Commercial Office Space in India - Leasing Vs. Owning analysis

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta
 

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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Are you a start-up or a growing organization? Find the checklist before you lease your next office space.

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta
 

Are you a start-up or growing organization? As a small company looking to bring new and innovative products and services to market, you want all your focus on the job at hand. You simply need no deviation from your core activities. While in large companies there is always a team to look into the non-core activities of a firm. The start-up can simply not afford it. The non-core activities include finding the right office space, manufacturing facility, admin tasks, and many such activities. Whereas the focus of a start-up is always on its products, customers, etc. However, there is no getting away from non-core activities.

Being a start-up ourselves, we understand how difficult is to perform these non-core activities within the constrained time and budget. Therefore, let’s start from the first step itself, i.e. finding your next office space. Make no mistake, having a right office space will not only allow you to focus on your core activities but at the same time it will help you to attract talent on your path to glory. So what are the things you as the founder of the start-up should keep in mind before going for office space hunting?

Tip 1 – Area Requirement:
Assess your current team size and the short term increase or decrease in team size. Let’s be clear, that most of the leases with landlord/developer will have a lock-in period of 3 years (it can be negotiated though). Therefore, having an eye on future expansion on team size will help you a great deal to justify the office space you lease for your operations. Having done that, now you need to calculate the area required. Our estimate based on the historical data assigns 80-100 Sq Ft per employee. Therefore, having a team of 10 should mean 800-1000 Sq Ft of carpet area requirement.

Tip 2 – Building efficiency:
It makes sense for you to look for office space buildings with greater efficiency. Now, what is building efficiency? Building efficiency is basically the ratio of usable (carpet) area to super area. In other words, higher the efficiency, the better is the space utilization in the building. Therefore, look for buildings with higher efficiency. For example, the building efficiency for Office Space in Gurgaon varies from 65-80%. Let’s take an example, having assessed your team size; you came to conclusion that you need 1000 Sq Ft of usable area. Now, for 80% building efficiency, the super area (the area on which you will pay rent) will be 1250 Sq Ft. And for 65% building efficiency, the super are will be 1540 Sq. Ft. It’s a no brainer that you will choose the building with 80% efficiency to cut on your monthly rent.

Tip 3 – Parking and Location:
Make sure to check for parking spaces available for your office space. As a standard practice, one parking is made available for every 1000 Sq Ft of area leased. One can also rent or buy the additional car space. If your business requires that your customers visit you frequently, it make sense to find the office space in a locality which is located in central business district, and is easily connected by road, metro, etc. And if you operate a back office call center, then location becomes irrelevant for office space set-up.

Tip 4 – verify other charges in addition to the rent:
Make sure to check the other charges in addition to the monthly rent. Typical charges include CAM (Common area maintenance, electricity, taxes, and lease registration charges). In Grade A buildings, CAM charges would typically be 12 to 16 Rs. / Sq Ft. Electricity charges will be as per actual. And taxes, lease registration charges vary from state to state.

Tip 5 – Read the lease documents carefully:
You would have heard of this phrase a many times “Read the documents carefully” :). Typically, a lease paper should comprise the parties to lease, lease date, lock-in period, minimum rent deposit (6 months, although it is again negotiable), lease term including the lease renewal options, rent appreciation format, CAM charges format, size of the area, and other legal clauses. For more about the lease document, Download "Points to remember before leasing your Office Space in Gurgaon"

Go through the process carefully, and all the best in building a great company!

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Commercial office market shines in real estate sector

Although the residential market continues to dip, stable lease rentals, high absorption levels, worldwide investor’s interest and insufficient supply have paved the way for commercial real estate market.

Unlike the disintegrated residential sector, a few distinguished developers, with the support of investors, are building quality office spaces in the central cities.

The chief operating officer of JLL India said, “While demand for good quality office space remains high, absorption will be lower this year because there isn’t adequate supply in the market. Also, demand is high but relevant supply, which depends on location and other advantages, is restricted. We expect the sector to continue to do well.”

