Smaller Developers Prefer Residential To Commercial Development

Smaller Developers Prefer Residential To Commercial Development

Arvind Jain, Managing Director, Pride Group

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 in commercial hotspots like Pune? 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 into 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.

Moreover, a developer needs to have prior experience in commercial development to succeed, and the gestation period for commercial projects is longer than for residential projects. Seeing commercial projects as a risky undertaking where lack of experience and capital can lead to failure, smaller developers generally 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 – in Pune, it usually takes only 1-3 years to sell all units in a residential project if the pricing is right. 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 India’s economic now fully underway and Pune’s thriving IT/ITeS and manufacturing sectors once again on the forefront of national and international business activity, commercial real estate development in firmly on the agenda of the city’s largest developers. Because of the favourable correlation of housing demand with office space expansion, the Pune real estate market remains promising for residential projects, as well.

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 capitalize 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.