Commercial properties across the world are mainly constructed either for selling, renting or leasing. Therefore, before buying or building a property for commercial development, it becomes vital to first understand what the Returns on Investment (ROI) for that property might be. This will enable better financial planning and efficient transactions. Keep reading to understand the factors that affect commercial property Returns on Investment, the ROI formula, how to calculate returns on real estate investment, as well as the prevalent commercial property ROI in different cities in India.
What is ROI?
Return on Investment (ROI) is a measure of how profitable an investment is. Expressed as a percentage value, this number indicates how much money was gained as profit against the total amount spent on an investment. The commercial property ROI denotes how much profit is gained by selling, renting or leasing commercial properties like offices, retail stores, hospitals, educational buildings, industries and other similar establishments. For calculating commercial real estate Returns on Investment, several aspects like land price, cost of construction, selling price and/or rental yield are considered, giving a comprehensive understanding of the building’s finances.
Important Terminology Regarding Commercial Property ROI
To understand and calculate RoI for commercial property, it is crucial to first understand some of the important terms commonly involved, including:
- Gross ROI: The ROI value before deducting additional expenses involved with investments is called gross ROI. In commercial real estate investing, these expenses can include property taxes, maintenance and operation costs of the building and interest on building loans.
- Net ROI: Net ROI indicates the actual profits gained through an investment after deducting all the additional expenses. This value enables effective financial risk management in construction projects by indicating their monetary feasibility and probable profitability.
- Rental Yield: Commercial property rental yield is a value that denotes how much rent can be generated by a property in a year. It is generally expressed as a percentage of the property value.
- Capital Appreciation: This is the increase in the value of a property over a period of time (generally one or more years). It denotes that the commercial property can be sold for a value higher than its original value or that it can be rented/ leased out at values higher than the initial rates.
How to Calculate ROI on Commercial Property
The simplest way to calculate the commercial property rate of return is by the following ROI formula:
Commercial Property ROI for Renting
When a commercial property is rented, the following ROI formulae can be used:
Gross Returns on Investment in a year = Rental yield in a year/ Total expenditure x 100
Net Returns on Investment in a year = Profits in a year/ Total expenditure x 100
Here, the profits can be calculated by summing up the rental yield in a year and deducting the operations and maintenance costs. The total expenditure can be obtained by adding the land price and cost of construction.
For example:
Assume the following aspects involved in a 1000 sq ft office building:
- Land cost (@ ₹10,000/ sq ft)= ₹1,00,00,000
- Total cost of construction (@ ₹2,500/ sq ft)= ₹ 25,00,000
- Rental yield per year (@ ₹120/ sq ft/ month)= ₹14,40,000
- Annual maintenance and operations costs (@ 20% of rental yield)= ₹ 2,88,000
Therefore:
Gross ROI = 14,40,000/ 1,25,00,000 x 100 = 11.52%
Net ROI = 14,40,000 – 2,88,000 / 1,25,00,000 x 100 = 9.21%
However, other expenditures, such as interests on loans and property taxes, are often involved in commercial properties. These can significantly affect the net ROI.
Commercial Property ROI on Selling:
When a commercial property is sold, the following ROI formula can be used:
ROI = Total profit in sales/ Total expenditure x 100
Here, the total expenditure can be calculated by adding the land price and the construction cost. Total profits can be calculated by deducting the total expenditure from the sale price.
For example:
Assume the following aspects involved in a 1000 sq ft office building:
- Land cost (@ ₹10,000/ sq ft)= ₹1,00,00,000
- Total cost of construction (@ ₹2,500/ sq ft)= ₹ 25,00,000
- Sale price (@ ₹15,000/ sq ft)= ₹ 1,50,00,000
- Profit= 1,50,00,000- 1,25,00,000= 25,00,000
Therefore:
ROI = 25,00,000 / 1,25,00,000 x 100 = 20%
However, other expenditures, such as property taxes and legal fees, are often involved in commercial sales. These can significantly affect the net ROI and profits gained.
City-wise Commercial Real Estate ROI Analysis in India
To calculate ROI commercial real estate values, the following average land costs (based on studies published by Springer and Brickwork Ratings) and construction costs in different Indian cities can be used:
| City | Average Land Price (₹/sq ft) | Average Construction Cost (₹/sq ft) | Total Expenditure (₹/sq ft) |
| Delhi & NCR | 5000 – 51000 | 1800 – 2100 | 6800 – 53100 |
| Bengaluru | 4000 – 32000 | 2000 – 2200 | 6000 – 34200 |
| Chennai | 3000 – 23000 | 2000 – 2200 | 5000 – 25200 |
| Pune | 2000 – 22000 | 1500 – 1800 | 3500 – 23800 |
| Hyderabad | 3000 – 21000 | 1800 – 2000 | 4800 – 23100 |
According to a study by Knight Frank, the average rental yields in these cities currently are as follows:
| City | Average Commercial Rent (₹/sq ft/month) | Average Commercial Rent (₹/sq ft/year) |
| Delhi & NCR | 80 – 95 | 960 – 1140 |
| Bengaluru | 82 – 89 | 984 – 1068 |
| Chennai | 60 – 67 | 720 – 804 |
| Pune | 65 – 70 | 780 – 840 |
| Hyderabad | 61 – 70 | 732 – 840 |
With these values, the following commercial property ROI numbers can be observed in the cities currently:
| City | Gross ROI (% per year) | Net ROI (% per year) |
| Delhi & NCR | 18 – 25 | 9 – 13 |
| Bengaluru | 20 – 26 | 10 – 15 |
| Chennai | 14 – 20 | 8 – 16 |
| Pune | 20 – 25 | 13 – 18 |
| Hyderabad | 15 – 25 | 10 – 18 |
However, these are only approximate values. The actual ROI real estate values can differ widely based on factors like market trends, area, demand and supply, operations and maintenance costs, capital appreciation, type of commercial property, etc.
