Renovate, upgrade your property to attract high rental rates
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Tips to attract high rent for property

Improve your old building's facade, upgrade existing features and add modern facilities to unlock the income potential of the properties.

Is your property situated at a prime location not fetching you the optimum rental income despite soaring valuation of land parcels and increasing property demand?

Your property might be getting a lower rental because it has grown old and is no match to the newer, high-quality properties. Retrofitting, or upgrading your building's economic life by adding new facilities such as spacious lobbies and modern elevators, can help realise the maximum potential of existing properties.

QUALITY UPGRADE

Poor quality properties on valuable land parcels fetch low rental income because your bargaining power decreases with diminishing building quality.

Even the low rental level is not enough to maintain high occupancy rates. Old buildings are seeing an exodus of tenant due to lack of modern facilities. Most of these buildings have small floor sizes and are not designed to accommodate modern equipment such as central cooling and power generation units.

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"Lots of buildings are old, and the maintenance cost just keeps adding. Poor efficiency leads to higher operational costs," says Uday Dharmadhikari, chief executive officer, Usha Breco Realty, a real estate consultancy firm. In order to get higher rental income, property owners need to offer high-quality buildings to tenants.

Owners of properties that are ageing can get better value through redevelopment or retrofitting. Redevelopment of a property involves razing down an existing structure and building a new, highquality structure with better facilities for the occupants.

Redevelopment is a capital-intensive route for increasing the rental yield from a property as the costs involved can be more than developing a vacant plot of land, thanks to the additional cost of demolishing the existing structure.

In contrast to redevelopment, enhancing the attractiveness and economic life of existing old structures through retrofitting does not involve demolition.

"From minor cosmetic changes in building facade to major alterations such as modifying building interiors, upgrading or completely replacing systems and services (such as heating, air conditioning, electrical cabling and plumbing) and structural alterations in the building (such as adding a lift) can be made through retrofitting," says Trivita Roy, manager (research and real estate intelligence service) with property consultant Jones Lang LaSalle India.

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Through retrofitting, property owners can realise the optimum potential of their properties without the investment risks and costs associated with redevelopment.

"Retrofitting is still an untapped solution in India. It helps reduce the costs and improves the overall building performance. For property owners, retrofitting an existing building offers a better solution than building a new structure since it can be achieved at lower cost and with shorter overall project duration," says Dharmadhikari.

Demolish or Repair

Redeveloping an existing land parcel may be the only option if the structure is dilapidated beyond repair. For structurally sound buildings, retrofitting can increase valuation and help unlock income potential by improving their economic life and quality.

Quality Control: Most buildings in the commercial business hubs of metros are decades old. Availability of high quality space is limited.
"Retrofitting is usually the preferred option for quality improvement (as compared with redevelopment) to increase the attractiveness of existing old buildings. However, the choice between retrofitting and redevelopment is highly dependent on the quality of the structure, best use of the building and other market dynamics," adds Roy.

Apart from the increase in valuation and rental yield, retrofitting can lower energy consumption through various means, including better lighting, electrical equipment and temperature-control systems.

An 'energy performance contract' for retrofitting guarantees a fixed amount of energy savings over a period that can mitigate the financial risks involved in the project.

When considering retrofitting of an old building, one needs to assess the facilities and space requirements with a long-term perspective. Changes for retrofitting will depend on location, type and condition of buildings, requirement of the users and their economic profile.

"Retrofitting may be economical depending on the condition of the building and the extent of retrofitting. However, it is advisable to go for complete redevelopment if the building is in a dilapidated condition. You should consult a structural consultant/expert to decide whether to go for retrofitting or redevelopment," says Dharmadhikari.

Both residential and commercial properties can benefit from retrofitting. If you own old residential properties in prime locations, you can uplift the facade, restructure space, add or improve balconies and common areas, services (such as electrical fittings and plumbing) and interiors based on the need. Retrofitting commercial buildings is a complex process as it involves many stakeholders. Proper planning and efficient management can mitigate the operational risks.

COMMERCIAL REALTY

A majority of office buildings in the country's central business districts (CBDs, or commercial hubs of cities) are at least three decades old with run-down structures arising from poor maintenance. The poor efficiency of these old buildings leads to higher operating costs for occupants.

With limited supply of new office space in CBDs, tenants have been forced to occupy existing lowquality buildings at high rents. The attractiveness of CBDs is diminishing compared with neighbouring micro-markets and suburban locations, which offer larger office spaces of higher quality at comparatively lower costs.

As land is rare in the country's central business hubs, improving the quality of buildings is important if these centres do not want to lose their preferential status. The CBDs of most Indian cities have huge potential to upgrade their existing old stock through retrofitting and unlock inherent land value.

"Rents of old grade-B buildings (those with just adequate facilities without central air conditioning and inadequate parking space) are observed to be 20-38% less than rents of high-quality grade-A buildings (with all necessary facilities, including central air conditioning and basement parking) in the CBDs of prime Indian cities," says Roy.

A recovery in office space demand began in the first quarter of 2010 and is expected to strengthen in 2011 and 2012. High-quality office space in CBDs will be able to command a premium due to rising demand. Owners of retrofitted buildings can have the first mover advantage as real estate micromarkets for office property are beginning to recover across various Indian cities. Retrofitted buildings will also enjoy increased tenant retention and higher occupancy.

Income Gap: High quality buildings in business hubs command higher rentals. Upgrading the existing grade-B buildings will improve their economic life and yield.
Owners of CBD office space have already capitalised, or are planning to capitalise, on the market recovery by retrofitting their properties. Several property owners in prime retail markets have also retrofitted the ground floor retail space in their building to accommodate the needs of modern retailers. This trend is expected to catch on in prime business locations in cities like Mumbai and Delhi, which have limited options for new development.

COST ADVANTAGE


The upfront capital investment in retrofitting projects depends on the amount of work involved. Benefits from retrofitting can be either immediate or long-term in nature. The payback period of investment ranges from two to five years for minor retrofitting and six to 15 years for major retrofitting projects, according to a recent study of retrofitted office buildings by Jones Lang LaSalle.

While the number of retrofitted projects in India is currently small, it is an effective solution for rejuvenating existing properties and making them attractive for occupants. It also helps re-establish the appeal of the locality. Limited scope for new development in metros is expected to make retrofitting a popular option in near future.