Back on track?

Back on track?

Commercial real estate

Back on track?

Bangalore has a significantly larger proportion of demand for office space than it did five years ago, among other metros as well. Is India’s commercial real estate on the path to recovery? If the recently reported Cushman & Wakefield GRI India Real Estate Investment report 2009: Survival to Revival - Indian realty sector on the path to recovery, is to be believed, Bangalore is expected to see the highest demand for office space in the period 2009 - 2013 with approximately 34 million sq ft.
Karun Varma, Managing Director - Bangalore, Jones Lang LaSalle Meghraj feels, “There has been an increase in enquiries for modestly sized office spaces in the ballpark of 20000-25000 sq ft. However, actual decision-making on behalf of the intending occupiers is extremely slow. This is because Bangalore is primarily about IT/ITeS, which has not seen a very telling recovery as yet. Transaction volumes have yet to show an incremental change, but we expect these to show more activity closer to the end of this year. Most large ticket occupiers looking at Bangalore are multinationals who are currently extremely cautious about incurring any fresh capital expenditure.”

Undoubtedly, when ascertaining the growth of commercial real estate, you would also want to know how much of an investment opportunity it gives rise to. Anil Rego, CEO and Founder – Right Horizons, investment advisory and wealth management firm says that the IT / ITeS sector is a key driver of Indian commercial market and accounts for a significant part of the total commercial properties in the country. Estimates state that the IT sector is likely to grow well in the next few years, despite intermediate set-backs; this is essentially a subtle indication that the future of commercial real estate looks promising.
There are also a lot of other emerging opportunities for commercial real estate from industries like Retail, Hospitality, Financial Services, etc. 

Revisiting the slump

Real estate in the past year took a severe beating because of a credit crunch and an overall decline in demand for newer properties.

This resulted in several major real estate companies having to revise their prices. When it comes to commercial real estate, Vaidyanathan, Executive Director, Nitesh Estates says, “The economic downturn did not spare any sector, but the commercial real estate fared better than the residential one. Mostly it impacted the revenue stream as the square feet rates had to be revisited and rentals revised, especially in the CBD which commanded high premiums, where commercial rentals have seen a 15 per cent drop vis-à-vis 2007-08. Having said that I must add that, the short-term outlook is improving. But full recovery will be slow in coming as there is a supply-demand gap.”

The Cessna business park. Real estate in Bangalore has thrived on IT, ITES, SEZs and the manufacturing industry. Nandakumar OP, GM, Business Development, Prestige Group opines that the total absorption in 2009 till date has been estimated approximately three million sq ft, which is more than 50 per cent lower than that recorded during the corresponding period in 2008. The transactions during the last three quarters have seen rental values in various micro markets drop considerably.

Also, the existing leases of various clients have seen rationalisation in rentals and also witnessed re-negotiation of existing terms. As the sector slowly started to bounce back, the demand for commercial space for retail as well as offices gradually seemed to be touching new heights. Prices of commercial property for sale and rent are now increasing rapidly. Bangalore has a significantly larger proportion of demand for office space than it did five years ago, among other metros as well. Property prices for commercial space have at times crossed 100 per cent and the rise is constantly touching new heights. Anil Rego elaborates on the financial feasibility of commercial real estate in today’s context saying, “The sector today provides investors with an attractive rental yield vis-à-vis residential real estate. What is expected to aid this growth is the advent of real estate funds and REITs (Real Estate Investment Trusts).

This will add depth to the market and can result in higher valuations. Investors can invest in commercial real estate indirectly through Real Estate Funds considering that a direct investment could require large capital outlays. Indian REITs and Real Estate Mutual Funds are much awaited avenues within this space and would be a good option for even retail investors to participate. In terms of projected returns on investment, rental yields stand in the range of 9-12 per cent for commercial real estate. To this you can add the property price appreciation of about 7-10 per cent. These returns are indicative and could vary.

Can Bangalore cope?

When it comes to infrastructure, Bangalore has invited the ire of several bigwigs of the commercial industry. Despite this, we find that there is an unprecedented demand for commercial space. Nandakumar OP feels that even though public infrastructure in Bangalore may not be at par with other cities, Bangalore undoubtedly has the finest talent pool in the country catering to both IT and ITES segments.  

Vaidyanathan elaborates, “Bangalore has been the preferred destination of multinational companies and other start-ups. This is essentially because of the progressive economic agenda the state has promoted all along.

There is a huge reserve of intellectual capital available as well, which is fundamental to the IT, KPOs and bio-techs existing in the city. Bangalore’s open and multi-ethnic culture makes it an attractive place for people to settle in besides its salubrious climate.

As a growing metropolis, which it was not meant to be; Bangalore is suffering from some predictable teething problems. But when public utility services which are undergoing a sea change become effective, we shall be singing paeans of the city.”

In Bangalore’s favour

Bangalore real estate has thrived on IT, ITES, SEZs and manufacturing industries. Increased number of double-income families, a multi cultural population and global lifestyles has made this city a hot spot.

With the mall culture now being an integral part of one’s lifestyle, organised retail in Bangalore has seen huge growth. Large multinational retail players are flooding to the city to find themselves a place.

There is also a heightened demand of commercial properties in Bangalore due to increase in retail construction. Vaidyanathan says, “Where recession is concerned, we are still not out of the woods. However, despite the US and Europe, which have been instrumental in scripting Bangalore’s growth in IT, bio-tech and KPO, taking a massive hit, we have seen a multitude of innovative start-up ventures which have spawned.

They too need space. I don’t foresee any one particular sector emerging a forerunner in acquiring commercial space in the near-future.

However, I must add that when things do look up, the IT/ ITeS sector will overshadow the rest considering the volume of business they do.”

Nandakumar OP has a similar opinion and feels that due to the improving economic conditions, positive market sentiments and growing corporate confidence, IT/ITeS sector is expected to lead the way in terms of increase in demand.

The occupancy figures in most 5-Star hotels have considerably increased over the last few months. Retail according to us would be the last to follow suit.  

Stepping stones to success

While demand for commercial space may be escalating in Bangalore, one must also factor in the hurdles.  What role does the government play? Nandakumar OP elaborates extensively, “At the national level, the government has introduced many progressive reform measures to unlock the potential of the real estate sector and also meet increasing demand levels.

The stimulus packages announced by the government like allowing 100 per cent FDI in realty projects, simplifying procedures to get tax free industrial enclaves notified etc, coupled with the RBI’s move allowing banks to provide special treatment to the real estate sector, is likely to improve the Indian real estate sector.

At the state level, around 1000 acres of land has been identified by the government for development of an Electronic Hardware park near the International Airport and over 100 acres in the Devanahalli Business Park for IT and ITES parks. The IT investment region proposed to be notified will further give a boost to IT expansion.

Apart from the above, government has initiated various measures to boost infrastructure in the city, some of which include the peripheral ring road, making the outer ring road signal free and road widening work in various areas.”

Vaidyanathan feels that aren’t any hurdles other than space and infrastructural constraints in the CBD now.

The city has to spread beyond its current limits to accommodate our burgeoning businesses and that will be the scenario of the future.

The government will also have to chalk out corridors for different industry verticals and be more aggressive in its plans of setting up SEZs, which has suffered a considerable setback recently.

Emerging areas in B’lore

Hebbal (Bangalore North) - due to its proximity to the new International airport and the announcement of major infrastructural initiatives such as peripheral ring rd express way.
Bangalore North will see a significant growth as well. Whitefield too still has potential