As per the property advisory CBRE, Bengaluru is riding high on the demand and the supply of office space and the vacancy level of its office buildings is the lowest. In Pune region, the scarcity of good supply has led to many people showing interest in Grade B buildings as well. One of the worst hit areas was the National Capital Region, grabbing only 37% of the 5 million sq. ft of office space or leasing.

Post the economic dip in 2008, many builders ceased to invest in capital-intensive projects and started showing interest in the residential market. The next few years saw many large apartment projects, resulting in a glut. The market, therefore, experienced a slowdown in the year 2012-2013.

The leading developers in building office projects are RMZ Corp, Embassy Group, Panchshil Realty and DLF Ltd. Most of these names have the support of global investors. Over 80% of the commercial office spaces are occupied by information technology (IT) and IT-enabled services (ITES) clients, the left ones are for the e-commerce firms and banking and financial services.

Panchshil Realty, backed by Blackstone group has added 5 million sq.ft of a new area in Pune for three projects. The Panchshil Reality Chairman Atul Chordia said, “We lease around 1.5 million sq. ft. office space every year, so we just have to keep building because the demand is high.”

DLF doesn’t have any residential launch this year, but the largest developer of India as per the market value plans to cover two-three million sq.ft office area in its lease/rental portfolio. The real estate giant seeks to repeat its success in developing a nearly 30 million sq. ft commercial portfolio over the past decade.

DLF has begun to work on a 2 million sq. ft office project in Gurgaon this year and is also going to cover 1 million sq.ft of the IT Park in Chennai. Chennai is seeing an investment from DLF in the commercial market, and increased investment in apartments in Chennai OMR by the House of Hiranandani.

K. Raheja Corp group based in Mumbai is also planning to spend about INR 2000 crore in purchasing land and building 6 million sq. ft of office space in the area of Navi Mumbai.

Vinod Rohira, the MD, and chief executive of commercial real estate and REIT, K Raheja Corp said,“ Growth and consolidation, particularly in the IT and ITES sectors, are driving the demand for big commercial office spaces. Demand for commercial real estate is growing at 20-22% on a year-on-year basis,”

The year 2016 is likely to observe two massive private equity investments in the commercial sector. While DLF is in the course of selling a 40% stake in its lease assets arm to get about $2 Billion, another $1 Billion investment is being invested by Brookfield Asset Management Inc. to purchase the office and reality assets of Hiranandani Developers in suburban Mumbai.

Like the developers switched focus to the residential market post the financial crisis of 2008, the commercial office projects are gaining popularity now. Some developers are rearranging their portfolios to build more office spaces.

Bijay Agarwal, MD of Salarpuria Sattva Group said, “While entry barriers are low in residential and there are too many developers, office development is not easy and as a result, we have a few serious developers building good projects,”

This is a guest post by Deepak Yewle

Furnished Office Space 15000 Square Feet on Golf Course Road Gurgaon for Lease

E-Commerce, IT/ITES, Consulting, Banking & Insurance, Other financial services, or Companies looking to set up their Head Office in Gurgaon have an opportunity to lease 15000 Square Feet of A-Grade Office Space at highly attractive rental and terms. The Office space is fully furnished & ready to move and offers following amenities:

• 170 workstations
• 15 cabins
• 1 Cafeteria for 35 persons
• Separate toilets for Ladies/Gents/Directors
• 15   reserved car parking space
• 100% Power back up
• Conference hall for 50 persons

This fully furnished office space on 3rd floor with a super area of 15000 sq ft is located on one of the most prime location at Golf Course Road, Sector 53 in Gurgaon.

Office Space Details:

FLOOR	: 3rd Floor
COVERED AREA	: 15007 square feet
ELECTRICAL SANCTIONED LOAD	:  75 KW
HVAC CAPACITY	:  66.5 TR
POWER BACK UP	:  Available with DG
CABINS	:  15
TOILETS	:  3 Gents, 3 Ladies
CAFETERIA	:  1 (35 People)
NO. OF CAR PARKING	:  15

Plan:

For more details:

Visit Fully Furnished Office Space in Gurgaon

or Write to us at nirrtigo@nirrtigo.com

Own an Office space property? How to make best use of it and generate maximum revenues?

