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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Innovation in essentials of construction materials

Civil engineering is raving up fast with new innovations being made rapidly. From sealants to adhesives, from wall solutions to roofing, it is getting environmental or technological friendly with every invention, which is indeed need of the hour.
Innovations in construction material industry are imperative to better manage the construction process and boost efficiency as well as provide cost-effective solutions. It also minimizes construction time along with adding durability factor.
Presenting to you with such 5 mind-blowing innovations that have brought new face to buildings-

• Dryfix, a revolution in masonry-

Dryfix is a revolutionary bond (or glue) that is a complete wall building solution and is highly superior to the traditional mortar used by masons. Unlike mortar, which is messy to work with and takes days to settle and requires loads of water for curing, Dryfix is a strong adhesive bond that requires no curation and is ready to use. With this innovative product you can build walls almost 50 percent faster. It is easy to use and leaves no debris to be dumped. It is also seasonally independent and cost-effective. Porothermdryfix drastically reduces gaps and joints, hence leaving no thermal bridges.

Image Courtesy: Wienerberger

• Bamboo corrugated sheets, a boon for people residing in earthquake prone areas-

Bamboo is well known for its robust and versatile nature. Bamboo, one of the best substitutes for wood, which is on the verge of getting extinct, is being extensively used in constructions, especially the low-budget buildings.  Its versatility allows it to be made into different forms like mat board, mat veneer composite, etc. among which bamboo corrugated sheets for roofing has highest merits. These bamboo roof sheets are the perfect substitute for asbestos and galvanized steel sheets used for roofing, particularly in the earthquake prone areas. They are lightweight, natural, energy-efficient and cost-effective, which also falls under green construction materials.

ImageCourtesy: www.habitat.org

• ‘Green wood’, the story of rages to riches!

‘Green wood’, an innovation by par, a 16 years old Delhi based girl, has made these bricks out of unwanted rice husks and straw mixed with resin which are then pressed to form particleboard. They’re believed to be free from fungi and mould and can be used for construction purposes. Alternatively, it can also be used as substitute for wood for making low-cost furniture.

• Hollow bricks, a smart innovation for fast and easy construction

Hollow bricks, yet another innovation in essentials of construction materials has successfully raised the process as well as the buildings to a whole new level. With hollow bricks the construction is fast due to uniformity in the make and pattern of the bricks. They are bigger compared to traditional solid bricks and hence reduce the joints thereby consuming less masonry, which helps to cut costs. They’re light in weight, which makes handling easy and speed-up the process that further reduces the cost. Since they’re made of natural resources like clay it helps in reducing energy consumption by providing a means for thermal insulation.

Image Courtesy: Wienerberger

• Bricks born from ashes, all in one rural area

RHA (Rice Husk Ash) brick is the brainchild of a farmer who believes in natural farming based in Kanchipuram. In the urge to prevent farming land turning infertile due to dumping of rice husk, this genius who has won rural innovation award started making these bricks.  These bricks can be done easily by combining RHA with sand, quarry dust and some cement. They are low-cost bricks and helps conserve the environment.

• Bagasse Particle Board as innovative laminated flooring- 

Bagasse, the leftover pulp of sugarcane after the extraction of juice can be used as a substitute for wood in particleboard. Bagasse is generated in large scale especially in sugar mills which otherwise go waste. Though bagasse is the core material used for laminated floors, it doesn't provide enough strength on its own and has poor water resistance. However, when combined with resin, which acts as bonding agent along with wax that is used as dimensional stabilizer, these particleboard can be used for laminated flooring. Further, bagasse based partial boards can also be used to make furniture which are not only Eco-friendly but also cost-effective.

All these innovative building materials have brought a wave of change not only in terms of saving environment by reducing use of concrete, wood and other traditional resources, but have also provided architects room to think creatively to inculcate green concept in their designs.   

This is a Guest Post by Wienerberger, the world leaders in Building Material solutions, present across 30 countries and 215 manufacturing units across the globe, provides complete solutions to our clients by delivering smart building materials and smart solutions. 

Resale Vs. New property – 10 Things to think about

Buying a resale property differs from buying a newly constructed one, both in terms of legality as well as the buying process. The properties listed on resale are often priced higher than the original cost considering factors like new amenities, pricing trends in the vicinity, ease of commuting to the city, malls, schools and hospitals, overall civic amenities in the area, etc.

However, there are several advantages of buying a resale property, such as…

1. Immediate possession of the property
2. Escaping the rent and EMIs simultaneously
3. Getting to see the desired specifications completely
4. No construction delays
5. Time for planning your move-in
6. Tax sops on home loan from the beginning 

In spite of the advantages at a higher price level, it is imperative to know what to expect and what you will get in a resale-apartment deal. 

• Talk to the experts 

There’s definitely a friend or acquaintance who has invested in a resale apartment in the past, and is evidently happy with the purchase. Ask how they went about the purchase. Also try to understand the general legal procedure. Apartment specific details may not be similar to your desire, but certain basics always match. 

• Check for clarity in the ownership context

Although one feels it’s easy to hire a lawyer or an estate agent, it’s better to be well versed in certain areas for your own understanding. Check the title of the property, as its clearance is highly essential to avoid any sort of fraudulent selling. 

• Documents

Check for all documents available with the purchase. Some of them are project commencement certificate, completion, occupancy and sale deed. Also check for the authenticity of the same with a lawyer or an agent of your choice.

• Clearance of loans taken 

Check whether the property is completely free of past loans taken by the builder. Check with bank personnel to conduct this verification because they have the necessary network to do so. 

