Commercial segment demand comes to the rescue of realty sector
Rising demand in the commercial real estate sector is encouraging and perhaps one option to improve the financials of realty companies
The structure of the real estate sector is changing as it adapts to the new demand-supply environment. The commercial and hospitality segments are all seeing heightened activity.
In the last 6-12 months, DLF Ltd, which has seen tepid demand for its residential homes, is seeing strong action in its rental portfolio, with nearly 40% of its assets in key business districts coming up for renewal. Phoenix Mills Ltd’s retail malls across large cities have attracted top-notch retailers, resulting in expanding lease rental volumes and price increases. Even Sunteck Realty Ltd is planning a significantly large office space that will be operational over the next four-five years.
If these are the listed breed of developers, there are several in the unlisted domain such as Century Real Estate Holdings Pvt. Ltd and the Salarpuria Sattva Group that have drawn up plans to cater to the falling vacancy levels in commercial offices.
Note that the same firms had launched themselves into the realty world through premium home projects. But with huge unsold inventory in this segment and rising demand for large and well-planned office space, developers are moving swiftly to cash in on the opportunity. DLF, Prestige Estates Projects Ltd, K Raheja Corp., Embassy Office Parks and Brigade Enterprises Ltd are some who have tweaked their strategy.
That vacancy levels are below 10% and rentals in key cities are set to expand by 5-10% in the coming year with an estimated increase in the area occupied, are factors nudging developers to move from the residential to the commercial market.
Also, the Real Estate (Regulatory and Development) Authority Act has slowed down sales, increased the cost of compliance and inventory levels, and would eventually lead to a consolidation in the residential market as smaller developers find it hard to survive. According to Anarock Property Consultants Pvt. Ltd, about 57,000 units in 170 stalled projects across seven key cities are stuck hopelessly, draining cash flows of developers.
Against this scenario, rising demand in the commercial segment is encouraging and perhaps one option to improve the financials of realty companies. DLF, therefore, has monetized its commercial assets through promoter stake sale to cut its huge Rs27,000 crore debt.
Further, rental assets, especially office segments, enjoy better margins compared to home sales. In an improving economy, higher demand for offices will see stable rentals. Assured rental income over the next three-five years is luring institutional funds through private equity deals into the commercial and hospitality segments.
Unlike the residential market, which has relatively lower entry barriers in the country, the Indian office and mall market is a capital-intensive business requiring developers to have adequate balance sheet strength, said a report by ICICI Securities Ltd.
This will restrict competition at least in the medium term of three-five years.
The preference towards rental assets among large listed companies is reflected in the segment comprising more than a third of the share of total enterprise value. Stocks of these firms would be preferred over those with a large residential inventory, at least until the stock is absorbed and new launches take over.
The latest report by realty consultant Knight Frank India reiterates the sentiment. It says that at least 54% stakeholders in the December 2017 quarter hope that office supply would rise in the next six months, the level of optimism being the highest in eight quarters and sharply up from just 38% in the previous quarter.