Are society shops worth the investment?

High cost of real estate kills the very purpose of setting up commercial units within housing society premises.

In a housing society, the convenience shops are a boon. However, what may seem like a convenience for a large number of residents of the high-rise buildings, is more often bad business sense for investors. Many dysfunctional commercial units within housing societies, whether for reasons of high rentals or cluttered competition, are tell-tale signs of that.

Investors often point out that the society shops are not worth the investment due to high real estate costs. In many cases, the complaints are justified. How could a developer sell commercial units at the rate of Rs 18,000 per sq ft in an affordable housing project, where the average residential units cost Rs 3,500 per sq ft? In such cases it may take an indefinite period for the investors to break-even.

Take the case of Greater Noida West, a residential market with no less than 3.5 lakh upcoming apartments. Every housing society has shops and the over-supply is huge. Rajesh Singh bought two shops at Rs 50 lakhs each, with the expectations of earning monthly rentals of Rs 50,000 from each. This expectation of 12% rental returns could not be termed as unreasonable. However, given that only around 1.5 lakh apartments in the micro-market are ready for occupancy, there seems to be over-supply. All that he is getting is 6% rental returns with no scope of capital appreciation. Off and on, tenants keep leaving the shops with complaints of business losses, he says.

Advantages of society shops

• Convenience to residents

• Quick home delivery

• No uncertainty with online delivery timings

• Saves time and fuel

Disadvantages of society shops

• High real estate cost

• Difficult to achieve break-even, with daily-use items

• Vast online choices versus limited inventory with society shops

• Competing businesses

What is the purpose of society shops?

The main purpose of the society shops is to offer convenience to the residents. They are conceptualised with the perspective that the residents need not step out to get their daily needs. At present, the commercial FAR (floor area ratio) is set at 2 to 5, depending on the size of the society.

However, the intent seems to be that of investment and returns and not the need to be served. No developer has, thus far, offered the society shops on the lease model. Without exception, all belong to the outright sale model.

The moot point for the investors is whether the society shops are worth the price, considering the high real estate cost of doing business per sq ft. Should the price of society shops be capped, proportionate to residential selling prices?

Society shops: What is an ideal price?

Aditya Kushwaha, CEO and director, Axis Ecorp, disagrees with the concept of price ceiling, pointing out that there is limited inventory available for society shops. If there is a price cap on these shops, they make little business sense from a developer’s perspective. Since these shops are a lucrative proposition, these enjoy a greater demand. “A developer has to allocate resources, efforts and inventory into establishing these shops at convenient spots. We believe that market forces are the best judge, to determine the price based on the location, size and footfall. Moreover, there is no stipulated body that can enforce a capping or make sure that the price capping is being adhered to,” says Kushwaha.

Vinit Dungarwal, director at AMs Project Consultants, believes price is a critical factor but not the only governing factor. For commercial real estate projects, location is another important consideration. Society shops have a location advantage as they are strategically located inside the housing complex and enjoy greater footfalls. The biggest USP for these shops is the convenience that they offer to the residents.

“Most of these shops come at a premium pricing. Whether these shops are worth the price, depends on the demand and footfall that they can generate. It is also dependent on how competent the manager is, in managing the stocks and keeping the goods moving. There is a need to cap the prices of society shops, in proportion to the place and footfalls they can attract. Also, since these shops are designed to suit the needs of the residents, it is unfair to classify them under the commercial segment. There would be greater demand for these convenience shops if they are priced better,” says Dungarwal.

Factors that could make society shops lucrative for investors

• Price capping of real estate

• Lease model by developers in large format townships

• Long-term leasing

• Tax benefits like residential units

• Lower maintenance and upkeep cost

• Loading that is similar to residential units

Factors that could make society shops lucrative for investors

• Price capping of real estate

• Lease model by developers in large format townships

• Long-term leasing

• Tax benefits like residential units

• Lower maintenance and upkeep cost

• Loading that is similar to residential units

Should you invest in society shops?

Having larger shopping complexes in the residential areas often adds to the issues. There could be issues pertaining to noise, security and privacy. However, from an investor’s point of view, one has to look at the following metrics before making a purchase commitment:

• First and foremost, is whether the catchment area is large enough for shops to do business. Do the society shops can also cater to the neighbourhood societies?

• An investor should also assess the potential of society shops in competition with the local kirana shops, as well as any high street or malls within walking distance.

• One should also consider the price of the society shop vis-à-vis the segment of the housing. The purchasing power of the residents is critical for the shops to succeed in the housing societies. Reasonable rental potential is also subject to the investment versus return.

• Fourth consideration is the future development potential of the area. A developing area has better chances of capital appreciation than a saturated micro-market.

• Finally, the investor must also check the loading percentage. The developers more often than not go up to 50% loading with society shops, as compared to 25%-35% loading on the residential units.