Commercial realty sluggish in Q1

Leasing and buying activity in the commercial real estate market in India remained sluggish for the first quarter ended March 31 of calendar year (CY) 2012. The total absorption of office space declined 12% in Q1 compared to the Q4 of CY 2011.

Slowing GDP, weak domestic macro-economic indicators and cautious sentiments among Indian corporates and financial institutions led to the fall in commercial space take-up, says a report by real estate consultant DTZ India. No change in the interest rates by the RBI in the last quarter also made companies hold their decisions to buy as they anticipated a fall in rates in the subsequent quarters.

During the quarter, the demand was the highest in Bangalore at 3.6 million square feet followed by Mumbai at 1.2 million square feet. “No major change in the composition of demand was seen as IT firms accounted for majority of the take-up across the country, while BFSI (banking, financial services and insurance) remained the largest occupier segment in Mumbai,” the report said.

“Policy level paralysis is taking a toll on the real estate sector,” says Anshul Jain, chief executive officer, DTZ India.

“Occupiers are holding on to their decisions to take up commercial A grade office space and are likely to continue with their present stance till the third quarter of CY 2012. We expect a turnaround sometime around October 2012. Rentals will remain stable or increase marginally till then.”

However, supply continued to overtake demand in the first quarter of 2012. Almost 5.9 million square feet of office space was added across leading cities of the country, says a report on Q1 office space by real estate consultant CB Richard Ellis.

“The new supply was largely concentrated in NCR, Bangalore, Mumbai and Chennai, comprising almost 90% of the entire supply being added in the first quarter of CY 2012.”

This was aided by increase in project completions that grew by 30% in Q1. “On a quarter-on-quarter basis, the pace of construction has picked up in key markets, such as Mumbai, Bangalore and Chennai, where most of the demand was concentrated in the past year,” says Jain of DTZ.

However, with the demand sentiment remaining subdued, rentals across the key prime markets in the country remained unchanged during Q1CY12, says Jain. “Accumulation of stock across most office micro-markets led to a downward pressure on capital values of property during the quarter,” says Anshuman Magazine, chairman and managing director, CB Richard Ellis.

Markets like Nariman Point and Lower Parel saw pressure on rentals due to sluggish demand, he said. Going forward, movement of commercial property rentals will be a function of the supply of office space in the market. “Values in the CBD (central business district) are expected to be largely stable, while those in suburbs could slip downwards,” he added.

However, in the coming quarters, some positive news for the commercial real estate in India could flow by way of demand for office space from US-based MNCs.

“With predictions of a better economic environment in US and the euro zone, the Indian markets would be impacted favourably,” says Ravi Ahuja, executive director, (office transactions), Cushman & Wakefield India.