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After the sealing, what?

Posted online: Friday, September 29, 2006 at 1010 hours IST
Updated: Friday, October 06, 2006 at 1157 hours IST

Ajay Arora, who till recently ran a garment store on GK-I Main Road, shut down his shop this month and emptied it of all its furniture and inventory to avoid having his premises sealed by the Municipal Corporation of Delhi (MCD). He then began looking for an alternative space from where he could resume his business. “I made enquiries at Sundar Nagar Market. The landlord demanded a rent of Rs 500 per sq ft, which is almost three times the rate that prevailed there six months ago. If I pay such a high rental, my chances of breaking even will be very low,” says a dejected Arora.


On September 15, 2006, Delhi government notified 2,204 roads on which mixed use will be permitted. Traders and professionals are now waiting to see if the Supreme Court will accept this notification. Arora, whose own shop isn’t located on one of the notified roads, says: “Suppose I rent a shop today for Rs 500 per sq ft per month in an approved market, and the Court accepts the government’s notification, then a lot of retail space will become available for about Rs 200 per sq ft or less. Having signed a three-year contract, I will be stuck at the rate of Rs 500.”


Shifting pains


Like Arora, thousands of traders and professionals all over Delhi are waiting for the Court’s verdict before deciding on their future course of action. Many would like to move to a new location and get on with their businesses, but are finding it difficult to do so. Says Rajan Ahuja of Realty & Verticals, a real estate consultancy: “For many small businesses, their location is their USP. They will not be able to generate the same kind of revenue for many years if they shift to a new area.” Newly set up businesses, he says, are finding it easier to move.


If you are not among those affected by MCD’s sealing drive, you may have felt that professionals and traders had no business, in the first place, to operate out of residential areas. And, you might have said, what has happened to them is just dessert for flouting the law for years. But the sheer magnitude of the problem compels a closer examination of the issue. Why would so many, otherwise law-abiding people, choose to break the law by setting up a shop or an office within a residential colony?


Perennial shortage. “Over the past few decades, Delhi’s population has grown several fold. In South Delhi residential colonies, kothis have been demolished and have been replaced with multiple builder floors. But supply of commercial space has not grown commensurately,” says Anshuman Magazine, managing director, CB Richard Ellis South Asia.


The small shopping complexes provided within DDA colonies have not been able to meet demand. And private developers have not been allowed to develop commercial space within Delhi — a move that would have helped meet the shortfall. Says Varun Pawa, Director, Pawa Builders: “In the last 7-10 years there have been very few office developments in Delhi. Delhi Development Authority (DDA) controls all the land in the capital. Only in the last 2-3 years have spaces been auctioned in district centres like Jasola, Dwarka, Rohini, Shahadra, Netaji Subhash Place, Saket and Vasant Kunj. It will take at least 3-5 years before commercial spaces are developed at these sites and become available for use.”


Huge rate differential. As a result of the acute shortage, the rental differential between a shop or office operating out of a residential colony vis-à-vis one operating out of an organised, legal space is very high. Magazine reckons the differential would be 100 per cent in most parts of Delhi.


Jayant Varma, executive director (north), Knight Frank (India), a real estate consultancy, cites an example. “Recently a footwear brand was planning to rent space in Lajpat Nagar C Block, which is not approved for commercial usage. The monthly rental for this 1,400 sq ft space was Rs 1.25 lakh. In a commercially approved part of Lajpat Nagar the same space cost around Rs 1.85-2.20 lakh.”


Adds Ahuja of Realty & Verticals: “If you set up an office within a house in GK-I, your rental rate would be as low as Rs 20-30 per sq ft. On the other hand, in a grade A office building in south Delhi it would be at least Rs 120 per sq ft.”


Besides the difference in rentals, the tenant also has to pay a maintenance cost within organised retail spaces, which comes to about Rs 18 per sq ft. “Most shopkeepers and small-time professionals would rather avoid this additional burden,” says Ahuja.


Visibility. Another reason why people operated out of residential premises was the higher visibility.


Says Pawa: “”If you are on the main road of an established colony, such as GK-I Main Road, you enjoy high visibility. And you are also close to the affluent clientele you are targeting.”
Now, what lies ahead for those who have had to shut down their shops and offices? Are organised, legal spaces available? And at what rates?


Office space: Demand-supply mismatch


The shortage of office space in the NCR has resulted in rentals rising consistently. Says Magazine of CB Richard Ellis, “Office rentals have, on an average, been rising by 10-15 per cent annually.” Pawa cites the example of Pawa Presidential Business Park, an office complex developed by his company in Vasant Kunj. “Two years ago we leased out space here at about Rs 85 per sq. ft.; today it commands a rate of Rs 150 per sq. ft.”


