Real estate investment has consistently emerged as a golden opportunity for investors to invest in a safe, high-return-yielding industry. Commercial real estate investing has been one of the most favorable due to its high rental income, even though it demands a handsome initial investment.
Conversely, investing in the Public Provident Fund, shortly known as PPF, has also stood as a steadfast and highly sought-after investment option for millions across India, cherished for its reliability.
Both commercial real estate and the Public Provident Fund (PPF) are excellent avenues for diversifying an investment portfolio, offering unique benefits to those looking to enhance their financial strategy. However, delving deeper into their characteristics can reveal which investment avenue fits your personal goals.
So, how do these two dynamic options compare when juxtaposed against one another? Let’s examine them closer to uncover which investment aligns seamlessly with your portfolio aspirations, let's examine them closer.
Commercial Real Estate Investing
Commercial real estate has established itself as a highly attractive investment segment in recent years.
Even after facing a downfall during the COVID-19 pandemic, when multiple businesses had to adopt a remote working culture, commercial real estate is gradually recovering. Companies are trying their best to encourage employees to return to their office spaces, recognizing the importance of company culture.
Moreover, the co-working segment is witnessing remarkable growth as flexible office solutions become increasingly appealing to startups and established businesses alike. These spaces offer cost-effective alternatives to traditional office leases and foster networking opportunities and a sense of community among diverse professionals.
This evolution in workplace dynamics signals a promising resurgence for commercial real estate, making it a compelling area for investment as the market adapts to new trends in work and collaboration.
Things you should know for Commercial Real Estate Investing
Historically, Commercial real estate provides higher returns than residential real estate, typically between 9% and 12% per annum. Even during economic downturns, it can yield at least 7% to 9% returns.
Investors in commercial properties can benefit from significant capital appreciation, potentially doubling or tripling their initial investment over a decade or more. Additionally, they can earn consistent rental income while also enjoying capital growth.
Leases in commercial real estate often include escalation clauses, which allow for rental increases of around 5% annually or up to 15% every three years, helping to keep pace with inflation.
Commercial realty investments are lower risk overall, with the main dangers being vacancy rates and the challenge of securing tenants.
To maximize returns, investors should conduct thorough research to select the right commercial properties in suitable locations while investing in infrastructure, facility management, and amenities—expenses that can impact overall profitability.
Grade-A properties, characterized by high-quality services and amenities, attract top-tier tenants but typically require a larger initial investment. In contrast, Grade B and C properties usually have lower prices.
Investors can take advantage of two main tax benefits regarding commercial real estate. The first is a standard deduction for expenses such as insurance, electricity, repairs, and water supply, set at 30% of the property's annual value. The second benefit includes income tax deductions on loan interest for purchasing or constructing a commercial property, which also covers processing and prepayment fees. Investors can claim the total interest, and if any interest was paid before the possession year, it can be claimed in five equal installments starting from the year construction is completed.
Furthermore, the corresponding portion of expenses is not taxable if the commercial property is used for business or professional activities. However, investors cannot claim notional rent for such properties—only actual maintenance, repairs, and depreciation expenses are eligible for claims.
Research indicates that the Grade-A office space market will absorb more than 700 million sq ft by 2022 as it experiences new growth. The manufacturing industry consulting, IT and ITeS sectors, E-commerce and hospitality, and retail drive demand. The market received positive outcomes from government-led initiatives, including the Real Estate (Regulation and Development) Act, 2016 (RERA) Goods and Services Tax (GST), and the 'Make in India' program that generated significant investment in real estate.
Public Provident Fund Investing
Public Provident Fund (PPF) represents a government-endorsed savings plan that attracts primarily Indian salary workers nationwide. Public Provident Fund presents investors with an appealing blend of safety and competitive interest earnings, an ideal option for cautious savers.
The Public Provident Fund compels participants to save for 15 years while granting tax advantages through Section 80C of the Income Tax Act. The minimum contribution requirement is ₹500, while the maximum limit stands at ₹1.5 lakh during each financial year for PPF investors. The interest received from PPF contributions remains tax-free.
The annual compounding mechanism in PPF allows account holders to achieve substantial growth from their investments during the designated period. The PPF maintains its reputation as a trustworthy investment tool through its multiple features and official Indian government support for building long-term wealth.
Things you should know for PPF Investing
The yearly interest level of PPF stands at 7.1 percent.
Investors must place a minimum of Rs 500, while the annual maximum amounts to Rs 1.5 lakh.
Your PPF account exists for 15 years before you can extend it by blocks of five years according to your requirements.
Under Section 80C, citizens can obtain tax benefits for PPF deposits as the maximum annual limit is Rs 1.5 lakh.
The money earned from PPF interest and your maturity payout remain exempt from tax.
PPF account creation is possible through any public sector bank and the post office network. Additionally, some private financial institutions provide this service option to their customers.
Your account opening process requires documentation of KYC information, including your nominee's particulars and photograph.
Union Finance Ministry determines the yearly interest rate paid to all PPF investors on March 31st.
The interest calculation method considers the lowest balance between the monthly last dates and the fifth-day end of each month.
A PPF account requires annual deposits of any amount from the account holder.
The payment can be made through multiple options, including cheque payments, cash handling, Demand Draft transfers, and online fund transfers.
A PPF account holder can secure a loan during years 3 through 6 of the investment period. Loan duration is limited to three years as specified by the maximum time frame of 36 months.
A PPF loan can be taken out for an amount equal to 25 percent of available funds.
After paying back your initial loan, you can request another loan before the final quarter of year six.
The PPF account holder will receive the entire investment amount and its accrued interest after 15 years.
Account holders can withdraw a portion of their funds starting from the 7th year, which is limited to 50 percent of the balance amount from the end of the fourth financial year.
Your withdrawal access to these funds is limited to one per financial year.
Which option should you choose?
Before you make any decision, let’s break everything down to help you select the right choice for mindful investing:
The returns from commercial real estate exceed those obtained from PPF investments.
Your investment returns in commercial real estate appear through rentals and capital value increases.
Promoted rental rates enable investors to recoup investments at both inflationary rates and steady market appreciation when they buy real estate properties in this category.
The government guarantees fixed returns, making your interest and maturity payments free from taxation. A tax benefit under Section 80C is provided yearly through this investment.
The interest payments from commercial real estate loans, depreciation expenses, and standard deductions allow taxpayers to enjoy tax benefits.
Even when purchasing commercial real estate assets, significant financial resources are essential to buy Grade-A office spaces.
The risks associated with commercial real estate investments include property selection, tenant acquisition, and empty property periods.
You will have the opportunity to maximize your profits through commercial property sales due to time value accumulation. The investment returns you receive from commercial real estate exceed the amounts obtained from PPF. Commercial real estate is an optimal choice, given sufficient investment funds and an extended investment timeframe.
Bottom Line
Each investment offers separate advantages since they serve distinctive financial requirements and risk tolerance. Commercial real estate properties provide investors with elevated returns, rental income, and appreciation value, yet they require handling market uncertainties and maintenance obligations. Recipients of PPF receive tax-exempt returns from a program backing while obtaining safe and protected investments suitable for people with limited risk tolerance.
The suitable investment option relies on matching your investment duration with your money availability while also fitting within your tolerance for financial risks. Financial growth with security becomes achievable by distributing your investments across both property options. Your financial investment objectives should be the deciding factor when choosing the best option.
If you are planning to investing in commercial real estate, we real estate experts from RES Management are here with our expertise at your service. Contact us today and get the best real estate investing advice you need to secure your future.
