Unlocking Potential of Available RE Spaces

Today real estate is witnessing optimization of spaces and aging commercial developments are offering an opportunity to the owners to evaluate newer development options for their properties. Growth of real estate developments in India started in early 1990s and top 7 cities of the country today have significant office space stock which is more than two decades old.

Top 7 cities of Mumbai, Delhi NCR, Bangalore, Chennai, Hyderabad, Pune & Kolkata have close to 600 million sqft of operational office space stock of which nearly 150 million sqft is more than two decades old. By 2025, nearly 200 million sqft of office space stock across these cities is expected to be more three decades old.

With time, office space buildings across city are likely to face one or more of the following challenges:

  • Worn out structures / facades due to poor maintenance
  • Lack of new technology – building safety and security measures
  • Poorly maintained common areas & outdated service systems – elevators, stair-cases, air-conditioning as well MEP systems
  • Poor mechanisms for energy efficiencies
  • Change in occupancy ratios
  • Change in function of the building
  • Change in the development regulations

Poor operational efficiency of the buildings is likely to result in higher operating costs of the buildings. As land parcels for developing new office spaces as well as development of new micro-markets is limited, alternatives for the land-owners / developers / investors to ensure the buildings are competitive is either retrofitting or redevelopment.

Retrofitting or redevelopment are typically two measures to improve economic life cycle of existing older buildings. Retrofitting is usually the preferred alternative as it involves lesser investment; however, for buildings that face both economic and functional obsolescence redevelopment is the only alternative.

Table below summarizes investment and return for both the scenarios:

Type of Improvement Investment Amount
Pay-back Period % Premium 2
Retrofitting 1 1,200 – 1,500 1 – 2 years 25% - 30%
Redevelopment 2,500 – 3,000 3 – 5 years 45% - 55%

In the coming decade, retrofitting of aging office space is likely to witness an increased interest from the owners as demand for specialized uses – Compact Housing, Professional Housing, Student Housing, Co-working spaces is on the surge. We estimate that nearly 70 million sqft of office space in India will witness space optimization by 2020 and market size for the same is pegged at INR 1,000 Cr.

Effective building performance evaluation helps to understand the technical and functional performance of a building. A detailed due-diligence of the building can help land-owners / developers and thereby command a premium by:

  • Identifying and arriving at solutions to problems in building
  • Improving functional efficiency
  • Establishing accountability of building performance
  • Reducing operational expenditure

A detailed due-diligence of the building can help an investor Identify risks associated with cost and time and thereby leverage investment negotiations. A DD helps to understand -

  • Physical condition of the building
  • Building performance
  • Statutory compliances

Retrofitting / redevelopment of properties is a trend we expect to continue as with investments from REITs as well as fund raising across specialized sectors, property owners today have an opportunity to understand potential of the property and improve its market position.

1 Of the total investment INR 300 – 600 per sqft is estimated towards structural repairs

2 Commanded after improvement