Residential developers are switching to construct Commercial Properties.

By Abhay Harish Shah, Realty Quarter

The real estate industry has experienced the launch of projects in SEZ, retail, luxurious homes or even affordable housing, without any justification for countless occasions. This often resulted in over-supply of such projects in the particular segment, or the specific micro markets. In this context, some of the owners of residential builders are now engaged in commercial projects.

Many residential developers are moving into this segment as commercial property provides reasonable yields. We look at the grounds for such projects and the probable success of such initiatives.

Developers are generally perceived to launch such projects because they are looking for greener pastures. While the profit margins in such sections can attract developers, their implementation capacities and business model stay dubious.

For the last three years, office space absorption was up to 40 million sq.ft per annum. The overall sentiments in this sector are bullish, with private equity (PE) investors also putting in money. PE investors were bullish even in the area of commercial real estate and are discovering tier-2 towns with good footprints, product blend and powerful revenues. The residential property sector operates on a straightforward sales model, whereas commercial spaces are largely in the lease model.

Why Developers are opting into Commercial Realty?

Evidence shows, that the growth of Indian property developers in non-core fields has largely failed. There are only a few developers in India who have succeeded in every real estate segment. Several estate experts think that what builders are moving toward the commercial sector is the desire to be regarded as a complete developer with a diverse portfolio.

“The developers are diversifying their portfolios and so are getting into commercial real estate, as the sources of capital in the market have been squeezed and fund raising has been a concern. Commercial real estate is more bullish by most of the credit rating agencies and analysts. ”

When Nikhil Hawelia, managing director of the Hawelia Group, questioned if it is profitable for housing developers, he said, it is not about what is profitable, but what is possible. According to him, one would not succeed in commercial real estate without the skills in leasing and corporate bonding.

“It’s like wondering if I should go into any other sunrise industry for greener pastures. My abilities are in building houses and a new ball game would be a place for me in retail or office space. Even if I’m open to a new curve, I need to know that the transition won’t be that smooth. However, the industry in commercial real estate is now definitely rosier,” describes Hawelia.