnеss.
      • Over the forecast period (2023-2028), the Indian real estate industry is expected to grow at a compound annual growth rate (CAGR) of 25.60%, from an estimated USD 265.18 billion in 2023 to USD 828.75 billion by 2028 according to a report bt Mordor Intelligence. 

      Govеrnmеnt Mеasurеs for Sustainablе Growth

      • Governmеnt policies playеd a pivotal rolе in shaping thе rеal еstatе landscapе during Q3 2023. Initiatives were launched with the goal of streamlining approval procedures, offering tax incentives, and encouraging sustainable development in line with the commitment to establishing a favourable environment for the real estate industry.
      • These interventions have a significant effect on the commercial real estate sector.
      • The government’s efforts to streamline procedures and promote sustainable practices are a step in the right direction towards ensuring long-term stability and growth.

      How the Government Impacted Commercial Real Estate? 

      1. Real Estate Regulatory Authority (RERA)

      • At the forefront of regulatory changes impacting commercial real estate in India is the Real Estate (Regulation and Development) Act, commonly known as RERA.
      • Implemented in 2016, RERA goal is  to enhance transparency, accountability, and efficiency in the commercial real estate sector.
      • RERA makes certain that developers register their projects, follow schedules, and maintain a high quality of construction.

      2. Goods and Services Tax (GST)

      • The introduction of the Goods and Services Tax (GST) in 2017 was a landmark move made by the government  that significantly impacted various industries, including commercial real estate. GST replaced a complex tax structure, streamlining processes and reducing tax-related bottlenecks.
      • In India, The introduction of GST has completely changed the landscape of commercial real estate.
      • A more effective, competitive, and sustainable market has been made possible by GST’s simplification of the tax code, cost-cutting measures, and increased transparency.

      3. Smart City Initiatives

      The Smart Cities Mission, an ambitious initiative taken by the Indian government, has greatly influenced the commercial real estate market. Commercial hubs and business districts have grown as a result of this initiative taken by the government, which aims to create cities with a high standard of living, sustainable environments, and smart infrastructure.

      4. Foreign Direct Investment (FDI) Policies

      The amount of capital entering the commercial real estate industry is directly impacted by the government’s policies regarding foreign direct investment (FDI). More foreign involvement in the real estate market has been made possible by the government’s gradual liberalization of FDI regulations over time.

      The relaxation of FDI regulations has not only attracted global investors but has also facilitated joint ventures and collaborations between domestic and international players.

      Other government policies affecting Commercial Real Estate

      Particularly in areas like tax policy, zoning laws, and environmental regulations, changes in government policy can have a big impact on commercial real estate.

      Tax Laws: Real estate prices can be significantly impacted by changes to tax laws. The cost of purchasing and selling real estate has gone up in India as a result of several levies imposed by the government in recent years, including capital gains taxes, registration fees, and stamp duty. Because buyers are less likely to purchase properties if the associated costs are too high, this has had a direct effect on real estate prices.

      Government Investment incentive: Real estate prices can also be impacted by government investment incentives. For instance, the government has put in place a number of programmes, like the Affordable Housing Scheme and the Real Estate Investment Trust (REIT), to promote foreign 

      These initiatives have helped to increase investment in the sector, which in turn has increased the prices of real estate in certain areas.Governments may also provide tax incentives for real estate investments made in particular regions in order to promote investment in those areas. Real estate prices may rise as a result of attracting additional investors to the area.

      Positive Impacts:

      1. Stimulating Investment:

      • Tax Incentives:
        • The government incentivizes investment through measures like deductions for depreciation and exemptions on capital gains, making commercial properties more attractive.
        • For example, the Real Estate Investment Trusts (REITs) framework provides investors with tax-efficient options for investing in income-generating commercial properties.

      Grants and Subsidies: Developers and investors are encouraged to participate in certain projects by providing funds, such as the creation of smart cities or mixed-use properties.

      One illustration is the “Housing for All” mission, which increases demand and draws investments by providing subsidies for affordable housing projects.

      2. Promoting Growth in the Economy:

      Creation of Employment:

      • Building, property management, retail, and other industries all gain jobs from a booming commercial real estate market.
      • The need for office space and warehouse facilities has increased due to the growth of the IT and e-commerce industries, which has helped to create jobs.

      Tax Revenue:

      • Government tax revenue from the development and management of commercial properties is significant and goes towards funding public services and infrastructure improvements.
      • Because of this, the sector produces taxes that are reinvested to increase its capacity and maintain a positive cycle of economic growth.

