Why are Developers Converting Residential Projects to Commercial?

At a time when the residential segment is showing every sign of weakness, from falling sales to stalled launches, the commercial real estate segment is giving the real estate sector reason to cheer. ”The office market has turned around for the last year and I think that is the real positive sign. We have seen an uptick right through, across most of the markets”, says Shishir Baijal, Chairman & MD, Knight Frank India.

This uptick is being driven by optimism about the fate of the economy, coupled with an expansion drive by IT & ITES companies. Data from Cushman & Wakefield shows that office space absorption rose by 32% to nearly 18 million square feet in the first half of 2015. Faced with a decline in residential sales, this is compelling developers to convert their residential projects into commercial to tap into this surge. Dharmesh Jain, Chairman & MD of Nirmal Lifestyle is doing exactly that with his project in Mulund, “We were originally thinking of developing the Mulund project as residential but are now adding office space to it. We are very excited about commercial realty picking up and are positioning it as an office development center”, he says.

Several other developers are looking at partial to complete conversions to hedge their bets in the current slump. Industry sources tell NDTV that brand name developers like The Runwal Group, V Raheja Builders and The Ashok Piramal Group are looking at ways to convert some of their projects into office spaces and experts expect this trend to grow in the months ahead. ”In the recent past we have seen close to about 5-6 million square feet which has gone through a change across the country. I would not be surprised if the figures by the end of the year go up to 10-15 million square feet”, says Sanjay Dutt, Executive MD for Cushman & Wakefield – South Asia.

The move to convert residential projects to commercial is predominantly seen in the National Capital Region (NCR) and Mumbai where the residential markets have been battered the most. However, developers in the NCR market are approaching the problem differently. “NCR is very restricted because everything is licensed like in the case of Gurgaon. It is not easy to convert projects easily. What developers are doing is if they have a mixed-use development, they are developing commercial first and not residential, instead of the other way around”, says Sanjay Dutt, Executive MD for Cushman & Wakefield – South Asia.

This doesn’t mean that every developer is rushing to convert projects into commercial. Much depends on their ability to lure big corporates into taking up space in their projects and these companies prefer to go with large trusted brands. So developers are keeping such conversions restricted; only going in for commercial when they are sure that they will be able to attract interest.

Nikhil Narayan Sivadas, Assistant Editor, NDTV


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