Given such high rental and capital values, bigger corporates might be able to shift to organised spaces if they can find such spaces. But for smaller professionals this might not be feasible.


Suburbs gain. With MCD’s drive spurring the demand for legal spaces, suburbs like Gurgaon, Noida and Greater Noida, where newly developed office buildings are available, have gained. Says Varma of Knight Frank: “Over the past two years, office prices have risen by 25-35 per cent annually in these suburbs.” According to CB Richard Ellis’s market report for the second quarter of 2006, the rate rise should stabilise somewhat by the end of the year with new supply of around 2.5 million coming into the market.


Retail: Less of a mismatch


In the retail segment, too, demand exceeds supply, especially in established destinations like CP, South Extension, GK I & II, and Lajpat Nagar. Here, too, rates have been on the upswing. According to Magazine of CB Richard Ellis, “Retail rentals have, on an average, been rising by about 15-20 per cent annually.”


MCD’s sealing drive has further exacerbated the demand-supply mismatch. Says Jaskirat Singh Bansal of Akal Constructions, a Rajouri Garden-based real estate consultancy: “Eight months ago, before the demolition-sealing drive began, you could have bought space on the ground floor of MGF’s City Square Mall in Rajouri Garden for Rs 18,000-20,000 per sq ft. Today buyers are willing to pay Rs 30,000 per sq ft, but no space is available. Rentals have risen from Rs 90-100 per sq ft to Rs 125-150 per sq ft.”


In the retail segment, however, the shortage is not as acute as in the official segment. Says Magazine of CBRE: “Malls are coming up in all parts of Delhi: in Saket and Jasola in south Delhi, and also in the east, west and north.”


Adds Varma of Knight Frank: “Several malls have already come up in east Delhi, Ghaziabad, Noida and Greater Noida. Gurgaon, in fact, is experiencing over-supply. High-end brands can move to these malls.” Smaller brands, he suggests, could move to district centres developed by DDA, such as the ones in Janakpuri and Vasant Vihar.


Smaller brands, even if they can afford the high rentals, may not find a space within malls. Says Ahuja of Realty & Verticals: “Today developers maintain a tight control on the retail mix of their malls, and will only allow well-known brands into them.”


In the short run, as the city makes the transition from haphazard commercialisation to stricter zoning norms, there is bound to be hardship. But there are several long-term benefits: fewer jams and lesser pollution within residential areas; and a realisation among end-users that they must occupy legal, authorised spaces.


Meanwhile, the authorities need to augment supply of commercial spaces by making provision for more commercial spaces in the masterplan, allowing private sector participation in the development of these spaces, and permitting the city to grow have gone up by 25-30 per cent in the last two months.


‘Supply hasn’t kept pace’


Anshuman Magazine, Managing Director, CB Richard Ellis South Asia


On demand-supply
Over the past few decades, Delhi’s population has grown several fold. Single kothis have been replaced by multiple apartments. But supply of commercial space has not kept pace.


On rate differential
The rental rate differential between residential spaces and organised legal, spaces would be close to 100 per cent in most areas.


On rate rise
Office rentals have been rising by 10-15 per cent annually for the last few years; retail rentals by 15-20 per cent.


‘High rental differential’


Rajan Ahuja, Realty & Verticals,


On shifting
For small businesses their location is their USP. They won’t be able to generate similar revenue if they shift to a new area.


On rental differential
If you set up an office in a house in GK-I, the rental will be Rs 20-30 per sq ft. In a grade A office in south Delhi, it will be Rs 120 per sq ft.


On entry barriers
Today developers keep a tight control on the retail mix of their malls. They might not allow a small-time retailer to set up shop.


‘Soaring prices, rentals’


Jaskirat Singh Bansal, Akal Constructions


On price of malls
Eight months ago, the ground floor rate in MGF’s City Square Mall, Rajouri Garden , was Rs 18,000-20,000 per sq ft. Now, no shop is available for Rs 30,000 per sq ft.


On office space
In an Ansal building, one year ago the rate was Rs 2,700-3,000 per sq ft. Now it is Rs 7,500-8,000 per sq ft.


On rentals
About eight months earlier, the rate on the ground floor of a mall in Rajouri Garden was Rs 90-100 per sq ft. Now it is Rs 125-150 per sq ft.



By vayaM CS