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Residential in, commercial out for real estate bigwigs

Shubhra Tandon, Mumbai, The Financial Express

October 24, 2011

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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,” Pirojsha Godrej, executive director, Godrej Properties, said in an interview to FE. “But, in the commercial market, it is a difficult thing to do.”

Godrej Properties (GPL) has put on hold its commercial estate development in Tier-II cities and, instead, decided to focus on residential apartments. According to Godrej, the commercial real estate segment turns out to be capital intensive without good returns. Residential real estate, on the other hand, 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.“We have not completely stopped lending to the commercial real estate sector, but we are selective towards the sector," said BA Prabhakar, executive director, Bank of India, in an earlier interaction with FE. “Though normal terms and conditions continue to be there, still we want to see that the company has a good track record, good location and, above all, there is demand in the particular area.”

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, son of Godrej group chairman Adi 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.

“Commercial projects are linked to the economic environment and as multinational companies are not going in for expansions, there is a slowdown in the office space,” Vikas Oberoi, chairman and managing director, Oberoi Realty, told analysts at a conference call earlier this week.

“ However, we feel that it is cyclical and, thus, a momentary phase. So, we are looking beyond a year in this business; once the economy bounces back, there will be demand again,” he added. 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”.

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