Why small developers prefer residential development

Arvind Jain

It is a known fact that commercial real estate in India is a lucrative proposition for developers. Why, then, do we see new developers concentrating on residential apartments rather than commercial projects in commercial hotspots like Pune? There are various reasons for this.

In the first place, commercial real estate development requires larger land parcels than residential. Also, the reputation of a developer plays a significant role in attracting tenants into a commercial project, and new, start-up developers do not have the requisite track record. Apart from the reputation factor, commercial projects also entail high project cost, and larger developers with established reputations are the only ones who can raise the required financing.

Moreover, a developer needs to have prior experience in commercial development to succeed, and the gestation period for commercial projects is longer than for residential projects. Seeing commercial projects as a risky undertaking where lack of experience and capital can lead to failure, smaller developers generally prefer residential instead of commercial projects. In fact, many inexperienced smaller developers have in the past launched small-sized commercial spaces which have remained vacant over several years. The reason is that the better grade of tenants prefer high-quality buildings with all amenities which are possible only for larger, reputed developers. Residential projects can be developed on small plots, even as small as half an acre, and the capital requirement is much lower. There are many more financing options available, and the gestation period is lower – in Pune, it usually takes only 1-3 years to sell all units in a residential project if the pricing is right. Also, cash flows start immediately on the basis of bookings even before construction starts; in a commercial project, cash flows via rents start only after completion of the buildings. With India's economic recovery now fully underway and Pune's thriving IT/ITeS and manufacturing sectors once again on the forefront of national and international business activity, commercial real estate development in firmly on the agenda of the city's largest developers. Because of the favourable correlation of housing demand with office space expansion, the Pune real estate market remains promising for residential projects, as well.