• Eligibility to apply for a new loan

Considering that you need to fund your purchase through a loan, and this would be a resale property, cross check with your bank about the amount that you are eligible to receive as a loan. Verify that you have the all-important documents to process your loan application. Sometimes it is better to fund the property partly through a loan, even if you can afford the entire payment. Outsource the due diligence to bank authorities and stay rest assured about the safety of the investment. 

• Conduct an evaluation of the property

It is important to get your desired property evaluated for its market value. This is required firstly to ensure that the finances are planned properly. Secondly, check whether the property prices are predicted to fall, which would discourage the banks from granting you a loan amount that you are eligible for. 

• Down-payment amount

Make prerequisite arrangements to pay an initial lump sum amount as a down payment for the purchase. The banks usually give you close to 80% of the total price on the property as a loan. 

• Age of the property

The ratio of loan amount received and the amount of down payment varies based on the relative age of the property. Older properties tend to be valued away from your advantage because banks try to safeguard their interest. Thus, the down payment for an older property would be a larger amount with respect to the loan you can avail.

• Maintenance fees charged by the society

This is a monthly recurring expense after you occupy the purchased apartment. Ensure that your budget can accommodate it with the EMI that you would be scheduled to pay every month to the bank for some years as well. 

• Reason for the sale

This should have appeared much higher in the list, but you can find out the reason for sale only after you build a rapport with the owner. Try finding out the reason behind the sale. Although it is not always necessary that you get authentic information, do ask to understand the intentions.

This is a blog post by Bharath Joshi who is the Marketing Executive for Unishire Signature in Bangalore.

What are the various kinds of risks involved in real estate investment? And what should you as an investor do to minimize those risks?

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

Any kind of investment whether in Gold, property, stocks, bonds, etc. is subjected to certain risks. While Government securities are considered risk free, there is still some amount of risk involved in those. What if the government defaults as has happened in some of the EU nations? Consciously or unconsciously people do their risk analysis before making any investment. In this post, we will analyze the risks that are involved in real estate investment. Whether one is investing a small amount or substantial amount, going through this risk analysis will help you in foreseeing the potential risks that can creep in your real estate investments.

• Business risk:

Property investors suffer due to fluctuations in economic activities that affect the variability of rental income generated by the property. Changes in economic conditions prevailing in the country often affect some properties more than others depending on the type of property, its location, and any existing leases. For commercial properties, particularly office space buildings, a property with a well diversified tenant mix is likely to be less subject to business investment risk. Lease deeds that provide the owner with protection against unexpected changes in expenses (e.g., with expense stops in the lease, or leases indexed to WPI, etc.) would have less business risk. Changes in the economic conditions also affect the residential property investors who are primarily looking for capital appreciation gains on the property. With economy slowing down, the capital yields goes drastically down as can be seen in the latest housing price index across many cities in India.

• Financial risk:

The use of debt (financial leverage) magnifies the investment risk. Financial risk is directly proportional to the amount of debt taken to finance the purchase of property. Based on the prevailing interest rates, the financing costs may go up and eat into the income generated by the property. Financial risks affect both commercial and residential property investor due to the financial leverage. The cost of financing goes up or down depending on the economic situation and prevailing interest rates.

• Liquidity risk:

This risk occurs when a continuous market with many buyers and sellers and frequent transactions is not available. The more difficult it becomes to sell a property, the greater the likelihood that owner will have to under-sell the property in order to dispose of the investment quickly. Sometimes, it can take from six months to a year or more to sell real estate income properties especially during period of weak demand. We have seen many cases in recent past when investors were forced to undersell because of slow property transactions across the country.

• Inflation risk:

Unexpected inflation can reduce an investor’s rate of return if the income from the investment does not increase sufficiently to offset the impact of inflation. To overcome this risk, use of leases that allow the Net Operating Income to adjust with unexpected changes in inflation is applied. Higher inflation also eats into the capital gains that are sought by many housing investors.

• Management risk:

The risk is based on the capability of the management and its ability to negotiate leases, respond to economic conditions, and operate/maintain the property efficiently. Even in case of residential properties, with outdated tenant laws across India, we have seen how difficult it gets for the manager or owner to get hold of their property. Therefore, as is the case in commercial properties, property owners must go for registered leases for residential properties as well.

• Interest rate risk:

Real estate tends to be highly leveraged and thus the rate of return earned by equity investors can be affected by changes in interest rates. Most mortgages are of floating interest rates in India and therefore any monetary policy changes by RBI is keenly watched by the real estate investors. Even if an existing investor has a fixed interest rate loan or no loan at all, the change in the monetary policy by RBI by increasing the level of interest rates may also lower the capital value of a property that a new buyer is willing to pay.

• Legislative risk:

Regulations such as tenant laws, taxes, registration procedures, stamp duty, restricted use of property, zoning, and other restrictions imposed by the state bodies or municipalities are categorized as legislative risk and must be factored in by the investors.

• Environmental risk:

Environmental risks such as constructing or buying property in areas where the land use policy is under jurisdiction and therefore have the possibilities of adversely affecting the returns on investment.


Having gone through the above risks, a property investor should do his/her due-diligence before investing in a property:

• Review of title/deed documents
• Property survey
• Government compliance
• Areas of review/locality
• Physical inspection
• Tax matters
• Insurance policies
• Pending dues
• Market studies including the demand for the similar property
• Review of rent agreements or lease deeds in case the property is already rented.

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