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Indian Real Estate News
Commercial real estate outlook optimistic
Source: Ravi Sinha, The Economic Times Apr 15, 2010
Once hailed as the growth engine of the real estate industry, commercial realty suddenly became a liability for developers and the ready prime projects had no takers, during the recent economic slowdown. With a shortfall in demand and liquidity crunch, 'affordable housing' gained importance and the focus of even commercial realtors took a shift. Many of the upcoming commercial realty projects came to a standstill and instead, more affordable housing projects were launched. While office spaces remained unoccupied, the retailers in malls bargained hard to renegotiate prices and to include minimum guarantee clauses in the agreement, or enter into revenue sharing agreements.

As per a report by real estate consultancy firm, Cushman & Wakefield, the year 2009 ended with a 29 per cent decline in space absorption, compared to the previous year. The total absorption of commercial space across major Indian cities stood at 26.3 million sq ft in 2009, compared to 37 million sq ft in 2008. Mall supply during 2009 fell short by 60 per cent, as only 5.7 million sq ft of space was delivered across major cities in India. The report points out that the poor demand from retailers forced developers to defer the expected mall supply of around nine million sq ft.

Of the proposed 44 malls at the beginning of the first quarter (January-March ), about 18 were delivered by the year-end. The overall vacancy rate for the major cities as of December, 2009, was 17 per cent, compared with a 16.7 per cent vacancy rate in December, 2008. Mumbai had the largest share of mall supply, in 2009, at 1.8 million sq ft, followed by Hyderabad (1.1 million sq ft) and the National Capital Region (NCR) (0.9 million sq ft). Bangalore saw the highest mall supply deferment, with 80 per cent less mall supply than what was expected. This slowdown in mall construction reflected a negative growth indicator, for the commercial real estate segment.

However, the projection for the year 2010 and ahead, suggests that the worst for commercial real estate could be over. According to a report by the DTZ, a real estate services group which undertook a study to examine how this recovery will come about and analyse what this means for the future, the recovery appears visible and inevitable. The research report, called 'The Second Coming', says that major office markets in India will revive by Q2, 2010, with increased interest from tenants and a downward correction in rentals taking place.

This projected indication of recovery has given commercial realtors in India a much-needed relief, after having weathered a liquidity crunch, slackening demand, piling inventory and falling rentals, for over a year. Many of them believe that the pace and scale of market recovery will be led by the tier-I cities of Delhi-NCR, Mumbai and Bengaluru. Tier-II cities, such as Kolkata and Chennai, will see a gradual recovery in the later part of 2010, while the Pune market is unlikely to see any major changes.

As per the data released by DTZ, of the 84 million sq ft of supply scheduled for completion across these six key Indian cities of Delhi-NCR, Mumbai, Bengaluru, Kolkata, Chennai and Pune, only 66 million sq ft will become available, in the next five quarters. This moderation in supply of approximately 18 million sq ft, is expected to ease the downward rental pressure in major markets. After correcting between 25 to 40 per cent, across all markets over the last year, rentals are now getting support at the development cost level, in some markets.

This market projection brings to the fore the question as to whether 2010 would be an ideal year to invest in commercial real estate. Brokers assert that there has been an increase in investors looking for such opportunities, since the prices are now near the lowest levels. Across India, there has been about 4.6 million sq ft of pre-commitments for space due to be absorbed over the next two years. Of this, Bengaluru alone accounts for 2.7 million sq ft. This indicates the revival of the IT/ITes segment, which is the mainstay in Bengaluru. IT companies are starting to get new contracts, thereby pushing them to commit to new real estate costs.

Pankaj Jain, executive director of Realistic Realtors, admits that the forecast looks bright for the commercial segment. However, he also cautions, "It depends on the profile of the buyer, time horizon and segment of the commercial property. I would say that for the corporate buyers, who are end users and have a time horizon of 10-20 years, this is the right time to buy. Investors, who have a medium-toshort-term outlook, should buy now, only in the prime locations of metros and suburbs, where prices are falling. For commercial properties far away from the suburbs, I think they should wait for another quarter."

Sanjay Kackar, COO of AEZ Group asserts that commercial realty has an edge over affordable housing, in terms of delivery. "While there is a lot of noise about affordable housing, an investor has no clue as to how it will shape up. For instance, the volume of residential spaces that should have been ready for delivery, across the first quarter of 2010, are still largely under construction or on paper.

On the contrary, in the commercial segment, you already have available stock and additional stock will be added to the market, in 2010," he elaborates. However, in a year of consolidation and low risk, commercial properties will have to re-brand and re-position themselves, to meet the challenges of 2010.

Tag: Commercial Real Estate, Indian Real Estate
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