Investors Turn Pessimistic on Commercial Real Estate

Monthly rentals and capital value expectations in commercial real estate in India rose in September quarter, albeit, at a pace lower than expected before, according to the Royal Institute of Chartered Surveyors (RICS), the UK-based qualifications and standards body for land, property and construction.

The Indian commercial property monitor also indicated that more number of respondents – investors and tenants – in the previous quarter felt that market valuation of the commercial properties were expensive compared to the quarter before.

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In contrast, the percentage of those who had previously felt that office spaces were fairly priced dipped in the third quarter ended September 30 compared with the earlier quarter.

In terms of the property price cycle of the commercial segment in the real estate sector, a large percentage – 38.3% – feel that it was in stabilisation phase. The percentage, which believed it was in an early uptrend, was also high at 27.2%. An almost equal percentage of 24.7% felt the commercial property segment was in mid-downturn. Only 6.2% felt it was in mid-upturn and a small 1.2% felt it had peaked.

Devina Ghildial, managing director, South Asia, RICS, said the Indian commercial property market was on the upswing as demand was outstripping supply but growth in rentals was modest compared with earlier expectations.

“There is a dearth of available supply of grade A office or commercial spaces across major cities in India. Many new MNCs are looking to come into the country while existing large corporates are also ramping up their operations at a solid pace, but supply of grade A office space is not able to match up to this demand, leading to healthy appreciation,” she said.

According to the report, there was a spurt in the demand for commercial property in the sector as auto, banking financial services and insurance (BFSI), telecom, fast moving consumer goods (FMCG), consumer durables, IT and e-commerce start-ups in the national capital region (NCR), Bangalore and Mumbai, which remained upbeat with closures of several large-sized transactions during the quarter.

Ashutosh Limaye, head – research & real estate intelligence service, JLL India, said commercial properties in India were most affordable when compared to other global markets with rentals having bottomed out and making its way up.

He said the rise in rental was “gentle” but the direction was definitely up.

“The rentals in the commercial segment of real estate is currently fair and competitive as it is still below the previous peak (in 2008),” said Limaye.

According to him, Bangalore was the only market that had reached its peak of 2008 while most others remained more than 10% below it.

Limaye said Chennai was 2% below its peak, Pune 10% while the rest were over 10% lower than their peak.

He said Mumbai and Delhi had reached a high of Rs400 per square feet (sq ft) per month in 2008.

“Today, Nariman Point is 30% below that (2008 commercial property rentals) while suburbs like Andheri, Kurla and others were 20% lower,” he said.

J C Sharma, managing director of Sobha Developers, said India offered arbitrage in two things – wages and salaries and office rentals. He said MNCs came to India because of these two arbitrages available to them to be competitive in the global market.

“If you, exclude markets like Mumbai, Bandra Kurla Complex (BKC) and Delhi, 90-95% of the transactions in the Indian commercial property sector were less than $1 per sq ft, which is very cheap compared to markets in other emerging markets and some of the Southeast Asian countries like Malaysia, Bangkok, Jakarta, etc,” he said.

Sharma said high absorption rate in the commercial sector over the past few quarters in markets like Chennai, Kochi and others had resulted in better realisation in rentals.

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