Owning large swathes of land was commonplace for royalties with power in ancient times, associating it mainly with supremacy. Even in the modern world, owning a piece of the planet to our name has been an attractive prospect – be it a person looking to own their dream home, or an investor looking for profitable returns. Among a myriad of investment avenues including mutual funds, debt funds, bitcoins, NFTs and everything else, real estate has always been a trusted investment option across the world.
And why not? 2022 is an exciting time to invest in real estate – residential, commercial, or otherwise – given the great strides made in regulations, policy boosts, tax benefits, cost cuts and more. For a newcomer however, there is another vital consideration I see is often overlooked. It is a common pitfall to step into but can be a costly one regardless. This is between choosing a ‘warm shell’ and ‘bare shell’ property. In this article therefore, let us demystify it for investors who are new to the space.
Understanding fit-outs
When a developer constructs a building, a shell and core (a base build) is essentially being developed. This building is not yet in a usable condition, as there are still several fit-outs to be done including interior design, lighting, mechanical systems, electrical systems, flooring, and more.
This ‘cold shell’ property is effectively a skeletal version of the property and the one using it will have to plan a ‘build-out’ to make it habitable. On the other hand, a ‘warm shell’ property has some basic amenities such as plumbing, electrical, structural systems, etc. in place, and the rest of the interior decoration and design will have to be built out.
While for investors who have a clear vision of what they want to be built on their mind (as well as on blueprints), placing their bets on a bare shell property shouldn’t be a concern. They will have to have a clear picture of the associated costs they will have to incur; be it the acquisition of materials or the labour to put them in place.
That said, more and more commercial investors and prospective millennial home buyers are not interested in units that need a massive renovation process. In such cases, investors want to pick from specific finishes – like the waiting period after purchasing a new premium car. After all, in India’s top 7 cities, 1,700 acres of land were sold in 1 year. Furthermore, in quarter 4 of last year, India’s office market absorbed 11.56 million square feet, rising by a whopping 86% Q-o-Q. This is why for instance, coworking places across India in tier 1 and 2 cities have opted for renting an office space, as opposed to renovating one from scratch.
Which is lucrative: Warm shell or bare shell?
In addition to the cost-efficacy of a package deal, the wide array of options in commercial and residential real estate today has allowed investors to pick and choose as per their individuality and tastes. This is not to say that the resale value of warm shell properties will be higher than bare shell properties, given the level of customization an investor requires may vary.
For a new property owner, it may appear frugal to invest in a single bare shell bedroom apartment, rent it out, and then go on to a larger unit. At the same time, For investors such as a multinational company hiring thousands of employees in India, it may make more sense to invest considerably for the long term. This is also because the company will stay longer to sufficiently recover the costs of making the building the place out. Furthermore, today’s technologies have made it quite easy to visualize the end product through artful 2D and 3D renderings.
To conclude, therefore, it is not the resale value of the investor that gets affected by the customization of a ‘bare’ or ‘warm’ shell property. The more high-end the property will be, the more viable the shell product will be. Investors should consider several qualitative grades (such as A, B, B+ etc), LEED certification, sustainability, etc. before settling on one.