Weak Signs Of Strong Revival

The stagnant commercial and office property market, paralysed over the past two years with plummeting demand and excessive supply, seems to be cranking back to life. But opinion is divided. While some large property broking outfits see an imminent revival in the second half of this year, others say the inventory is too large and prices and rents too high to stoke a large-scale recovery in a hurry.

A report by property consultancy DTZ found that the cumulative take-up across seven major cities had risen 42 per cent in the January-March quarter this year compared to the preceding quarter. Meanwhile, new supply had declined 6 per cent quarter-on-quarter and 30 per cent year-on-year. The report said the deal sizes for leases had become larger and a revived IT/ITeS sector was driving the market. Some of the big corporate leases in April cited by DTZ include EXL’s 225,000 sq. ft in Global Oxygen IT Park in Delhi, Ocwen taking up 180,000 sq. ft in Bangalore’s Vrindavan Tech Village, and Religare’s 80,000 sq. ft deal in Pune’s Matrix.

“Excessive supply has dried up. Many commercial projects have been recast to cater to residential demand. There is 16 million sq. ft of residential property coming up in south central Mumbai but no new commercial ventures,” says K.G. Krishnamurthy, CEO of HDFC Realty Fund. In Bangalore, too, stagnant sales in Devanahalli, near the new airport, had picked up with several large groups such as Ascendas striking new lease deals, he adds. Many companies seeking large floor areas are not finding suitable space. “Deloitte is looking for 250,000 sq. ft, Ernst & Young and a number of law firms are in the market. Citibank is considering demolishing its building in the Bandra-Kurla Complex to utilise more FSI (floor space index) to meet its needs.”

Other analysts, however, think that the commercial market has a long way to go before it revives. “The last quarter of 2009 saw all-India commercial sales and leases of 1.7 million sq. ft. This is a vast improvement from the previous three quarters that averaged just 400,000-500,000 sq. ft. However, when you consider that there is an unsold inventory of 147 million sq. ft of completed and under construction commercial property, the over-supply situation continues,” says Pankaj Kapoor, CEO of property tracking agency Liases Foras.

Which way are rentals moving? According to DTZ, rentals are stable with the trend towards firming up of rates. “As vacancy eased, there were indications of strengthening prices in Gurgaon and Delhi. Quoted rentals in some cases revised upwards in the range of 5-10 per cent,” said the DTZ report.

But Knight Frank Property Consultants’ chairman Pranay Vakil saw no substantial upward pressure. In Mumbai’s top notch commercial address — C.J. House in Worli — Vakil says the asking rate is around Rs 300 per sq. ft a month. At peak, Lehman Brothers had leased property at an astronomical Rs 450 per sq. ft in C.J. House. “Now, at the smell of a deal, landlords are ready to settle at Rs 225. Buyers have a choice,” he says.

High vacancies are putting downward pressure on rentals. Godrej’s Vikroli facilities in Mumbai are saddled with 1.5 million sq. ft of vacant office space. At Rs 60 per sq. ft a month, brokers say there are few takers because similar commercial property in the northern suburb of Thane was available at Rs 30 a sq. ft.

The retail segment is also facing a glut. Knight Frank estimates that by 2012 the retail market will face an oversupply of 21 million sq. ft across seven big metros. Considering that the organised retail stock by 2012 will be 95 million sq. ft, this oversupply amounts to a huge projected vacancy of 22 per cent. Real estate developers are overestimating the actual organised retail activity.

Developers are not doing their homework,” says Vakil, who sees a large number of the 350 malls in the pipeline delaying completion.

The good news on the flip side is that the frenetic rental hikes witnessed during the boom will not haunt retailers until 2012.