Vacancy rates in the financial center of Mumbai and New Delhi topped 20 per cent in Q3, the highest in Asia after Chengdu, China, where 32 per cent of offices are empty, according to broker Cushman & Wakefield Inc. Six Indian cities are among the 10 office markets with the worst vacancies in the region, according to Cushman.
Demand for offices in India has been declining as Asia's third-largest economy - labelled a "dream market" by Warren Buffett two years ago - faces the slowest expansion in 11 years, the fastest inflation rate among large emerging markets, and the risk of its debt ratings being cut to junk. New supply in the country's seven major office markets, including Mumbai, Hyderabad and Bangalore, fell to the lowest in almost two years in the three months to September 30, broker CBRE Group Inc. said.
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"India is faced with an intimidating macroeconomic landscape," said Anshuman Magazine, chairman of CBRE South Asia Pvt, in New Delhi. "Companies remained cautious, a trend which continued to inhibit office leasing activity across the country."
India's economic growth probably held below 5 per cent for a fourth straight quarter, the longest stretch in data going back to 2005, according to a Bloomberg News survey.
Reduced Demand
Until two years ago, India was a darling of global investors with the economy expanding more than 9 per cent in the year-ended March 2011. That spurred 55 million square feet (5.1 million square metres) of new office space across the country's key cities in 2010, according to CBRE, which began compiling the data that year. That compares with 29 million square feet in 2011 and 30 million square feet in 2012. For the first nine months of this year, 23 million square feet were added.
The building boom ended as economic growth fell 50 per cent, and companies and investors showed little confidence in a government battling corruption scandals. ArcelorMittal and Posco scrapped plans for $12 billion of investments, while global funds pulled $12.3 billion from Indian bonds in the five months to October. Buffett's Berkshire Hathaway Inc. exited an insurance distribution venture this year.
Price Correction'
"Indian cities have not recovered from the rental and price correction of between 20 per cent and 40 per cent from the peak in the third quarter of 2008, while other business districts in Asia-Pacific have performed better," said Ashutosh Limaye, Mumbai-based head of research at Jones Lang LaSalle India. "The oversupply created in Indian cities kept rents and prices in check."
Bangalore, that has established itself as a technology hub, has the largest office market in India with about 100 mn square feet, according to CBRE. The city, the National Capital Region and Mumbai account for about 65 per cent of the office real estate market, according to the broker.
Bangalore - home to Texas Instruments Inc., the largest analog chipmaker, and Qualcomm Inc., the world's largest maker of chips used in mobile phones - posted the steepest decline in office space added to the market, falling by about 90 per cent in the September quarter from the previous three months, CBRE said. The National Capital Region had an 80 per cent slide, while new office supply in Mumbai dropped by more than half, it said.
Turning Residential
To counter decline in demand, some developers, like Oberoi Realty Ltd , India's second-largest by market value, are considering converting plans to build offices into residential buildings. "Commercial assets are struggling," said Chairman Vikas Oberoi.
Many developers have converted their commercial projects into residential because they provide positive cash flows upfront, Oberoi said.
Bangalore Offices
Not all are refraining from adding supply. RMZ Corp, the largest office developer in south India, is building offices outside of the central business district in Bangalore, catering to the information technology industry and tenants looking for cheaper offices, said Raj Menda, managing director at RMZ.
RMZ, which received $300 million from Qatar's sovereign wealth fund this year, has 98 per cent of its office assets in secondary business locations, Menda said.
"We are on a terrific acquisition spree," Menda said in a phone interview. RMZ, based in Bangalore, is buying office buildings in cities including Bangalore, Chennai, Pune, Hyderabad and the National Capital Region, he said.
Bangalore is also home to Goldman Sachs Group Inc.'s third-largest office globally, while Nissan Motor Co and Renault SA's local units have their offices in Chennai.
Private-equity funds are favouring India's office market because of attractive yields and an anticipated pickup in demand as the economy shows signs of stabilising. The rupee has gained 9.5 per cent from a record-low August 28, while overseas investors returned to buy $17 billion of stocks this year.
GIC, Ascendas
GIC Pte, Singapore's sovereign wealth fund, and Ascendas Pte said Nov. 19 they plan to invest as much as $483 million in Indian commercial property.
Blackstone Group LP and HDFC Property Ventures Ltd, the private-equity unit of India's largest mortgage lender, made a $367 million investment in Bangalore-based Embassy Group in February, according to data from Venture Intelligence, a research firm that tracks private-equity investments in India.