The Indian real estate sector is experiencing significant growth across various segments, according to a recent report by Equirus Capital. The study highlights strong momentum in residential, commercial, retail, hospitality, and Special Economic Zone (SEZ) segments, driven by rapid urbanization and steady investments.

Commercial Space Demand Surges

The demand for commercial space in India's top eight cities is projected to grow at an impressive 11% Compound Annual Growth Rate (CAGR) between 2020 and 2025. The report indicates that commercial space absorption is expected to increase from 39.3 million square feet in 2020 to 66.4 million square feet by 2025, showcasing the robust growth in the sector.

Bengaluru: A Global Leader in Office Space Absorption

Bengaluru has emerged as a frontrunner in the global office space market, outperforming major international cities. The southern Indian metropolis absorbed a staggering 75.2 million square feet of office space from CY16 to 9MCY24. This performance is particularly impressive when compared to other global financial hubs:

The negative figures for New York and London indicate a contraction in office space absorption, further highlighting Bengaluru's remarkable growth.

Competitive Rental Pricing

Indian cities offer significantly lower rental prices compared to other major global markets, making them attractive destinations for businesses. As of Q3CY24, the office rental rates in key cities are as follows:

The competitive pricing in Indian cities, particularly Bengaluru and Mumbai, presents a significant cost advantage for companies looking to establish or expand their operations.

Cost-Effective Operations

Bengaluru stands out not only in terms of office space absorption but also in operational costs. The city's operating costs are 81% lower than Tier-II cities in the United States. The cost per Full-Time Equivalent (FTE) in Bengaluru is just 19, compared to 100 for US Tier-II cities. This substantial cost difference makes Bengaluru an attractive destination for Business Process Management (BPM) operations and multinational corporations seeking to optimize their operational expenses.

The combination of robust growth, competitive pricing, and cost-effective operations positions India's real estate sector, particularly its commercial segment, as a promising market for both domestic and international investors. As urbanization continues and investments remain steady, the sector is poised for further expansion across its various segments.

India's real estate sector is poised for a significant transformation as the government prepares to implement major Goods and Services Tax (GST) reforms, scheduled to take effect on September 22, 2025. These changes are expected to have far-reaching implications for various segments of the real estate market, from residential to commercial and retail properties.

Simplified Tax Structure

The cornerstone of the GST 2.0 reforms is the simplification of India's tax structure. The current system of five tax slabs will be streamlined into two primary slabs:

• 5% for essential goods and services
• 18% for most other items

Additionally, a 40% tax rate will be applied to luxury goods, maintaining a progressive taxation approach.

Positive Impact on Residential Real Estate

The residential sector stands to benefit significantly from these reforms:

• Construction costs are projected to decrease by 3-5% due to lower GST rates on key materials such as cement.
• This reduction in costs could potentially revive demand in the affordable housing segment, which has seen a decline in recent years.

Affordable Housing Market Trends

The affordable housing sector has experienced a notable shift in recent years:

This data highlights the pressing need for initiatives to reinvigorate the affordable housing market, making the GST reforms particularly timely.

Mixed Implications for Commercial Real Estate

The commercial real estate sector faces a more complex scenario:

• Developers will lose eligibility for Input Tax Credit on property leasing, potentially leading to increased operational costs.
• This change may result in higher rental prices for commercial properties.
• The introduction of the Reverse Charge Mechanism will require tenants to pay 18% GST when leasing from unregistered suppliers, adding a new layer of complexity to commercial leasing transactions.

Boost for Retail Real Estate

The retail real estate segment is expected to see positive outcomes:

• Lower construction costs will benefit new retail developments.
• Streamlined supply chains should improve operational efficiency.
• However, rental income from retail properties will continue to be subject to 18% GST.

Long-term Goals and Challenges

The GST 2.0 reforms aim to achieve several long-term objectives for the Indian real estate sector:

• Increased transparency in transactions
• Reduced compliance burdens for businesses
• Attraction of more institutional investment into the sector

These reforms come at a critical time, as India faces significant housing challenges:

• Current urban housing shortage: 1 crore homes
• Projected shortage by 2030: 2.5 crore homes

Conclusion

The upcoming GST reforms represent a significant shift in India's taxation landscape, with potentially far-reaching effects on the real estate sector. While the residential and retail segments are poised to benefit from reduced construction costs and simplified tax structures, the commercial real estate market may face new challenges. As the implementation date approaches, stakeholders across the industry will be closely monitoring these changes and adapting their strategies to navigate the evolving regulatory environment.

The success of these reforms in addressing India's housing shortage and attracting investment will be crucial in shaping the future of the country's real estate market. As the sector prepares for this transformation, the coming months will be critical for businesses and policymakers alike in ensuring a smooth transition to the new GST regime.