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Commercial Estate Market: Between the Lines

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Amiya Sinha:

The commercial estate market consists of properties which are meant for commercial, office and retail purposes. In my analysis of the commercial market, I draw a comparison between the changes that have occurred in the market in 2008 Q4 (recession period) and 2009 Q4 (post recession). The study helps us to understand the immediate effect of the global (local) crisis on the commercial sector of the real estate market and the changes that have taken after a year in 2009.

2008 FOURTH QUARTER-ESTATE MARKET MACROECONOMIC REVIEW

The Indian economy displayed mixed developments during the quarter. At the time when inflation eased below 7 percent, rebounding industrial and infrastructure growth rates and the falling crude oil bolstered the sentiments of the economy, other factors such as volatility of the stock market, departure of FIIs, decreasing global investments and falling currency value caused sluggishness in the growth. However, the government continuously supported the economy with necessary actions such as cut in CRR, SLR and repo rates by 250, 50 and 100 points respectively to maintain the liquidity into the system. In addition, the Prime Minister invited Gulf countries to invest into infrastructure sector and the union finance minister met with the industry representatives and leaders and urged them to decrease the prices to stabilize the market activities. The opening of liquidity adjustment facility (LAF) window to Housing Finance Companies by the Reserve Bank and cut in housing loan interest rates were some of the initiatives taken from the government to address the credit needs and to boost demand in the sector. As far as the direct measures for real estate sector is concerned some measures such as refinance of Rs. 4,000 crore to NHB and designating home loans up to Rs. 20 lakh under priority sector lending together with RBI’s move to cut the repo and reverse repo rates are surely expected to help customer confidence in the market.

Having seen the economic situation of the Q4’08, I move forward to a city wise analysis of the commercial estate market. With a nationwide study of the estate market not possible due to different living standards and availability of facilities, we break the study and compare the situations in the commercial estate markets in TIER 1 cities of the country, i.e. New Delhi and Mumbai. It is worth noting, however, the enormous potential held by the growing markets in the tier 2 and tier 3 cities, such as Pune, Hyderabad or Chennai. Owing to insufficient information, smaller stock of real estate and a poor level of infrastructure, these markets are still relatively illiquid and harbor greater risks.

MUMBAI-INDIA’S FINANCIAL CENTRE
2008 Q4

The Grade ‘A’ office market witnessed a total available supply of approx 5.5 million sq ft inQ4’08. The supply was primarily concentrated in areas such as Andheri East, BKC, Lower Parel, LBS/Thane and Goregaon, among others, in the form of supply left over from the previous quarter. The CBD observed a small supply, although the remainder of the supply was contributed by Malad, Navi Mumbai, Powai and Kalina.

On the demand front, the Mumbai market remained weak and witnessed a reduction in the volume of transactions following the overall economic sentiments. The negotiation leverage of the end-users was evident in the recent transaction of multinational bank Standard Chartered, which bought a large (2.5 lakh sq ft) office space in BKC at a rate approx 30 percent below the price of previous such transactions in the same area. However, on the other hand this transaction also helped in pushing the market sentiments in the upward direction especially at the sale front.

the above chart shows a comparison of 2008 Q4 and 2009 Q4 for Mumbai

2009 Q4

Over 10 million sq ft. of Grade ‘A’ office space was available for lease in 4Q2009 in Mumbai. 65 percent of this available stock was for IT/ITES office space usage. The projects or part of the projects ready for fit- out in 4Q2009 included Raheja Cromium and Rustamji Natraj, developed by Raheja Universals and Rustamji Developers, respectively. There was no new project launched during the quarter; however, the pace of construction increased in the projects that had either stalled or slowed down due to economic credit crunch. A significant new supply is expected to hit the market in the first and second quarters of 2010, in areas such as Andheri, Lower Parel, BKC and Thane.

BKC witnessed increased activity as many companies Indian as well as Multi Nationals saw it as a good option to consolidate their business due to prevailing lower rentals, planned infrastructure and its locational advantages.

NEW DELHI-POLITICAL BATTLEFIELD
2008 Q4

Delhi and Noida Grade ‘A’ office markets observed3.5 million sq ft of total available supply in Q4’08.The supply was primarily contributed by Noida on account of left over supply of the previous quarter and completion of some of the projects. The rest of the available supply was shared by Jasola followed by Saket and Noida.Your browser may not support display of this image.

The overall demand witnessed a slowdown across the Delhi market as the companies, domestic as well as MNCs, were cautious regarding their expenditures and holding their expansion plans due to the global turmoil. Taking advantage of the situation the end users were holding strong position in negotiations with developers and owners. Despite downward sentiments, Crossings Infrastructure, a special purpose vehicle promoted by seven real estate companies, announced two commercial projects in Delhi NCR. In order to boost the road and transport infrastructure, the Noida Authority has come up with a mega plan of INR 1,200 crore for the city. The project is expected to be completed by 2012.However, a number of flyovers, underpasses, elevated roads and parking lots are expected to be completed in 2009, before the 2010 Commonwealth Games, which will enhance city’s prospects to be a business destination.

the above chart shows a comparison of 2008 Q4 and 2009 Q4 for Delhi

2009 Q4

Approximately 1 million sq ft of Grade ‘A’ office space was available in 4Q2009in Delhi. Of this available supply, more than 85 percent was located in Jasola and Saket. On the new supply front there has been no addition to the city’s Grade ‘A’ office space in this quarter.

Your browser may not support display of this image.

After almost three quarters prime office space in the CBD has seen no further falling rentals QoQ. Jasola and Nehru Place witnessed a marginal increase, of approx2-5 percent, in rentals as well as capital values; few large transactions in the area upgraded market sentiment. Netaji Subhash Place felt pressure on rentals and witnessed a correction in the range of 8-9percent QoQ, due to consistently higher vacancies.

A number of companies based in Mohan Co-operative have shifted to Jasola and Nehru Place considering the locational advantage, better infrastructure and prevailing low rentals.
Before the Commonwealth Games, the Delhi Government has decided to turn100 prominent buildings in the city into green buildings. The TERI-(Clinton Climate Initiative) will help building owners identify, design and implement large-scale energy-efficient building retrofit projects.

The writer is a correspondent of Youth Ki Awaaz pursuing Economics (1st Yr.) from Ramjas College, University of Delhi. Football is his religion and Manchester United is his god.  Writing has always been one of his areas of interest.

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