First generation of malls and organised office spaces in India went for an outright sales model. But leveraging the experience, added with the ease of funding in India’s commercial property, the developers swiftly moved to lease model. Since then, Track2Realty finds in the commercial real estate it has been an endless debate whether the lease model is the best way to operate or the sales model works better.
Post Covid, both the developers as well as the space occupiers have yet again been busy with their own cost and benefit analysis. While leasing has helped some of the companies with recurring income, others have gone for the outright sales to meet their funding needs. So, if leasing answers one query of the developer, sales answers the other.
Most of the malls and office spaces operating out of India’s leading cities have decreased footfalls and empty spaces ever since the pandemic. The over-supply borne out of lack of demand and emerging realities of e-commerce has also forced both the developers as well as the retailers to evaluate their space occupying methodology. The ground realities are no different in office space as well where the nature of occupiers is changing fast and the developers have woken up to the reality that it is no more the IT/ITeS that can sail them through.
Analysts tracking the market maintain that since footfalls have decreased in the malls, the retailers are also deserting the commercial spaces. The business urgently needs the concept of revenue sharing to attract the retail brands and out-of-box consumer connect to drive the footfalls. Similarly, in the office space since the occupiers’ demand has scaled down, many of the developers are re-thinking their strategy.
What works better in the commercial spaces—sale or lease? More importantly, whether the sales strategy is dependent on the market conditions or the industry has managed to have some learning out of the evolution stages in the last over a decade? There are many such questions and the answer to these questions are not easy to find.
Cost & Benefit
One school of thought believes in the fact that most firms operating within the real estate space have huge debt on their books. Therefore, lease model is definitely a better strategy for development firms, as there is a regular flow of money and returns on their investments. This kind of a strategy helps companies to offload a significant amount of their debt and continue to earn revenue from the cash flows generated through leasing of space.
For regular cash flow, lease model might be a better business sense. If one has to draw a comparison between a large-scale retailer and a small-scale retailer, a large scale domestic retailer would prefer to buy the space, as the asset price adds to the overall worth of the business. However, for an international retailer it will not make sense to buy assets as the company will incur cost and might not be able to put enough funds for expansion. International corporate occupiers in the retail space often go for lease model. For a small office occupier too, if the rent is affordable and reasonable, it makes sense to operate through a lease model.
Another school of thought believes Indian firms traditionally prefer purchasing office properties for their own businesses, while multinationals in the country typically prefer to lease office space. For retailers and small office occupiers, following a pure lease model instead of divesting units to individual investors provides better business sense.
Analysts tracking the market believe lease model is always easy and better in comparison to the sales model in commercial property. For a lessee it gives a strategic option of rethinking if it is not giving the desired outcome considering all different aspects and factors involved in any particular kind of business. For a developer also, it works as an indirect sales model where a developers can comfortably sale the lease area to an investor who can enjoy both the benefits of property appreciation as well as the lease money.
Industry Voices
Ashish Narain Agarwal, Founder & CEO, PropertyPistol.com believes ideally lease model is better since the initial cash outlay is low and payments are in parts later. In lease settlement, the start-ups and small companies benefit as the income is yet building up and payment of huge amounts can be avoided.
“The maintenance of the property is on the owner and one doesn’t have to worry about its upkeep. In case one wants to change the location, he can do so freely. Also, property appreciation or depreciation will not have a major effect in a rental agreement,” says Agarwal.
Amit Goenka, MD and CEO at Nisus Finance categorically says whether to lease or buy depends on the buyers’ capex capability, ability to service debt, asset lightness, and long term vision as it is more expensive to lease commercial spaces in the long run.
Conclusion
There is a general consensus within the built environment of commercial real estate that leasing always makes better strategy for commercial properties in the long term. Worldwide leasing has been a successful formula, wherein the whole towers are leased out to different corporates and ultimately offloaded to institutional investors or Real Estate Investment Trusts (REITs). With REITs
having tested initial success in India, this will become more popular and also provide an exit route to developers.
Lease model also provides better business sense for the retailers and small office occupiers since capital is not blocked in the real estate and they can move freely to other locations to adapt to the ever changing and evolving business environment. The capital can hence be better utilised for business expansion.
Of course, the emerging reality of retailers negotiating rents with landlords and asking for a revenue-linked lease model in the wake of Covid also makes lease a sound business model in crisis. The rentals skyrocketing in the wake of market conditions turning bullish provides the developers the same leverage.
Adopting a “lease only” model for their commercial spaces helps developers to easily control tenant positioning and manage common areas more effectively, which would not have been possible in case of a strata-sold model. Proactive tenancy leasing, screening and management are also essential for maintaining a successful commercial center. The adoption of rental models, such as revenue-sharing, could provide support to occupiers seeking to establish themselves in the market, and also enable developers to attract international and domestic retailers to set up offices and flagship stores.
Ravi Sinha
@RaviTrack2media
Track2Realty is an independent media group managed by a consortium of journalists. Starting as the first e-newspaper in the Indian real estate sector in 2011, the group has today evolved as a think-tank on the sector with specialized research reports and rating & ranking. We are editorially independent and free from commercial bias and/or influenced by investors or shareholders. Our editorial team has no clash of interest in practicing high quality journalism that is free, frank & fearless.
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