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta
 

You chose office space property – why?

Many of us invest in real estate for hedge against inflation, wealth creation, and returns. Within real estate some of us have the propensity to take on higher risk and invest in commercial real estate. Now that you have invested with a reputed builder in a commercial real estate project and own an office space property. There are possibilities that you would have conducted your own due-diligence about the builder, its track record. During the construction phase, builder promised you assured returns and you were satisfied with the entire deal. Finally the construction has been completed and the office space property has been offered to you. Now what?

Now, you would like to either use the office space property for your own use or lease it out to other tenants. Either way, you would like to justify your investment for office space property. Hence income generated by leasing out the office space property will signify how successful has your investment been. If there is demand for office space, then income from leasing will justify your investment. However, if the property remains vacant for considerable period of time then the investment may turn out to be a burden. How can you as the owner of the office space property make best use it?


Enhance the property value

At any given point of time there will be supply of many similar office space properties in the market and user will have the option to choose from those options. For example, the market for Office Space in Gurgaon continues to remain upbeat. However, to stand out from the crowd, you can enhance the value of your property by following below presented tips:

1. Make sure your builder has delivered on what was promised at the time of contract agreement including the super area, carpet area, and efficiency of the building. It is noticed that tenants prefer office spaces where building space utilization is high. This is to make sure that they are able to utilize majority of the space for their staff and minimum amount of space is lost for common areas such as reception, corridors, etc.
2. Parking: Parking is a key consideration for tenants when occupying a particular office space. Make sure that parking space allotted for your office space is properly demarcated. If required, do not hesitate to buy or rent the additional parking space from the builder. 
3. Facilities: Facilities such as power back-up, maintenance, and house-keeping enhances the value of entire premises and not just your individual office space property. Before taking possession, verify if these facilities are properly in place or not. In many cases, builder outsources the property management function to third parties. It is advisable to check the credentials of the property management company so that future disputes related to property management can be avoided.
4. Form an association with other property owners and make sure that there is an easy entry and exit for people from the building premises. Nobody likes to visit the building that has bad entry and exit points.
5. For your individual office space unit, check if the lifts are working properly.
6. Go for fit-outs of your office space property and adjust the rent accordingly. There is likelihood that tenants will choose the ready to use office space as opposed to bare shell space. Negotiate for rent with tenants for your ready to move space.

Market it properly

Having made sure that your office space is in proper condition, it’s time to market it and generate qualified leads.  There are multitudes of channels to reach out to prospective tenants and one can choose among these channels based on his/her comfort.

1. Spread the word that your office space is ready to occupy with all its features and unique selling points. Inform your friends, colleagues, relatives, and people within your network.
2. Hire a professional real estate broker and again highlight the unique selling points of your property.
3. Use internet and list your Office Space on property portals. Make sure, you advertise your property on a platform that is not too crowded and at the same time has the capability to bring leads to you. Provide latest pictures of your property and other unique points. Advertise Office Space here.

Due-diligence of tenants

1. Financial statements/income statement – balance sheet
2. Credit ratings (if available)
3. Any analyst reports on the firm/industry
4. Bank relationships
5. Existing obligations (debt, other leases)

Closing the lease

Underwriting leases is a very important component of risk assessment, which ultimately affects the cash flow produced by the property and hence its value. There are varieties of terms in a lease document; therefore, it is advisable that you hire a professional agency or an advocate to complete this task successfully.

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Basics of office Space leasing and what’s in it for the tenant (companies) and the developer/landlord who is offering the space to lease.

Author: Sachin Gupta | Find me on Twitter Follow @sach_gupta
 

Office Spaces are leased to tenants for a specified period of time. The lease document assigns rights, duties, and responsibilities between the lessor (owner) and lessee (tenant) for the duration of the lease. The terms of the lease include legal considerations that are designed to protect the interests of both the lessor and lessee and specify how rents and expenses are to be paid.


