The commercial real estate sector in India is in the throes of a continuing recession. It is probably going through one of its worst periods with several properties lying vacant and rates stooping. A look at the demand-supply scenario in the commercial real estate business across the country would certainly point to an oversupply situation. Rates have been crashing. Slowdown in the economy and subdued job growth in the IT sector, which was at its lowest level last quarter, is holding back demand for commercial and retail properties.
The commercial capital of Mumbai is among the worst affected, with several projects still awaiting tenants. “The commercial real estate sector continues to be in a shock. The unplanned and uncoordinated development without a firm idea of the demand has spelt disaster for builders. Several real estate companies have pulled out of their commercial projects mid-way,” says Viren Jadhav, managing director of Mumbai-based EmerCorp Capital Advisors, which advises real estate companies on deals.
Ganesh Vasudevan, vice-president and business head, Indiaproperty.com, agrees. “There is an oversupply situation in most metros and tier-II towns. The mall occupancy rate is still around 65 per cent. This is a good time for existing leaseholders to renegotiate long-term deals and lock-in lower lease rates,” says Vasudevan.
Amit Grover, national director, DLF Offices, however, believes that the demand-supply situation is somewhat balanced now across the country. He makes some distinctions between grade-A and grade-B facilities. “Most supply in 2009-11 has already been absorbed leading to more balanced demand-supply situation pan-India in 2012. In 2009-11, tenants had secured lower rentals, ignoring some of critical space decision aspects such as infrastructure, quality of building, safety and past experience of development and operations and intention of long-term holding of Indian assets. Most grade-A tenants have now realised that taking decisions based on just rentals was not good enough because most new builders had a short-term perspective, bringing in challenges on day-to-day operations due to their limited experience in planning and execution. The result is that demand and supply is good demand with grade-A facility, while vacancy for grade-B building / facilities may stay for some more time. The larger captive players, IT/ITeS companies are continuing to grow at 10-12 per cent growth rate pan-India,” said Grover.
It’s not just the question of oversupply or properties lying vacant; there have been issues of delayed deliveries and delayed payments. Responding to a recent survey conducted by Kotak Institutional Equities’ Industrial Report, most companies admitted delay in deliveries, slow incremental ordering, delayed payments and competition. Even operational expenditure is coming under pressure. For commercial real estate, in particular, companies cited dearth of ordering and are resorting to lower margins to get some business, according to the report.
Interestingly, however, when it comes to retail, which is a significant part of the commercial real estate sector, things are quite different. “There is no doubt of significant development in maturity, scale and quality of commercial real estate in most Indian urban centres over the past few years. The sustained demand from occupiers for both, office and retail space, has driven hitherto unseen levels of absorption and supply. For the retail sector, the past couple of years have seen robust demand-supply dynamics, manifesting itself in a strong supply pipeline and growing absorption of mall space from brands across major cities,” Tanaji Chakravorty, Delhi-based senior urban economist told Financial Chronicle.
“At a macro level, the persistent drivers of urbanisation as well as growing aspirations and disposable incomes is likely to sustain the near to medium-term dynamics of this sector. However, periodic adjustments of scale and format of space required by retail brands, reflecting the changing trends of consumption and investment within the economy, is more likely to drive the need for better quality of the retail built environment, rather than quantity,” said Chakravorty.
More or less the same feelings were echoed by the NYSE-listed and Los Angeles-headquartered CBRE Group, the world’s largest commercial real estate services firm. Consider what Anshuman Magazine, chairman and managing director of CBRE, South Asia has to say. “The rising level of activity in retail space across key cities is testimony to the growing confidence of domestic and international retailers in India. Retailers are looking to expand their operations beyond the top three cities to the likes of Hyderabad, Chennai, Kolkata, Pune and Chandigarh due to growing urbanisation and an increase in acceptance of organised retail,” he said.
Going ahead, transaction activity and size are expected to increase on the back of higher consumer spending and expanding mid-income purchasing power. The anticipated changes in the FDI (foreign direct investment) regime should propel the demand for organised retail space further, the CBRE report said. Although, when would these proposed changes in FDI actually come through, that’s anybody’s guess.
The demand slump in commercial realty space has not been peculiar to India alone. Jones Lang LaSalle India (JLL) feels that slowing economic growth, even in the powerful emerging markets of China, India and Brazil, continues to create a subdued and uncertain operating environment for corporate occupiers.
JLL Quarterly Global Perspective Report suggested that expansion of both, multinational companies (MNCs) and domestic firms slowed in China and India, but more relocation and decentralisation was evident. In India, some opportunistic occupiers are taking advantage of more affordable rents to upgrade. Average rents in India were either flat or saw marginal growth, JLL felt.
What is then in store for the commercial real estate sector in the country?
Grover of DLF said that in view of consistent increase in construction cost and absorption of the grade-A supply in 2009-11, less supply of ready built space is available in the market. “Rentals are likely to go northwards from this point. We have witnessed 10 per cent increase in rentals in the past six months in locations like DLF Cybercity, Gurgaon, India’s largest business district where tenants have accepted value addition, including private captive power generation plant, 16-lane signal free road network and infrastructure initiatives.We have seen strengthening going in line with the progress,” he said.
Vasudevan of Indiaproperty expects a turnaround in mid-2015. “The catch-up in occupancy to supply is expected to take at least two more years, provided the economy grows at present rates. Other than for high-end retail, there are no signs of firming up of demand in the medium term,” he said.
Bitten by price-driven decision, end users are now focusing back on grade-A developments/locations, which, in turn, promises to offer complete solution on infrastructure, safety, transportation and other amenities. Leading players in the commercial realty space will have some catching-up to do.
ritwikmukherjee@mydigitalfc.com
Source: wrd.mydigitalfc.com
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