      3. Promoting Sustainability:

      Regulation for Green Buildings:

      • Policies like mandatory green building certifications and energy efficiency standards encourage sustainable practices in the construction and operation of commercial buildings.
      • The IGBC (Indian Green Building Council) rating system incentivizes developers to adopt eco-friendly construction practices, reducing the environmental impact of the sector.

      Carbon Pricing Mechanisms:

      • Implementing carbon pricing mechanisms, like carbon taxes or emission trading schemes, discourages carbon-intensive activities in the sector, promoting sustainable practices.
      • Such policies are still in their nascent stages in India, but their potential to incentivize sustainable development is significant.

      4. Enhancing Accessibility:

      Accessibility Features:

      • Regulations mandating accessibility features for disabled individuals ensure inclusive access to commercial spaces.

      This makes things more inclusive for everyone and advances social equity.

      Development of Mixed-Use Projects: Walkable communities are encouraged by zoning policies that integrate residential, commercial, and recreational spaces.

      This promotes sustainable transport and enhances accessibility by lowering the need for private vehicles.

      5. Stabilizing the Market:

      Mortgage Forbearance Programs:

      • During economic downturns, the government can implement measures like mortgage forbearance programs to provide temporary relief to distressed borrowers.
      • This stabilizes the commercial real estate market and helps to avoid widespread defaults.

        Emergency Finances:

        The value of commercial investments can be safeguarded and widespread market crashes can be avoided by allocating emergency funding for troubled properties.

        By taking these actions, the industry’s long-term viability is ensured and investor confidence is maintained.These steps help to preserve investor’s confidence and ensure the industry’s long-term viability.

      Additional Positive Impacts

      • Smart Cities Mission: With the use of innovation and technology, this project seeks to create 100 smart cities in India that will enhance livability, sustainability, and infrastructure. The growth of commercial real estate in these cities is significantly influenced by this mission.
      • Startup Ecosystem: Because of the government’s focus on encouraging entrepreneurship, the startup ecosystem has expanded, increasing demand for coworking and office spaces. This has encouraged the creation of specialty commercial real estate that meets the requirements of startups even more.

      Negative Impacts:

      1. Excessive Regulations:

      Burdens for Developers and Investors:

      • Overly complex and bureaucratic regulations can increase development costs, slow down projects, and discourage investment in the sector.
      • Promoting an environment that is favorable to development requires streamlining regulations and lowering administrative barriers.

      Limited Flexibility:

      Strict rules can restrict developers’ and companies’ ability to innovate and respond to shifting market conditions through new building designs and technological advancements.

      2. Unpredictable Tax Policies:

      Uncertainty for Investors:

      • Frequent changes in tax policies, including property taxes and capital gains tax rates, can create uncertainty for investors and discourage long-term investment.
      • To draw in investment and guarantee the sector’s long-term growth, a stable and predictable tax environment is important.

      Bottom Line

      The commercial real estate sector is greatly impacted by the government. Its actions can sometimes be advantageous, but they can also occasionally backfire. It is crucial to understand the potential impact of government actions on the market prior to making any investment decisions.

      Assetmonk, India’s rapidly growing and promising alternative investment platform provides high-quality tax-efficient investing choices for those seeking to maximize profits. These investment opportunities are carefully selected from India’s thriving private markets and are overseen by a trustee registered with SEBI.

      With a high IRR and growth potential, Assetmonk provides access to a wide range of individualized, inclusive, and diversified commercial real estate investments.  For long-term retail investors looking to expand their exposure to the CRE market, Assetmonk’s fractional ownership options offer a high potential earning yield of 14 to 21% annually.

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      FAQs

      Q1. Is the real estate industry growing?

      A. India would have the third-largest real estate market in the world by 2030. The Indian government projects that by 2030, the real estate industry will be valued at $1 trillion, or 18–20% of the country’s GDP.

      Q2. Is commercial property a good investment in 2024?

      A. Of course! In 2024, Buying a commercial property would be a wise investment.

      This is true for a number of reasons. To begin with, there is an increasing demand for commercial real estate. In fact, there has been a steady increase in demand. This indicates that a greater number of people than in prior years will wish to rent or purchase commercial properties in the future.

      Q3. Do government controls affect the demand or supply of real estate?

      A. The real estate market can be impacted either positively or negatively by subsidies, policy modifications, and other government-imposed laws.

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