Wednesday, November 6, 2019

Commercial Office Space in India - Leasing Vs. Owning analysis

Author: Sachin Gupta | Find me on Twitter
 
This post covers the topic of Commercial Office Space in India and why businesses choose to lease office space than owning a piece of commercial real estate!

Businesses use real estate as part of business operations along with manpower, machinery, and other resources to produce desired output. Even though the primary business of these corporations is not real estate investment, they have to make many decisions regarding the use of real estate because real estate is typically an integral part of the firm’s operations. For example, real estate is used for office space, warehouse, manufacturing, retail, and so on. Vast majority of real estate used by business firms is leased and not owned because of following reasons:
  1. Space requirements are less than the quantity of space that they would have to purchase in order to satisfy their needs in a desired location. Even if they lease the remaining space to other business firms, still leasing would be preferred than owning mainly because
    • Large capital to purchase the desired space
    • A purchase would put the business firm in real estate business which can take away the focus from firm’s core activities.
  2. Even if business firm manages to occupy all the space that is available with the purchase, the firm will still prefer to lease
    • Owning would reduce operating flexibility: if the business firm desires to move its operations from the purchased location, then space selling or leasing to other firms will constraint the movement or slow it down. Instead, had the firm leased the space then they can move without having to worry for real estate space.
    • If the space is owned, then it must be maintained, operated. These activities may result in loss of focus of the firm from their core activities. Operating and managing properties is usually done more cost effectively by firms that specialize in the real estate operations.
    • Flexibility of scaling down the business. That means if a firm decides to scale down its operations then the firm can do it easily if the space has been leased than owned. Scale down means use of less space.
  3. Real estate business activities should be performed by professionals trained in real estate business. Some of the following activities are:
    • Selecting the right tract of land and developing the right amount of space
    • Leasing that space to many different tenants, for example, builders develop Office Space in Gurgaon and lease it to many different tenants with different office space sizes.
    • Hiring personnel, collecting rents, and maintain the facility
    • Finding financing for the investment or development
    • Doing continuous research about real estate markets in order to decide when to sell, raise or lower rents, renovate and so on.
    • Many other such activities.


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43 comments:

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