Realtors Turn Office Space into Homes
Faced with tight liquidity, builders are finding it easier to work on housing projects, given their self-financing ability.
A number of builders in Mumbai are converting their office projects into residential ones amid poor sales and falling rentals in the commercial space. In the backdrop of tight liquidity, builders are also finding it easier to work on housing projects, given the self-financing ability of residential projects through customer advances as against back-ended commercial developments.
Among major developers, Oberoi Realty is now contemplating to convert its office space project Oberoi Splendor Commercial on Jogeshwari-Vikhroli Link Road in Andheri, a suburb of Mumbai, into a residential project. Brokerages like Motilal Oswal and IDFC Securities have termed Oberoi Realty’s decision as a positive trigger, given the possibility of better sales volume. Other builders such as Godrej Properties and Kohinoor have considered and executed such decisions in the past few months as existing ready commercial real estate spaces continue to see vacancy levels growing.
“Most of the current office space deals are aimed at cost reduction and that does not necessarily mean demand growth. Therefore, it’s good to hedge your risk and go for more residential, which is relatively easy to sell than focusing on commercial space that may take long to get absorbed,” says Raja Seetharaman, managing director of property advisory firm Aperon Real Estate Services.
Slower economic growth has led to decline in expansion by companies due to prevailing cautious sentiments and the market saddled with higher inventory isn’t showing any bright recovery promise soon. Total net office space absorption across top eight Indian cities was down 37% from a year ago at 3.6 million sq ft in the first quarter of 2013, showed a recent report from property consultant Cushman & Wakefield. However, fresh supply continued to rise 18% to 7.9 million sq ft with 3% increase in vacancy rates to 19.6%. Residential property market, however, is relatively well placed and experts see more developers trending towards it as customer advances is a much better option than going in for expensive loans or private equity partner induction.
“In residential market, latent demand is getting converted at right price point. Cash flow situation is much better in this segment than commercial. Residential projects work on negative working capital and therefore it makes more sense for a developer to focus on this segment now,” says Ambar Maheshwari, managing director, corporate finance at Jones Lang LaSalle India. In certain cases, developers of even ready and constructed commercial towers are reviewing such plans and are going ahead with them. Kohinoor Square, an under-construction project of Kohinoor Group with an entire 52-storey and 203-meter high ready commercial tower is also being converted into a mixed-use project with focus on residential. The company is planning to add hospitality component with serviced apartments too. According to property brokers, Kohinoor Square has not sold or leased out any space in this ready building yet. The additional hotel component will help the company fetch higher development potential and therefore cut possibility of losses. However, it will be interesting to see if civic authority actually allows usage change for a ready tower. But there are others who envisaged upcoming sluggish commercial market and therefore modified their plans. Last year, Godrej Properties, the real estate development arm of Godrej Group, resized and repositioned its projects in Ahmedabad and Hyderabad with focus on residential development. Godrej’s Ahmedabad township resizing and re-positioning effectively reduce the developable area to 24 million sq ft from 40.4 million sq ft, while increasing the ratio of residential area to 90% of total area from 65%. Citing silent period ahead of its annual earnings, Godrej Properties declined to comment on queries related to preference to residential development.
While responding to an analyst query in its earnings conference call in November, the company’s managing director and chief executive officer Pirojsha Godrej had said that the company does not have any plans to launch additional commercial real estate in Vikhroli in the near future and the total development is skewing towards residential.