On revival mode

Property

Think real estate and most people think of residential spaces. However, playing a big part in the realty scene is commercial and office space.  This year, the commercial office market in Bangalore took a cautious approach with a relatively limited infusion of new space. “While the beginning of the year saw supply forecasts of approximately eight million sq ft for 2009, only about 60 per cent of this was delivered in the first three calendar quarters (up to September) i.e. 4.8 million sq ft of supply. The last quarter (Oct – Dec) is expected to see a new supply of approx two million sq ft taking the year’s total to 6.8 million sq ft – a marked reduction from the last few years.
 
Supply in 2008 was approx 11.2 million sq ft and in the year 2007 it was 9.6 million sq ft. Office space absorption gained momentum particularly during the third quarter of 2009; however, volumes were much lower compared to the previous years. While absorption up to the third quarter of 2009 was recorded at four million sq ft, the year is expected to close at approx five million sq ft thereby recording 52 per cent drop from the absorption witnessed in 2008. Further, most of the absorption was observed in the older vacant stock and second-generation buildings indicating sufficient available supply in the market,” says Sumit Rakshit, Executive Director, Occupier Services, Cushman & Wakefield India.

Market dynamics

Says Goutam Chakraborty, Regional Director, Office Leasing & Sales, Colliers International, “the first two-and-a-half quarters of 2009 were really bad for the commercial space in the city. For the last three to four months, things started getting better. The demand is back in the market. There is a positive sentiment across the market. Multinational companies have some visibility in their growth; now that is translating into restricted demand. In the Bangalore market, we have more than two million sq ft requirement floating at present, which is a very positive sign for the industry.” With the economy gaining more confidence, a number of multinationals have again begun to reconsider their expansion plans.

In most cases, these would have been part of their expansion strategy for the last couple of years (that was put on hold owing to the downturn). Rentals in the Bangalore office market segment underwent a drop in the range of 13-19 per cent during 2009 compared to year-end of 2008. Most of the markets in Bangalore peaked in the second half of the year 2008 with the exception of ITPL that peaked in 2005.

“The market is expected to record more small and medium-sized transactions, particularly in the CBD/Off CBD locations. Pre-commitments are likely to be less on account of significant ready supply. Bangalore might see relatively increased activity from other sectors in the times to come. The first two quarters of 2010 are likely to see reduced infusion of new supply. We expect demand to gain momentum by the third quarter of 2010. Existing projects are likely to see accelerated pace of construction activities hereon,” adds Chakraborty.

Office market trends

Lease rental rates have taken a beating during the peak recession time. Also seen is some consolidation initiative in the market influenced by the reasonable real-estate cost as well as the positive market condition. Announcement of headcount increase by the top IT companies indicates near future expansion in terms of real estate. As far as an all India perspective, Ajay Midha, Vice President, Commercial, Raheja Developers Limited says, “from a commercial office space standpoint, look for Delhi, Gurgaon, Chennai, Hyderabad and Mumbai to be the strongest markets in the country. Bangalore will have a tougher time in countering the current down cycle. Hence, developers in Bangalore market may be expected to cut rents more aggressively.”

Impact of Dubai crisis

It is believed that the Mumbai real estate market could elicit a lot of interest, following the Dubai crisis.  “NCR is probably the most well diversified commercial office real estate market in India. Supply of reasonable real estate, connectivity to Delhi and a captive manpower base has led to companies setting up their biggest operations in the country.

The most important factor that favours NCR is the Commonwealth Games in 2010. As a result, there is a lot of new development taking place in infrastructure that will improve connectivity with Gurgaon, Noida & Ghaziabad,” says Midha.

The rental values that had taken a major beating during recession have now begun to stabilise. Office spaces in Bangalore are available around the Outer Ring Road, EPIP Zone and Whitefield areas. Rental values have already softened by 10 to 20 per cent and are showing signs of increase in the near future. In view of the prevailing rock-bottom prices, many investors are also looking at commercial properties as a lucrative long-term investment alternative.

Moreover, as an increasing number of individual investors are eyeing commercial space along with residential properties to invest in; the demand in this sector is already on the rise. Explains Samir Chopra, Director, RE/MAX India, “there is however a situation where a large part of buyers are shying away from the realty market, therefore creating a glut of options. This imbalance tilting towards buyers has led to the supply outstripping the demand leading to abated prices.” With better economic conditions and rise in demand, developers are also restarting their stalled ventures or investing in new areas. Says Surendra Hiranandani – Founder & MD, Hiranandani Group & Hiranandani Upscale, “the commercial market is definitely indicating a positive sentiment. Expansion plans that were put on hold due to the economic meltdown have started taking some shape again. Some cities are witnessing an excessive supply of office space due to over anticipated demand, which would take about two years to be absorbed.”

Incidentally, Hiranandani Upscale’s commercial project at Electronic City would have Grade ‘A’ offices of small configurations available on an outright purchase basis.  This model will cater to the demand of office spaces by startup IT companies, professionals, branch offices and numerous service providers. E-City as a micro market has revived interest among corporate due to the improved connectivity. 

Brightening up

In all, the scene is certainly brightening up. The market has witnessed 30 – 50 per cent correction from the peak and rentals are expected to remain stable in the short to mid term before any escalation.

The international airport in the North & Elevated Expressway in the South would give a major fillip to commercial activity in these zones.  “Growth of commercial realty market looks robust. Infrastructural support and value proposition of the product will be key growth drivers. Traffic congestion and high rentals in the CBD have made corporates to seek office space in the suburbs. It is expected that 2010/2011 should see a substantial growth in the commercial market,” concludes Hiranandani.