Supply spurt to temper real estate prices in 2-3 years: Report

Realty prices across most Indian metros are slated for correction as supply outstrips demand in the commercial real estate segment, according to a yet-to-be published report by real estate consultants "� Cushman & Wakefield.

For example, Mumbai, Bangalore and Delhi will see a downward pressure on realty prices in the next 24-36 months as close to 23 million sq ft of new supply is coming up in these cities.

While Mumbai and Delhi are expected to add 12 and 8 million sq ft of realty space, respectively, Bangalore may add 3 million sq ft by the year end.

With Mumbai adding around 12 million sq ft of space, prices will move down in the medium term. With new stock getting released in Lower Parel, Andheri (East) & Goregaon (East), realty prices in CBD (Fort area), Worli, Bandra-Kurla Complex (BKC) and Andheri (East) may come under downward pressure.

But the prices are likely to remain firm for Mumbai commercial space for offices in the short term given the crunch for grade A office space due to the scarcity factor, which may even cause capital and rental values across micro precincts rise significantly.

The report says that fresh supply of 12 million sq ft is currently under construction in the western suburbs adjoining the Western Express Highway, Goregaon, Bandra-Kurla Complex and Andheri (East).

The Western Express Highway and Goregaon (East) due to accessibility, lower costs and quality of development continues to be a favoured destination, says the report.

It points out that rental and capital value have appreciated by over 200 and 150 per cent in Lower Parel and BKC compared with 2003 levels.

The prices will come down only when the new supply comes in around 24 -36 months from now. Lower Parel is expected to see an addition of around 3-3.5 million sq ft.

On the residential front, the report says that the recent free-fall in the stock markets has dampened sentiments among buyers.

It points out: "The stock market index and property prices do not necessarily go hand-in-hand and the impact from any sustained volatility in the equities market could have a bearing on property prices only in the medium term."

The report, however, admits that there is an element of speculation in the market "from investors who are seeking to ride the positive market sentiment especially during the initial phases of construction wherein investors enter the market at lower levels and flip assets as prices firm up when projects are nearing completion thereby gaining substantially."

The office market in New Delhi has stabilised across major business districts. The report points out that the Gurgaon office market continues to remain buoyant as most commercial projects scheduled for completion this year are being committed to corporates.

The market has witnessed an increase in rentals by approximately 10-16 per cent in the last quarter. The Delhi market is expecting to add around 7.8 million sq ft for fit-outs during the year.

The announcement of special economic zones by various large developers and corporates such as DLF, Reliance, Unitech, Vipul, TDI, MGF, DMRC and Uppals will also impact the market in the long term as the supply will get augmented.

On the residential front, South Delhi has been witnessing a plateauing of values and price thresholds being established. "The huge disparity between the seller's and buyer's price expectation visible in the market in the last few months is dissipating," the report says.

Also, the trend of short-term speculators flipping properties and booking profits within a short span of 4-6 months has reduced considerably in the Delhi market, it says.

The Bangalore market is expected to witness increased demand for build-to-suit facilities along the Outer Ring Road (Marthahalli-Sarjapur - Hebbal) and also for small office spaces, especially in the CBD and off-CBD areas.

With stock in excess of 1.5 million sq ft to be taken up in this quarter and at least another 2-3 million sq ft to be delivered in the next two quarters, the supply is exceeding demand by a huge margin.

The report points out that there has been a rapid and visible transformation in the last one month for road infrastructure development in Bangalore and it is expected to continue at all critical and important junctions of the city.

It says that demand for office space has been relatively slower in the last two months. It points out that developers have also slowed down speculative construction and are concentrating on existing, under-construction and build-to-suit properties.

The capital and rental values have remained stable across all micro markets in the city, except Whitefield. Rentals in Whitefield stands corrected by approximately 10-15 per cent due to excess supply.

The real estate markets in Chennai, Hyderabad, Kolkata and Pune continue be driven by IT & ITeS sectors. As a result, the demand for commercial office space is likely to keep exceeding its supply.

The mismatch will continue for sometime in these cities. In Kolkata, expansion by major IT companies has resulted in even small plot owners developing office buildings suitable for IT/ ITeS occupants.

However, most of this stock is sub-prime. The next couple of quarters will see an increase in supply of space directed at IT/ ITES firms in suburban districts. Given the state government's initiatives, the city is expected to witness more investments in the foreseeable future.