Lease? No thanks. I will buy 

The article above shows how the leasing of commercial spaces in India is not very popular. The preference here is to own rather than rent.

This is odd. Given the low rental values, there should be a rush of tenants. Instead, there seems to be a rush of buyers.

This is an Indian, or perhaps even a South Asian, peculiarity. Elsewhere in the world, the logic of prices works as predicted by economics — demand varies inversely with price.

One reason for this, of course, is the presence of large volumes of black money. You can't pay rent from it, at least not the entire amount. But you can certainly pay up to 80 per cent of the market value of the property with it if you buy it.

But large firms don't deal in black money. Yet, instead of renting, they prefer to build their own spaces. Why?

The balance-sheet answer is that the asset looks good on it. If firms have to borrow, they have something to mortgage.

Owning is also seen as a better option because rents add to overheads and tend to go up when there is a downturn, because landlords want to protect their own income streams.

Much of this is about behaviour conditioned by tax policies. Economic theory, on the other hand, seems to have very few explanations for such perverse behaviour.

Indivisibilities

The most rational explanations are to be found in theories that explain indivisibilities which seek to explain how a market clearing price is arrived at in markets where huge indivisibilities exist as, for example, in the case of containers, airplanes, ships, and so on.

Airplanes have sorted out the problem by dividing the space into seats and/or fractionalised cargo spaces. All they need are passenger or freight aggregators.

This sort of fractionalising can be — and is — done with commercial spaces also. Dividing space into shops is a good example.

But such buildings have a specific design. They are also easy to rent out because shopkeepers need to be highly mobile and prefer paying rent rather than owning the space.

In economic theory, this is called “transferrable utility”. The higher this transferability, the easier it is to get to an equilibrium or market clearing price.

When it comes to office spaces, however, the solution doesn't work.

Offices need to be of a minimum size (although in India many small firms with 10 or less employees cram into virtual shoeboxes).

In India, most service firms are still tiny, so they need only small spaces and work out of residential areas.

As and when large service providers come into the market — retail, IT, and so on, — things ought to change.

The solution

How should the builders respond to the size-cum-transferability problem in the meantime?

Basically, they need to address the size problem by solving the transferability problem. The answer lies in being able to transfer utility — as with a car, say — because everyone likes to own liquid assets.

They need to sell smaller units in commercial buildings like in Rajendra (known as Rajinder) Place in Delhi. There is Nehru Place as well. Both, ironically, were built by the government and are thriving.

Sometimes it helps to think small.

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