General contents of a lease: 

1. Parties to the lease, namely, lessor and lessee
2. The date of lease agreement
3. Occupancy date (move-in date)
4. Identification of area to be leased
5. Duration of the lease term
6. The base or minimum rent
7. Method to calculate the future rent
8. Description of any concessions and other inducements to be provided to the tenant by the landlord
9. Deposits and any indemnities
10. Guarantees from third parties or co-signers
11. Condition of the leased premises to be provided to the occupant on the move-in date, including any tenant improvements
12. Allowable uses of the property, restrictions on occupancy, and prohibitions regarding future changes in the use of the property
13. Any restrictions on assignment or subletting of any of the leased space by the tenant
14. Use of common areas and facilities such as lobbies, rest rooms, and parking lots
15. Responsibility for maintenance and repair of the tenant’s space and of general premises
16. Any restrictions on alteration or improvements to the property by the tenant
17. Construction of any expansion in the future by the owner and provisions for affected tenants
18. The responsibility for payment of specific expenses by the lessee and/or the lessor
19. The extent to which the lessor and/or the lessee must provide for fire and casualty insurance
20. Any lease renewal options
21. Estoppels

For large corporate users who may be leasing large amount of space and who plan to move many employees and equipment to the space being leased, many conditions are negotiated in the lease agreements.

Leases and Responsibility for expenses (recoveries):

Owners of office space property incur many operating expenses. Some expenses such as electricity, water usage, and gas are paid by tenants individually. However, expenses related to the areas of the property (common area) used by all tenants, the normal way is to recover those expenses by prorating them among all tenants.

Typical operating expenses for office space properties:

1. Cleaning: Housekeeping
2. Repairs
3. Maintenance
4. Landscaping
5. Electricity
6. Water/Sewer
7. Security
8. Management
9. Real estate taxes
10. Insurance

Different combinations of rent and of operating expense recoveries are possible:

1. Gross (full service leases): tenant pay only rent and owner provides all services and pays for all operating expenses.
2. Modified (full service leases): tenant pays rent and pays for individual, specified expenses identified in the lease such as electricity, gas, water and the like. Such expenses are usually linked to tenant by sub metering. Tenant also pays pro rata share of certain operating expenses (known as CAM Charges) incurred by the property owner.  This is the most preferred lease mechanism in India.
3. Leases with expense recoveries in excess of an expense stop: tenant pays rent plus a pro rata share of certain operating expenses incurred by the property owner. Here stop is usually calculated as the total operating expenses per square foot of rent-able area in the building that is incurred by the owner during the specified base year. The tenant agrees to pay only for expenses per square foot in excess of this stop. This way, the owner hedges its risk of increasing operating expenses and passes it on to the tenants.
4. Pass through leases: these leases are made when a few tenants lease very large amount of space in a property. When fewer tenants lease large amounts of space, operating expenses tend to be identified and linked more directly to those tenants. In this case, base rents tend to be lower than for full service, and modified full services lease.

Some Important terms:

Rent-able area in a building:

Total area on all floors + lobby – thickness of exterior walls – any columns or protrusions through the floors – mechanical equipment closets – basements and any area needed by owner to maintain or operate the building + elevator landings + reception areas + restrooms + any other area that could be used by tenants

Multiple tenants – Rental area per floor:

When there are many tenants in a building, each tenant will occupy its usable area on a floor. However, there would be some common area used by all the tenants. In that case, the common area will be prorated among the multiple tenants in order to determine the actual rent-able area. 

Load factor: 

Total rent-able area/total usable area. Load factor is seen as “efficiency measures”. High load factors generally mean a large number of common areas and therefore lower building efficiency. For example, load factor for Office Space in Gurgaon varies from 1.25 to 1.67. Generally, tenants occupying larger office space has lower load factor relative to the tenants occupying smaller office space.

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