How to Maximise Commercial Property ROI
Some of the ways commonly used to maximise commercial property ROI are:
- Value Additions in Design and Technology: Aspects like sustainable building practices, flexible/ open floor plans (such as coworking spaces or expansive retail spaces with minimal visual obstructions), adequate parking and elements of biophilic design can significantly increase ROI. According to Commercial Design, buildings that are eco-friendly and fulfill ESG (Environmental, Social and Corporate Governance) goals can generate returns of 11.2% against 7% returns for properties that don’t fulfill these goals.
- Reduce Operational Costs: Incorporate smart building technology, HVAC sensors, smart lights and robots that reduce the monthly expenditure on utility, security and maintenance in the long run. The operating costs of buildings that include such amenities are lower by 10 – 40%.
- Retrofits and Upgrades: It is important to keep commercial buildings updated with the latest technology and amenities. According to JLL, retrofitting older buildings with new amenities or upgrades can increase rental yields by 15-30%. These retrofits can include transitioning into net zero energy buildings or just simple changes like upgrading the flooring materials used.
Factors Affecting Commercial Property ROI
- Location, Demand and Supply: Each city or town in India, as well as each area in a particular city/ town, has different ROI commercial property values, as the demand and supply in every region vary. Factors like construction cost, land prices, market trends, rental rates and property rates significantly affect these values. For example, in Bengaluru, the office rental value per sq ft/month in the CBD (Central Business District) is ₹125 – 195, while it is ₹50 – 95 in parts of North Bengaluru, according to a study by Knight Frank.
- Type of Commercial Property: Every type of commercial property has a different ROI. For example, the average return on commercial property used for industrial purposes might be lower than the value for commercial office/ retail spaces. However, industrial rental yield may be more stable and low-risk than retail rental yield. As per a study published by Brickworks, the market shares of different types of commercial property in India are as follows:
| Type of Commercial Construction | % Share in Commercial Market |
| Office Space | 40 – 45 |
| Industries and Warehouses | 15 – 20 |
| Retail Space | 20 – 25 |
| Hospitality | 10 – 15 |
| Others | 10 – 15 |
- Taxes and Loans: Various types of taxes apply to commercial construction, including property taxes, taxes on rental incomes and capital appreciation taxes. Check out Brick & Bolt’s property tax calculator to estimate the taxes for your property.
Apart from these, any loans taken for buying or building property will accumulate interest over the years. These construction financing options and taxes can majorly impact the net commercial property ROI.
- Maintenance Costs: Maintenance and operations costs per year are typically around 20-50% of the rental value of a commercial project. These costs include expenditure on electricity, water supply and plumbing, cleaning, gardening and other routine maintenance procedures. A good commercial property ROI calculator takes into consideration all these factors.
- Leasing Vs Selling Vs Renting: The real estate return on investment depends on how the property is ultimately used. While selling commercial properties can result in good immediate earnings and prevent the accumulation of loan interests, renting or leasing can generate more long-term profits and have high capital appreciation, but is typically more risky.
Risks in Commercial Real Estate Investing
The most frequently observed risks in commercial real estate investing are:
- Low Liquidity: Most developers/ investors enter into commercial estate as it is a type of Alternative Investment Fund (AIF) that generates high ROI.
Proportions of AIFs in India
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However, compared to other AIFs—such as stocks, gold and fixed deposits—real estate has very low liquidity. If an investor wants to exit or a developer wants to sell a commercial property, it can take months for the exit or sale to happen and for gaining money.
- Demand vs Supply: The demand and supply of commercial spaces vary across locations and with time. For example, during the COVID-19 lockdown, rental yields underwent a massive downfall, but recovered once people started shifting back to working in offices. When the supply exceeds the demand, high levels of vacancy can also be observed. According to research by Knight Frank, the average vacancy level in office property in India was 15.4% in 2024. While Pune and Chennai had low vacancy levels (7.8% and 9.3%), Mumbai and Hyderabad had much higher vacancies during the same period. High vacancies lead to low rental yields and ROI.
- Market Fluctuations: Factors like political changes, inflation, and GDP growth can all have an impact on commercial property ROI. These factors can often bring in new laws and regulations for zoning and land use, new taxation systems and varying interest rates on loans. Such variations can often make investors hesitant to enter into long-term rental or lease agreements, thus increasing vacancies and lowering ROI.
Getting the Best Returns on Investment for Your Commercial Property
The design of a commercial property has a major impact on how much return can be expected from it. Therefore, efficient designs with optimised floor plans are a crucial aspect of commercial construction. Brick & Bolt, a leading commercial construction services provider in India, offers design-build services for all types of commercial properties. The company also offers building materials supply for its projects and provides a 10 year structural warranty, ensuring low prices as well as premium quality. With functional and aesthetic designs, these properties can maximise commercial property ROI in every city. To ensure that the real estate returns from your commercial construction projects are optimised with efficient space usage, get in touch with Brick & Bolt today!
Hemali Patel