Freeing urban commercial spaces

Leasehold property deeds are hindering the commercial development and growth of urban areas

In the early years, when one looks at the beginnings of urbanisation, it invariably involves the processes of industrialisation as well. The industries and factories attracted an increasing number of people seeking livelihood, who eventually settled around, allowing for cities to be created.

These so-called industrial cities were consequently spurred into catering to the various needs of their inhabitants by providing services like hospitals, schools, and municipalities. As urban development progressed, cities expanded their offerings to include leisure and entertainment through shopping complexes. This population influx and the growing functions of a city subsequently led to an increased demand for commercial spaces that went beyond industries and factories.

As the nature of work evolved, so did the understanding of space. From traditional usage of what a space could offer, such as shops or an office, we moved to innovative use of space that assimilated the cultural undercurrent of the city in the form of, say, experiential shops catering to contemporary aesthetics or a co-working space. Consequently, the value of commercial properties in urban centres experienced a steady upswing, catching the attention of investors who recognised the untapped potential of urban commercial real estate.

Real estate has always been a dynamic sector, with property prices rising or becoming lucrative due to external factors. As the mode and location of work moved to more office-based settings, properties near offices became ideal for housing, setting up amenities, enhancing transportation links, or even for the development of more office spaces.

With more multinational companies and corporations setting up offices in the country, demand for commercial property increased, especially in locations that were in the heart of the city. With the increasing prominence of commercial properties and the evolving dynamics surrounding their utilisation, a growing number of regulations and laws have emerged to govern various aspects of the sector, including property transfer, use, ownership, and sale.

In India, one of the earliest laws addressing real estate ownership is the Transfer of Property Act, which dates back to 1882. This legislation established rules governing the transfer of property through sale, lease, mortgage, and gift. More recently, the Real Estate (Regulation and Development) Act, 2016, has been introduced to safeguard consumer interests within the real estate sector. This Act led to the establishment of the Real Estate Regulatory Authority, aiming to ensure transparency and accountability in the industry.

Another important aspect when looking into commercial properties is the distinction between “leasehold properties” and “freehold” properties, which has significant implications. As urban dynamics and economic demands continue to shape the commercial property sector, the discussion on moving towards freehold structures has gained prominence. In a “leasehold” arrangement, the occupant holds property for a specific period by paying rent to the government. Under such an arrangement, ownership of the property is not transferred from one party to another, and restrictions on the lessee’s control and property enhancements remain.

On the other hand, in a “freehold” agreement, complete and perpetual ownership of the land (and any structure on it) is granted. This model provides more autonomy and control over the property, allowing owners to make decisions without any lease constraints. Currently, our cities have a mix of leasehold and freehold commercial properties.

 In cities such as Chandigarh, over 6,000 commercial properties and nearly 1,500 industrial plots are held on leasehold terms, allowing occupation for a limited period while the actual ownership rights remain with the government. However, the Union Territory administration has opposed the conversion of these properties from leasehold to freehold. Consequently, many commercial properties remain unsold even after multiple auctions, despite a 30 per cent reduction in prices for leasehold properties.

Properties worth crores of rupees are left vacant as a result. This situation has once again highlighted the necessity of transitioning to freehold properties for several valid reasons. Lessees operating under a leasehold arrangement encounter challenges such as legal barriers, difficulties in securing mortgages, and complications in the sale and purchase processes. In contrast, the state government in Kolkata has taken a proactive approach by initiating the conversion of land to freehold properties. This move is widely regarded as a step in the right direction as it promises a more organised implementation of industrial projects and facilitates easier access to bank credit.

The development of commercial properties amid urbanisation reflects the dynamic interplay of economic demands, evolving work structures, and regulatory frameworks. However, freehold properties are favoured due to their higher resale value, investor appeal, long-term security, and greater freedom for modification. Moreover, these properties offer flexibility, enabling maximisation of returns and long-term financial stability. Given these advantages that clearly surpass a leasehold arrangement, administrations and governments should actively permit and execute property conversions to freehold arrangements.

Kapoor is chair, Institute for Competitiveness, India and lecturer, USATMC, Stanford University; X: @kautiliya. Debroy is chairman, Economic Advisory Council to Prime Minister of India; X: @bibekdebroy. With inputs from  Jessica Duggal