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Indian Real Estate News
Revival in commercial property
Source: Mar 23, 2011
There is a strong revival in demand for commercial property across the country but the oversupply situation may continue through 2011. In the first three months of 2011 the country saw the absorption of around 5.5 million square feet of office space against 4 million sq ft during the corresponding period a year ago.

All the major cities - Delhi, Mumbai, Kolkata, Hyderabad, Chennai and Pune -- are witnessing a demand revival.

As an indication of the buoyancy in commercial real estate, in one of the biggest land deals ever struck, on March 11, 2011, the Noida Authority in Uttar Pradesh sold a sprawling commercial land for Rs 6,570 crore - a whopping Rs 1.07 lakh per sq m -- to Wave Infrastructure. Three companies - Wave, Amrapali and 3C - had participated in the bidding. The 6,14,000 sq m of land comprising two entire sectors (32 and 25A) in Noida will be used to build the largest commercial space in northern India.

According to Gurgaon-based Shahel Parmendra, managing director (markets), Jones Lang LaSalle India, it is expected that in 2011 (January-December) there will be around 50 million sq ft of office space available in the country, of which around 35 million sq ft will be absorbed.

Parmendra said the NCR area alone is expected to see office space absorption of around 4.5 million sq ft in fiscal 2011, which is a 5 per cent increase from a year ago.

The surge in demand has been triggered by steady hiring in the banking and financial services sectors and IT industry. The overall economic growth of the recent past has also brought more disposable incomes in the hands of consumers, leading to a retail boom. In the October-December quarter, lease/rentals of commercial properties have gone up by 7-10 per cent fuelled by the improved demand.

Mayur Shah, managing director, Marathon Group, said, "We are seeing 100 per cent increase in demand in 2010-11 compared with 2008-09 when we went through the economic meltdown."

Marathon Group recently launched a four-lakh sq ft commercial property in Lower Parel in Mumbai. "Around 90 per cent of our commercial property has been booked and we are planning to launch another commercial property of four lakh sq ft area by June," Shah said.

However, Parmendra points out, although demand is likely to increase for commercial properties, rents may not move in line with demand due to oversupply.

In locations like Bandra-Kurla in Mumbai, Cyber City in Gurgaon, and Hyderabad's SEZ, prices may go up, but in other locations prices are unlikely to increase despite the improved demand as there is ample supply, he said.

"Within Mumbai, Bandra-Kurla continues to hold considerable tactical value for corporate office space occupiers. Lower Parel has also set an astounding pace in Grade A office space development, and the forward momentum set by some recent key projects has now found a natural growth extension in Dadar. With the completion of a couple of new landmark Grade A office projects, Dadar has now joined the fray for Grade A business space in Mumbai where both commercial and residential prices are seen moving up," Parmendra explained.

According to Harjith Bubber, chief financial officer and managing director of CCI Projects, there is an uptrend in utilisation of commercial property, and "rentals for commercial space in Mumbai's western suburbs have gone up by 10-15 per cent".

Bubber said that CCI Projects has already acquired a 22-acre land in Borivili, a suburb in Mumbai's Andheri, on which it plans to develop a commercial and residential project as well as a mall.
Vestian Global Workplace Services, a real estate services subsidiary of the Chicago-headquartered Vestian group, attributes the revival in Hyderabad's commercial space to the expansion by IT/ITeS, wherein rentals across different micro-locations in the city have gone up by 5-8 per cent in the last two quarters.

Shrinivas Rao, Vestian's CEO - Asia Pacific, said, "During slowdown phase (Q4 2008- Q1 2010), demand fell by almost 30-45 per cent across different micro-locations. Rentals of commercial space dropped by almost 20-30 per cent and the vacancy rate went up as high as 30 per cent."

Pointing out that the IT-ITeS sector remained the key source of demand for commercial space, Rao said, "Investors are looking to invest in commercial properties but the preference is for properties which are leased and situated in a good location."

Developers are more optimistic for residential asset class properties compared with commercial asset class as the former is almost 80 per cent of the total real estate market size, and a sizeable proportion of residential projects can be sold in the pre-launch phase.

"This characteristic helps developers in project risk mitigation and funding during the construction phase. In comparison, the scope for pre-lease is less in the commercial segment and the funding needs to be done by the developer. Besides, project fund requirement is comparatively less in the residential segment," said Rao.

When it comes to the eastern region or specifically Kolkata, commercial spaces have always been in limited supply because of which rental values have always shown an upward trend in most high street locations. Malls such as Forum and South City witnessed an appreciation in rentals of up to 5 per cent in the second half of 2010.

Going forward, the demand for commercial space will gain momentum in 2011, with projects that are in the final stages of completion likely to see acceleration in construction activity.

Rental and capital values are also likely to increase across malls. Tenant queries and lease transactions by retailers executing their expansion plans will also go up significantly over the next 12 months, Ritwik Das, managing director, BlueChip Projects, told FC Build.

There is however a rider. "Be it in Kolkata or elsewhere, malls coming up in good locations and constructed by experienced developers with credible track record and with a professional mall management team for active tenant mix management will maximise these opportunities and record a good rate of absorption," said Das.

Nilesh Biswas, director, Calcutta Skyline, a leading realty research, marketing and brokerage firm, said that demand for commercial space is mostly coming from IT/ITeS, social infrastructure segments like education and healthcare, services sector like parlours, and the hospitality industry comprising hotels and restaurants.

The other interesting trend in Kolkata is that new central business districts (CBDs) are coming up in places like Rashbehari Connector, Bantala (for IT/ITeS), Prince Anwar Shah Road and Tollygunge, among other places. This will also push up demand for commercial space further, said Biswas.

Chennai is also witnessing some uptrend in demand but it is not very significant. According to Rajesh Babu, CEO, Recs Group, a boutique property consultancy firm in Chennai, the Guindy area and central business district witnessed a slight upward movement in commercial space rentals owing to demand from IT & non-IT segments.

On OMR, Chennai's IT corridor, rentals have shown a slight upward movement and the scenario is positive upto the toll plaza. Beyond the toll plaza, it has remained more or less stable at last year's rental levels. In the case of Ambattur, a western industrial suburb of the city, commercial rentals are more or less stable, mainly because of oversupply in the region.

"When we refer to commercial space in Chennai, a bulk of it is only IT, as there is very little stock coming into the market for non-IT. Overall, close to 3.7 million sq ft of commercial space was absorbed in Chennai last year (2010)," said Babu.

"Further, demand for SEZ space was good last year and it continues to hold good for this year. However, it is still too early to ascertain the impact of the 18 per cent MAT imposed in this year's budget," Babu added. Even here, the city-based SEZs are preferred over those located in and around the city's suburbs.

Shailesh Ghorpade, MD & CEO, Azure Capital Advisors, a real estate focused investment company, said, "The oversupply situation in commercial real estate may persist during 2011 despite strong demand revival, primarily due to the huge supply pipeline -- including projects in advanced stages of construction as well as vacant stock in completed projects that is yet not fully assigned to occupiers. As such, rental values for commercial properties are likely to stabilise during 2H11. This stabilisation in rental values may induce institutional investors/HNIs to make investments in this asset class which may result in yield compression for commercial properties in 2011. While rentals would stabilise, capital values for commercial properties are likely to see appreciation on y-o-y basis."

Tag: commercial property in india, delhi,mumbai,kolkata,hyderabad,chennai,pune commercial properties
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