For the last two years, we have seen a gradual shift of the focus of real estate builders from developing luxury residential apartments in Delhi, or in any other part of the country, to invest in commercial space. This change from residential to commercial, which was slow to start, hadgathered speed after the demonetisation drive when the entire real estate sector has come to a grinding halt. The commercial transaction in real estatewas largely done through cash (both white and black). However, after the sudden demonetisation, the cash component in the market was reduced substantially, which affected both the commercial as well as the residential sector enormously. However, while the commercial real estate market has picked up, the sales figures in the residential property market remain subdued. This has forced businesses to shift their focus away from the residential market towards the first growing commercial real estate.

The reasons that commercial real estate developers are able to make a greater profit in the market are many. If we compare the business model of those companies, which build and sell residential complexes with that of companies, which are engaged primarily in building commercial space, we find the cash component in the overall transaction is disproportionately high in the case of the former. For this reason, residential apartment builders are facing so many issues. Additionally, the price rise in the residential sector is very low compared to that of the commercial sector. As the Indian economy grows by leaps and bounds, a large number of companies both domestic, as well as international,are looking to expand their operations all over the country. This has led to anincrease in demand for commercial office spaces. This rising demand is fuelling the price of commercial properties hugely, which is making this sector lucrative for real estate developers.

Investment in the commercial real estate is also very lucrative due to attractive leasing rates. You will find that in the market, there are some areas that are limited by land or law, which allows the real estate builders to get impressive returns on lease agreements. Additionally, you will find that as against giving residential apartments on rent, the lease contracts for the commercial properties are much longer. This ensures that the commercial real estate owner has a more secure financial stability of cash returns over a longer term as their properties are leased by commercial entities that havea long-term lease.

Investing in the commercial real estate is much more lucrative than in the residential sector as it is easy to not only sell the commercial property directly but also rent or lease it to various commercial enterprises. Additionally, if you have a large space, you can divide it into smaller spaces and rent it out to small companies that are not interested in big office spaces. You cannot do this if you have a residential property. Furthermore, due to the space crunch in the cities, the prices of real estate have become so high that it has almost gone out of the reach for the middle-class family. However,this is not the issue for commercial entities as there are a large number of companies that can afford a higher lease price to get the right property for their business office. This has ensured that there is an upswing in the price of the commercial real estate, which makes it so lucrative for the builders.

Published by Zac Ferry