Why res­i­den­tial projects make sense to builders

This is to cap­i­talise on the de­mand com­ing from the pri­mary and se­condary work­place hubs

HT Estates - - HTESTATES - HT Es­tates Cor­re­spon­dent

It is a known fact that com­mer­cial real es­tate in In­dia is a lu­cra­tive propo­si­tion for de­vel­op­ers. Why, then, do we see new de­vel­op­ers con­cen­trat­ing on res­i­den­tial apart­ments rather than com­mer­cial projects? There are var­i­ous rea­sons for this.

In the first place, com­mer­cial real es­tate de­vel­op­ment re­quires larger land parcels than res­i­den­tial. Also, the rep­u­ta­tion of a de­vel­oper plays a sig­nif­i­cant role in at­tract­ing ten­ants to a com­mer­cial project, and new, start- up de­vel­op­ers do not have the req­ui­site track record. Apart from the rep­u­ta­tion factor, com­mer­cial projects also en­tail high project cost, and larger de­vel­op­ers with es­tab­lished rep­u­ta­tions are the only ones who can raise the re­quired fi­nanc­ing.

A de­vel­oper also needs to have prior ex­pe­ri­ence in com­mer­cial de­vel­op­ment to suc­ceed, and the ges­ta­tion pe­riod for com­mer­cial projects is longer than that of res­i­den­tial projects. See­ing com­mer­cial projects as a risky un­der­tak­ing where l ack of ex­pe­ri­ence and cap­i­tal can lead to fail­ure, smaller de­vel­op­ers usu­ally pre­fer res­i­den­tial in­stead of com­mer­cial projects. In fact, many in­ex­pe­ri­enced smaller de­vel­op­ers have in the past launched small-sized com­mer­cial spa­ces which have re­mained va­cant over sev­eral years. The rea­son is that the bet­ter grade of ten­ants pre­fer high-qual­ity build­ings with all ameni­ties which are pos­si­ble only for larger, re­puted de­vel­op­ers

Res­i­den­tial projects can be de­vel­oped on small plots, even as small as half an acre, and the cap­i­tal re­quire­ment is much lower. There are many more fi­nanc­ing op­tions avail­able, and the ges­ta­tion pe­riod is lower. Also, cash flows start im­me­di­ately on the ba­sis of book­ings even be­fore con­struc­tion starts; in a com­mer­cial project, cash flows via rents start only af­ter com­ple­tion of the build­ings.

With es­tab­lished play­ers cater­ing to the high de­mand for homes large township projects, smaller de­vel­op­ers are launch­ing small- sized build­ings with project sizes vary­ing from 50- 100 units and unit sizes vary­ing from 600-1200 sq ft. Th­ese de­vel­op­ers see this as a de-risked fo­cus area as there is less com­pe­ti­tion from re­puted de­vel­op­ers in this seg­ment.

Th­ese de­vel­op­ers are pri­mar­ily de­vel­op­ing projects in emerg­ing lo­ca­tions of the city, with the aim to cap­i­talise on the de­mand com­ing from the pri­mary and se­condary work place hubs. The land prices in newly emerg­ing lo­ca­tions is af­ford­able to th­ese de­vel­op­ers, and they are bank­ing on suf­fi­cient de­mand for their of­fer­ings to main­tain good sales ve­loc­ity.

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