Leasing, by far, still remains a better option for both, developers as well as the retailers.
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. Ever since the first generation of malls and organised office spaces came into the business, both, the developers as well as the space occupiers have been busy with their own cost and benefit analysis. While leasing has helped some of the companies with recurring income, others have gone for outright sales to meet their funding needs. Most of the malls operating out of India's leading cities have decreased footfalls and empty spaces. The over-supply borne out of lack of demand and emerging realities of e-commerce has 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 just seem to have failed to acknowledge that it is no more the IT/ITeS that can sail them through. The dilemma of lease versus sales model as a strategy to sail through has hence, yet again, started confusing the commercial space developers. The concept of revenue sharing to attract the retail brands and out-of-box consumer connect to drive the footfalls is missing in the sector. Similarly , in the office space segment, since the occupiers' demand has scaled down, it seems many of the developers are re-thinking their strategy and are open to outright sale of the office space. 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 answers to these questions are not easy to find. Sachin Sandhir, MD, RICS South Asia, maintains 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 will help companies to offload a significant amount of their debt and continue to earn revenue from the cash flows generated through leasing of space. “For some, lease model might be a better business sense.
If we are 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. Buying space will unnecessarily put burden on him and might even fail his business,“ says Sandhir.
George Mckay, south Asia director Office and Integrated Services with Colliers International, however, believes that lease model, as against sales model, is working well in the commercial property more in the case of top tier developers who have backing from FDI money or a significant domestic backer source of capital. By comparison, developers that are still holding high levels of debt andor do not have as much FDI domestic backing still have a high preference for sale of their spaces. Although only the biggest and best developers are likely to directly benefit from REITs at least in short to medium term. It varies case to case by retailer/small business occupier. Generally , if an occupier expects a stable need for space over the next 10 years then owning almost always is better than leasing,“ says Mckay.
Anshuman Magazine, CMD, CBRE South Asia, says leasing office space is the preferred option for large development firms, as it is more likely to yield greater returns in the long-term, over other property types. Indian firms, traditionally, prefer purchasing office properties for their own businesses, while multi-national entities 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. “The adoption of rental models, such as revenue-sharing, has provided support to retailers in India seeking to establish themselves in the market, and has also enabled shopping mall developers to attract international and domestic retailers to set up flagship stores. Adopting a 'lease only' model for their shopping centers 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 retail center,“ says Magazine.
Rattan Hawelia, chairman of Hawelia Group, is of the opinion that lease model is always easy and better in comparison to the sales model in commercial property segment as 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. Whereas for a developer 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 . “It is easy for developer to use commercial property as a mix and match option. In a way , it is a better option for small-scale business. In any business raising of funds and managing it is the biggest and important factor.
So, considering this, lease model allows a businessman the option of money management as per their business strategy and planning,“ says Hawelia. Lease model provides better business sense for the retailers and small office occupiers since capital is not blocked in the real estate. The capital can hence, be better utilized 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 slowdown also makes lease a sound business model in crisis, whereas the rentals skyrocketing in the wake of market conditions turning bullish provide the developers the same leverage.
Today's market realities are, nevertheless, confusing for the developers who have waited for long to see the upside of leasing model.
Worldwide, leasing has been a successful formula, wherein the whole towers are leased out to different corporate groups and, ultimately, offloaded to institutional investors or Real Estate Investment Trusts (REITS).