Glut in office space delaying recovery in commercial rentals

Glut in office space delaying recovery in commercial rentals
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First Published: Mon, Sep 07 2009. 09 46 PM IST

Suspended expansion: In the year to June, commercial rentals have dropped by 15-35% in all markets. Ramesh Pathania / Mint
Suspended expansion: In the year to June, commercial rentals have dropped by 15-35% in all markets. Ramesh Pathania / Mint
Updated: Mon, Sep 07 2009. 09 46 PM IST
New Delhi: India’s commercial property market is showing signs of picking itself off the floor, but will take longer to recover than the residential sector, builders and analysts say.
Suspended expansion: In the year to June, commercial rentals have dropped by 15-35% in all markets. Ramesh Pathania / Mint
DLF Ltd, Unitech Ltd and other home builders are beating the downturn by consciously going downmarket and losing the premium tag in the residential segment. Smaller unit sizes and lower specifications—homes starting at Rs30 lakh in Gurgaon, for instance—have buyers lining up, encouraged by some relaxation in mortgage rates.
The binge by builders in the boom years resulted in a glut. While office rentals are not expected to decline any further, any sustained increase may take at least two years because of the oversupply, said Abhishek Lodha, director, Lodha Group, a Mumbai-based developer. “There is a lot more supply than the market can deal with,” Lodha said. “Until supply and demand balance out, rents will not increase.” Lodha has 4 million sq. ft of office space under construction.
Anshul Jain, chief executive officer of real estate adviser DTZ in India, says commercial rentals will take at least one year to recover.
“It depends on how you look at it,” Jain said. “When people say there is a revival, it is from a demand point of view but we don’t see office rentals going up anytime soon.”
India’s commercial real estate sector began sinking in August last year, a month before credit markets froze up as the global financial crisis spread, forcing companies to hold back expansion plans.
Commercial rentals have bottomed out from peaks seen in 2007. In the year to June, they dropped by 15-35% in all markets, including Delhi, Mumbai, Bangalore, Chennai, Gurgaon and Noida, according to data by real estate consultant CB Richard Ellis.
According to the consultant, office rentals have dropped some 30-35% from the peak seen in early 2007. In the residential segment, home prices have dropped by around 20-30% from the peak levels of early 2007.
There has been some quarter-on-quarter improvement in demand for office space, said CB Richard Ellis managing director Anshuman Magazine. “It depends on what you are benchmarking against. If you are benchmarking against the peak levels of 2007, then demand has not picked up, but if you are benchmarking against the end of last year and the beginning of this year, then there is movement in the market.”
While the National Capital Region, which includes Gurgaon and Noida apart from Delhi, and Mumbai are more active in terms of demand, leasing activity in Bangalore is also slowly picking up, Magazine said.
“Companies delayed expansion because of high rentals,” said Kaustav Roy, director, Cushman and Wakefield, a real estate consultant. “Now, more companies are willing to commit to adding space.”
“This is mainly in the non-IT (information technology) sector,” Roy said. “The IT sector will go through a little bit more stress.” According to Roy, IT office space could see a further 5% correction in rentals.
DLF is more upbeat. Revival is taking place in both IT and non-IT office space, according to A.S. Minocha, chairman of DLF Commercial Developers Ltd. “There are a lot of enquiries even from IT companies and a fair number of enquiries are getting converted into leases,” he said.
In the last two months, DLF has signed leasing agreements for 800,000 sq. ft to 1 million sq. ft of office space with both IT and non-IT companies, Minocha said.
DLF, which suspended work on 12 million sq. ft of office space at the end of the third quarter of 2008-09, has resumed construction on some of the office space, and it now plans to test the market with a few soft launches.
According to Roy, the expected office supply for this year is around 50 million sq. ft, although demand trigger may be for 30 million sq. ft. “We also have to take into account the oversupply from last year, so rentals are likely to improve only by the middle of the next year. By that time, most of the supply would reach some kind of absorption.”
Rents will stay stable for a year, Jain said. “Most of the markets have 30-40% vacancy, and for the current supply to be absorbed, it will take two-three years,” he said. “It will take two years for rents to go up.”
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First Published: Mon, Sep 07 2009. 09 46 PM IST