The return to pre-meltdown rental levels is still some months off with banks unwilling to lend to realtors, but India’s 9 per cent GDP growth is sure to boost demand for new commercial space.
Sunil Rohokale
Executive Director, ASK Investment Advisors
An increase in rentals is still not visible in the coming 12 to 18 months since absorption is low and vacancy levels are much higher than the 5 to 10 per cent norm
Commercial property is an integral part of the real estate ecology and its growth is linked to GDP growth, tax incentives, capital expenditure and the expansion cycle of companies.
In India, commercial real estate is traditionally divided into office space, IT/ITES space, retail, hotels and leisure. Most Tier 1, 2 and 3 towns have central business districts (CBD) that developed after Independence. With economic growth over the last decade, new CBD areas evolved. This was clearly based on the rental values occupiers could afford to pay as a business model. High-street retail saw a sea change with the advent of “destination supermarket” and “hyper market” stores. Hotels and leisure also caught up, with a new set of hotel operators crowding the space with different formats to cater to various segments — this included luxury, business, no-frills, service apartments and so on.
After the dotcom bubble burst, India started dominating the IT/ITES businesses in global markets, and the years between 2003 and 2008 saw exponential growth in demand for office space in Bangalore, the National Capital Region (NCR), Pune, Chennai, Hyderabad, Kolkata and Mumbai. To start with, the government’s Software Technology Parks of India (STPI) and Special Economic Zone (SEZ) policies helped create oversupply with unaffordable lease rentals in many cities. Then with the 2008 global meltdown, most corporations shrank, cutting jobs, postponing expansion plans and focusing on cutting costs by re-negotiating rentals or moving offices to cheaper areas. In Mumbai, for example, this is what happened in Nariman Point, Lower Parel, the Bandra Kurla Complex, Andheri Kurla road and Goregaon. The same thing happened in Whitefield in Bangalore, OMR in Chennai and Hingewadi in Pune. Rentals corrected almost 40 to 45 per cent, vacancies in most buildings touched 30 to 35 per cent and retaining AAA-rated tenants became the sole focus of real estate owners and developers. Most hotel projects were shelved too.
Calendar 2010 started with confidence returning, giving the impression that the fall in rentals in CBDs in the main cities had been arrested. But the real challenge remains in current absorption rates, since market rentals are still 25 to 30 per cent below peak rentals of pre-meltdown days. The new supply of the past two or three years that was delayed has started hitting the market and that is putting tremendous pressure on rental stability. The question of an increase in rentals is still not visible in the coming 12 to 18 months since absorption is low and vacancy levels are still much higher than the 5 to 10 per cent norm.
At the same time, debt or equity capital sources to developers are diminishing much faster since banks are unwilling to take the risk of lending to realtors with unoccupied offices and IT buildings. As a result of housing loan scams, the regulator has become more stringent about lending norms to real estate. The developers’ balance sheets are not strong enough to hold these fixed-income yielding assets owing to poor cash flow and liquidity in real estate, while foreign direct investment (FDI) is risk-averse and domestic private equity is focusing on shorter generation, city-centric, self-liquidating residential real estate opportunities. In the absence of guidelines for real estate investment trusts (Reits) and mutual funds (REMFs), the prospects of converting these fixed-income yielding assets to liquid assets look very dim for the next couple of years. The new FDI policy, if modified to allow multi-brand retailing, will help attract deep-pocketed global retailers to fill in the empty boxes, and a new era of high street to destination shopping and lifestyle retail might change the skyline of Indian retail
The year 2011-12 seems to be a challenging one for commercial real estate developers because the recovery has been anaemic, and liquidity remains a key concern with banks raising interest rates and becoming cautious. The tide has not yet turned but the next 12 to 18 months look much more optimistic. The silver lining is that smaller office space has seen some movement in terms of absorption. The current situation could prove to be an opportunity for end users and occupiers to get deep-value deals.
Ashok Kumar
Principal and Managing Director, CresaPartners India
With commercial real estate trading at the bottom, rentals have become attractive with many IT/ITES tenants reorienting their long-term growth strategies towards lower costs
Commercial property is showing signs of revival, with spurts of activity both in retail and office space. Though this revival might be attributable to the domino effect of the boom in the residential market, there are positive signs in the form of increased demand and activity by current as well as new clients. The revival of the commercial real estate market was a bit slow at the beginning of calendar 2010, but prices have started picking up now.
There has also been a decline in vacancy levels in all major markets in the last few quarters.
The IT/ITES sector is believed to be the key driver of the Indian commercial real estate market, accounting for approximately 75 per cent of total absorption of commercial property. The IT sector is likely to grow 35 to 40 per cent in the coming years; the same data can be used as a benchmark to evaluate the growth of commercial real estate. The thumb rule says every new job directly creates demand for roughly 100 square feet of office space.
Some of the fundamental reasons driving this tide are:
Strong growth: India’s GDP is growing at 9 per cent and is expected to accelerate to double digits. This, in turn, may create more business and job opportunities and demand for office infrastructure to support this growth. This escalating growth is gearing up to occupy extensive land in the available areas for building business parks, IT parks or Special Economic Zones (SEZs) and business centres offering both premium and affordable spaces.
Growing demand: All major cities are showing signs of increasing offtake of office and retail space. One of the positive outcomes of the downturn was the fact that increasing competition encouraged developers to offer some good value discounts — this trend, in turn, is attracting investors not only from India but also from aboard.
Vacancy rates: These are coming down slowly since no new supply is hitting the market in the same way it did two years ago. Projects in the pipeline then are now being completed in phases because developers had not only stopped new construction but also halted ongoing projects last year owing to the global slowdown.
Domestic job creation: Hiring by domestic corporations has risen considerably, resulting in more demand for office space. Financial institutions, consumer goods, telecom, pharma and manufacturing companies have contributed largely to the revival in demand. Major government investment in infrastructure projects is also creating rural and urban job opportunities.
Outsourcing by MNCs: This is also showing signs of a pick-up with the developed economies still struggling to grow. These multinationals are not only pushing up demand for leased spaces, investors are also flocking in to buy upcoming commercial properties located in far-flung areas where properties are available at affordable prices owing to limited development in the area.
Great value proposition: With commercial real estate trading almost at the bottom, rentals have become attractive across the country with many IT/ITES tenants reorienting their long-term growth strategies towards lower costs. Rentals for IT/ITES space in all major markets are still quoting in the range of Rs 25 to Rs 45 a square foot a month.
Rising demand for office space implies the creation of new jobs. All major India cities – Mumbai, the National Capital Region, Bangalore, Chennai, Hyderabad, Kolkata and Pune – are seeing a rise in demand for office space. The substantial infrastructure growth in these cities has also contributed to the stability of office rentals.
Strong growth in India will continue to boost demand for new space from occupiers as well investors.
The Indian commercial property sector is projected to experience considerable growth from 2010 to 2013. The surge in demand for office space is expected to reach approximately 200 million square feet and demand from the retail sector is pegged to grow to 45 million square feet.
Going forward, the SEZ and sustainable development businesses are also poised to take off. We expect to see the creation of several thousand jobs in the next decade in power generation, manufacturing, renewable energy, environment management, water and waste management, carbon trading and so on.
