Residential in, commercial out for real estate bigwigs

Originally published in the Financial Express on 24th October, 2011

Lack of funds, customer aversion to striking advance lease deals and a slowdown in demand for office space have combined to push real estate developers into building more residential apartments than commercial spaces.

“In the residential market, you can pre-sell the space and customer advances can almost fully finance the actual construction ad agiainst the commercial market,” says Pirojsha Godrej, executive director, Godrej Properties.
Godrej Properties (GPL) has put on hold its commercial estate development in Tier-II cities and, instead is now focusing more on residential apartments. According to them the commercial real estate segment turns out to be capital intensive without good returns and residential real estate, on the is more viable, given the way the selling of space takes place in such projects.
“Residential properties definitely give higher returns as, in some of the projects, bookings start even before the ground breaking happens, which is not the case in the commercial space,” says Samantak Das, national head (research), research & advisory services, Knight Frank (India).
Lenders funds developers who have a good track record and are involved in projects that have demand. Consultants say lender risk is linked to muted rentals.”The key risks for lenders to commercial real estate are that rents are not likely to improve for the next 18-24 months,” says Anshul Jain, chief executive, real estate consulting firm DTZ India. “The demand has also been lacklustre in 2011-2012 compared to 2010-2011.”
In Kolkata, Godrej is developing two large information technology parks Godrej Waterside and Godrej Genesis. “We have locked up huge amounts of capital in these projects, but the returns have not been proportionate,” says Pirojsha Godrej. The company, which was earlier planning to develop both commercial and residential properties in Ahmedabad, will now build only residential apartments there.
Many developers agree with Godrej.
As the current economic scenario is gloomy, developers are deferring commercial office space ventures, says Samantak Das of Knight Frank (India). “There is a lot of supply in the market, which can still be absorbed,” he says.
In CY 2010, anywhere between 33 million and 35 million sqft of commercial space was sold; in 2011, it is likely to be 35 million sqft, says DTZ’s Jain. “In 2012, the demand offtake is likely to taper off to 31-32 million sqft, provided the world does not burst because, if that happens, the situation could be akin to the the one in 2009 when the offtake slipped to 23 million sqft from the 40 million sqft in 2007”.
Source: capitalcityscape.over-blog.com