by Pawan Kumar Agarwal, Managing Director, NK Realtors
The Union Budget 2025-26 has presented numerous possibilities for India's commercial real estate market. The budget, which focuses on urban infrastructure, financial reforms, and foreign investment, is projected to drive development in critical sectors like office space, warehousing and co-working settings. The development of the Urban Challenge Fund and the Asset Monetisation Plan demonstrates the government's commitment to revitalising urban regions and courting private sector engagement. Despite these encouraging advances, the sector's critical expectations remain unmet, such as the lack of GST reduction on commercial leasing, incentives for green buildings, and the long-awaited industry status for real estate. According to IBEF projection, the Indian real estate sector is projected to reach USD 1 trillion market size by 2030, necessitating a perfect balance between boosting the ecosystem and strengthening fundamentals.
Important policy changes boosting the real estate sector
The Union Budget 2025 includes several legislative measures and policies designed to improve urban infrastructure and the real estate sector. The Rs.1 lakh crore Urban Challenge Fund has been established to support urban redevelopment initiatives across the country. This effort is anticipated to considerably improve urban infrastructure, improving the value of commercial buildings. Other initiatives include a Rs.1.5 lakh crore allocation for MSME investment and increased demand for commercial infrastructure, including warehouses and business centres. In addition, the government increased insurance's Foreign Direct Investment (FDI) from 74 per cent to 100 per cent. As a result, it allocates additional funds for foreign investors to participate in the real estate market.
Budget provisions for urban development
The focus placed by the Indian government on urban infrastructure has revolutionised the commercial real estate sector. The Rs.1 lakh crore Urban Challenge Fund intends to finance 25 per cent of urban redevelopment projects, including roads, water systems, sanitation and public transit. This would improve inhabitants' quality of life while also increasing demand for residential and commercial properties in these locations. Likewise, the Rs. 50 lakh crore Asset Monetisation Plan would significantly impact urban developments. Monetising public infrastructure assets gives commercial actors, particularly real estate developers, more chances to engage in new projects and contribute to urban growth. Moreover, the Rs. 10 lakh crore market borrowings would increase funds availability for developers, thus driving urban expansion.
Budget impact on office spaces, retail, warehousing and co-working sectors
The increase in market borrowings and demand from firms, particularly MSMEs, would open up new prospects for office space providers. In recent times, the hybrid work culture has greatly influenced how workplaces are utilised, prompting an increasing desire for co-working spaces. The demand for these spaces is increasing as firms choose flexible rental terms and expandable workplaces. Co-working operators are ideally positioned to capitalise on the growing tendency towards hybrid working patterns, particularly post-pandemic. This trend along with 100% FDI in insurance will also see many foreign players entering the market and will boost the demand for office spaces.
Furthermore, with the rising disposable incomes of middle-class people, retail real estate demand is likely to expand. The construction of metro lines, improved connectivity through the UDAN project, and the rise of Tier 2 and Tier 3 cities would all help to boost the number of shopping malls and retail centres in these locations. Also, foreign investment via sovereign wealth and pension funds will further bolster retail infrastructure development.
Meanwhile, the Rs.1.5 lakh crore allocation to MSMEs would increase demand for industrial and logistical spaces, including warehousing. Improved connection through programs like the UDAN plan would improve last-mile delivery capabilities, allowing e-commerce companies to create fulfilment centres in smaller locations. This transition will result in a large rise in storage demand for Tier 2 and Tier 3 cities.
Investment climate and financing outlook
Post-Budget 2025, the investment climate for commercial real estate is mostly hopeful. Several provisions are intended to encourage capital flow into the industry, including enhanced foreign investment restrictions, improved financing for MSMEs and a higher TDS level for rental revenue. The rise in the insurance industry's FDI quota (from 74% to 100%) will most certainly result in more foreign capital flowing into real estate developments, promoting competition and innovation in the sector. Additionally, the Rs. 10 lakh crore Asset Monetisation Plan would offer new possibilities for private investors. As public infrastructure assets are monetised, developers will be able to collaborate with the government to capture value, increasing the feasibility and scope of real estate projects. The Rs. 15,000 crore SWAMIH Fund-2 aims to finish stalled projects and boost the real estate supply.
Major budget gaps for the real estate sector
Despite the many positives, Budget 2025 failed to fulfil a number of critical expectations. Some of them are:
No Industry Status: The real estate sector continues to lack "industry status," which would have allowed for easier access to lower-cost financing and tax breaks. The lack of this crucial feature was a major disappointment for developers.
No GST Relief on Commercial Leasing: The real estate industry had anticipated for GST reduction on commercial leasing, which would have made renting out commercial premises more reasonable. The lack of this assistance continues to put pressure on firms and renters in the commercial sector.
No Green Commercial Buildings Incentives: Another major miss in the Budget 2025 was the lack of incentives for the construction of sustainable buildings. With rising environmental concerns, the lack of tax rebates or other financial incentives for green construction looks disappointing.
No Plans for SEZ Reforms: While the real estate industry is developing numerous measures to enhance the sector, there is no clear plan for Special Economic Zones (SEZs). This, in turn, presents difficulties in encouraging export-orientated sector growth.
No additional tax benefits for REITs: Real Estate Investment Trusts (REITs) are taxed differently for Indian investors depending on their income type. Dividends are normally tax-free if paid from qualified SPVs, although interest income is taxable. The real estate industry hoped for certain tax breaks for REITs but did not receive any.
In conclusion, The Union Budget 2025-26 lays a strong foundation for commercial real estate by focusing on urban infrastructure, MSME growth, and foreign direct investment. These measures are expected to drive long-term industry expansion. However, the absence of key reforms—such as GST relief, industry classification, and SEZ policies—leaves room for further improvements. To navigate these challenges, developers, investors, and businesses must adapt strategically while continuing to advocate for mid-year regulatory adjustments. As the sector moves forward, industry stakeholders remain optimistic that future policy refinements will address these gaps and unlock new growth opportunities in India's commercial real estate sector.
