Sentiments towards commercial real estate investment remains favourable as India's economy shows itself to be less vulnerable to the overall slowdown compared to other Asian economies. In the coming quarters, despite a slight drop in occupier demand during the April-June period, office and retail sector will continue to drive investments, according to the RICSIndia Commercial Property Survey Q2 2013. The industrial segment is expected to lag compared to office and retail.
While investment enquiries remained stable from the previous (January-March) quarter, it is expected that the capital values and transactions will continue to edge up as the year progresses. Investments and prices are also both likely to remain in the positive territory in the coming quarters across retail, office and industrial segments.
Along with signs of sluggishness in the economy, the commercial sector is facing challenges such as the lack of funding for building more projects, inflated prices, excess inventory across large cities and delays in obtaining building approvals.
However, despite these hurdles and the slowdown in the economy, the mood of investors is a little more positive as there is a sense of stability due to the recent measures such as the opening of foreign direct investments in retail. The retail sector is forecast to grow because of the announcement.
On the rental side, the values appear to be moving higher despite some oversupply resulting from the completion of a series of projects sanctioned before the downturn in the economy.
The marked pick up in the activity of distressed properties in the first two quarters could be a concern. The expected supply is projected to continue rising during Q3 (July-September).
However, the increase will be more modest than during the earlier periods.
Commenting on the trend, Sachin Sandhir, managing director, RICS South Asia, said: "Amidst the economic uncertainty and liquidity crisis, the situation may continue until the economy gains some renewed traction. The growth prospects for the next couple of quarters remain broadly flat, reflecting a degree of caution in the sector as the Reserve Bank of India grapples with the challenge presented by a subdued economy and the volatility in the currency."
On the occupier side, it appears that the slowdown in economic growth over the past year is still taking its toll on occupier demand although the economy is expected to tick up over the remaining part of 2013. On the supply side, inventory continued to rise in the second quarter. As a result, the gap between the change in demand-supply recorded during the second quarter has remained in the negative territory.
Commenting on the findings of the report, Simon Rubinsohn, chief economist of RICS, said: "Despite the disappointing economic picture, investor appetite for good quality real estate remains firm and this is likely to continue to underpin capital values in prime locations. The sector should also benefit from the recently-announced government measures to open the country up to more foreign direct investment."
"The occupier side of the market is a little more challenging with the flatter trend in occupier demand reflective of the more mixed macro picture. However, for the time being rent expectations remains positive which may be partly linked to the subdued trend in development starts over the past few years," he added. The survey also notes that the development starts were picking up despite the slow growth in economy.
