Millennium Post

Realty demand likely to be cautious in 2014

Come 2014 and demand for commercial real estate — against the current economic backdrop — is likely to remain cautious in the medium term. Corporates are expected to continue their focus on optimal space utilisation and cost cutting measures and transaction activity is expected to be mainly restricted to take up of small- and medium-sized spaces. Recent indications of a revival in the global and domestic economy, however, should contribute to better performance and improved economic prospects towards the second half of 2014.

The commercial office segment of India’s top cities is expected to see fresh supply addition of about 140–150 million sq. ft by the end of 2017. With a considerable level of this upcoming supply lined up for fiscal 2014–15, rental values of select micro-markets — such as Gurgaon, ORR, Thane and Navi Mumbai — are likely to remain under pressure.

This projected expansion of the commercial office realty segment, however, is subject to an effective utilisation of the potential opportunities for growth and implementation of relevant policy measures to resolve bottlenecks bothering the sector. Reforms are specifically required in areas such as slow project approval processes, supply logjams, opening up key sectors like retail to foreign direct investment (FDI), and infrastructure creation through private–public partnership (PPP) projects.

Meanwhile, India’s economic performance for 2013 stood in contrast to the high-growth years between 2003 and 2011, with a gradual revival being visible from the July–September period, when the economy grew by 4.8 per cent — largely on account of improved performances in agriculture, financing, insurance, real estate and business services, as well as select infrastructure sectors.

In a bid to bolster demand and inject liquidity into the sector, the Reserve Bank of India (RBI), the country’s central bank, revised base rates twice by 50 basis points (bps) during the first quarter of 2013, and then again reduced the base rates by 25 basis points in May. Although the repo rate was raised by 25 basis points again in September; it was left unchanged at 7.75 per cent during the December Monetary Policy Review. The move, widely appreciated by the industry, was quickly followed by banks lowering new home loan interest rates.

The very fact that the RBI decided to keep repo rates unchanged despite persistent inflationary conditions is indicative of India’s central bank beginning to address larger issues of economic growth, aggregate consumption and investment. Going forward, the RBI may be expected to maintain stability or reduce base rates. All in all, a positive signal for the investment climate in India’s realty sector — and a likely indication of a gradual economic recovery.

India’s office market continued to take cues from the prevailing economic sentiment in the country throughout 2013. With cost reduction being a primary focus, occupier sentiment remained cautious and most corporates continued to review expansion plans by focusing on improving existing space utilisation to control costs. The first quarter of 2013 saw fresh commercial office space supply to the tune of approximately 10 million sq. ft. across the country’s leading cities while absorption stood at about 6.6 million sq. ft. Transaction activity was dominated by Mumbai, Bengaluru, Chennai and the Delhi National Capital Region (NCR), representing about 90 per cent of total transacted space during the quarter. By the first half of 2013, more than 20 million sq. ft. of new office space had been added, with supply growing by 16 per cent year-on-year. Absorption, however, stood at approximately14 million sq ft in the first half of 2013.

The top three cities of Delhi NCR, Mumbai and Bengaluru continued to dominate transactions in the first half of 2013. By the third quarter, less than 3 million sq ft of office space entered India’s prime real estate market, with supply dropping by more than 75 per cent quarter-on-quarter and by nearly 50 per cent over the same period last year. The July–September period witnessed the lowest addition of office space over the past several quarters. This rationalisation of office space supply across the top urban centres of the country was largely attributed to prevailing vacancy pressures in completed projects and weak commitment levels for under-construction properties.

The last few months of the current year, however, seemed to have witnessed the beginning of a gradual recovery curve for the economy at large, and by extension the commercial office segment. According to estimates, the year ended with a total office space absorption in the range of 25-30 million sq ft, as against 26 million sq ft of office space absorption in 2012. Transaction activities seem to have improved slightly over the last few months, as market sentiment has begun to revive to some extent.

Although the information technology (IT)/ IT enabled services (ITeS) sector continues to dominate the commercial market as major occupiers of corporate space, new sectors have opened up too — especially BFSI, consulting and research, as well as the engineering and manufacturing sector. More interestingly, despite small- and medium-sized transactions (of less than 20,000 sq. ft of space) having dominated the commercial office market segment in India’s top cities in 2013, the year saw a healthy mix of quite a few big ticket deals too.  The SEZ story too continued to survive, with over 5 million sq ft of deals getting finalised in 2013 alone.
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