March 12, 2010

The conditions of commercial property are finally ameliorating. Both the retail space and office are back in demand. Although, the development in 2010 is most likely to occur in tier-1 cities of Mumbai, NCR, Bangalore and Chennai, a new group of companies is, for the first time, considering off shoring in these destinations.
In 2010, an office space of about 60.9 million sq ft. is likely to come up in seven cities including Mumbai, NCR, Kolkata, Pune, Hyderabad, Chennai and Bangalore is the report by Jones Lang LaSalle Meghraj (JLLM), a global real-estate consultant. Around 74 percent of it will be supplied by the tier 1 cities.
The change that has come up in the market is noticeable to the realtors too. The General Manager of business development, Prestige Estates Projects, Nandakumar OP said that as far as commercial leasing activity is concerned, there is an appreciable increase in it. Since the price befits of offshoring/ outsourcing to India are eyed by a large number of spectators, there is a possibility of see a lot of new companies scouting for leased premises.
There is even a good scope of the retail side of the commercial market.
Mr Gupta of JLLM told that although numerous of retailers, both foreign and domestic, are evaluating their plans of expansion in India in the coming 2-3 years, the number of enquiries from retailers that are converting into consumption are mostly in the forthcoming malls only.

This trend has added to the stagnant spaces in new malls, which have already been finding it difficult to get initial bookings from retailers. According to a report by global real-estate solutions firm Cushman & Wakefield (C&W), the mall vacancy rate in urban India touched a high of 16% by the end of 2008.

The survey was carried out across eight major cities—NCR, Mumbai, Kolkata, Ahmedabad, Bangalore, Chennai, Hyderabad and Pune. The report attributes the vacancy levels to inconsistent mall supply and revival of the high street as the most sort after retail destination. The highest level of vacancy in malls was witnessed in Delhi and Pune, with vacancy levels of 24% and 15%, respectively.

“There is a gradual but noticeable exodus from malls to single-format stores on high street. Today, retailers seek viability in stores and give lesser importance to stores for branding purposes,” says JLLM (Jones Lang LaSalle Meghraj) MD (retail) Shubhranshu Pani.

“The retailers are preferring the high street because of higher visibility, independent access and the greater comfort level as compared to the malls,” Cushman & Wakefield retail services director Rajneesh Mahajan adds.

The fact that prices are falling in the Indian real estate market has sparked off a new wave of interest among NRI residential property rates, prompting increased NRI participation in real terms, reported Economic Times. Sanjay Dutt, CEO- Business, Jones Lang LaSalle Meghraj said, “The promise of a correction in key metros and tier II cities has revived NRI interest in the residential market. We expect a number of scheduled transactions to happen by the end of the first quarter of 2009.”

NRIs are also expected to stay away from investing in retail projects and other property segments in unfamiliar and historically over-speculative tier II and tier III cities. The NRI preferences are also undergoing a market sea-change, where they are picking up only existing, and fully-leased assets by reputed developers.

The seeming lackluster approach of the NRIs has also influenced the business plans of some of the developers like Ganesh Housing. This Ahmedabad-based developer who is targeting NRIs with its luxurious villas and apartments in a 500-acre project has delayed the official launch of this project and is also thinking of a rejig.

Bhavin Mehta, the business development head of the firm said, “NRIs have become increasingly cautious while investing in property. They may invest as inflation lowers further next year. But for the time being the earlier euphoria is missing and people want to see the project before investing.”

After the fall-out of the sub-prime crisis in the U.S, NRI investors have woken up to the potential there. However, they are also aware that the meltdown has created attractive opportunities in India, as well. NRIs invest in India for more than just financial reasons- for them; there is a large component of sentimental value attached to owning a home in India. Many NRIs plan to repatriate at some point in time – and this fact is ensuring that India remains a priority investment choice for this segment.

Market-men see prices cooling and projects are blocked because of lack of funds cheap, but do not expect the market crash.

The collection of funds and American investors from Western Europe, which represent a large portion of money from overseas to India, will be difficult. “Developers should explore new avenues such as the Middle East and Korea,” said the consultant global real estate Jones Lang LaSalle Meghraj country head Anuj Puri.

The first to be affected would be the price of commercial real estate, even if a correction in the residential segment is also planned. Rate has almost doubled during the three years leading to 2007, when interest rates began to harden.

“The feelings of these events as (collapse of Lehman Brothers, Merrill Lynch and others) have an impact on Banking and Financial Services’ real estate requirement of India,” Puri said.

Failed investment banker Lehman and Merrill Lynch, which was supported by the Bank of America, commercial space in India extends over 2.5 lakh square feet – which itself is not enough to bring down prices crashing, but the feeling is.

“This is not a major exhibition to examine 50 million square feet of office space transactions each year in India,” Puri said, adding that there was not much of an impact direct result of both companies down under.

Property prices in a good location would not be affected much, said Amit Sarin, Chief Executive Raj Anand Industries, in which Lehman instead of 1.8% Thursday.

However, the first within areas could feel a pinch, said Sarin, whose company is mainly the construction of the IT space.

The tightening of credit affect investment from private equity players primarily in the United States, experts said.

The current environment is “difficult” for Indian real estate market, Puri said.

Asked about the overall impact on the market, he said there could be a drop in prices due to the negative.

Overall, banks have written over $ 500 billion in bad debts, exactly half the total expected losses by the International Monetary Fund because of losing loans from American banks for people with low credit or infamous “subprime” loans.

The slowdown is also due to high interest rates and the price system, particularly in the housing segment have softened in the last year.

Private equity firm Red Fort Capital Director Chawlla Kuldip said: “Flow of funds from the United States will certainly come, at least in the short term. Fund to both private and public actions of developers are likely to fall”.

The developers, who thought of raising funds through an IPO in the near future, now reluctant to go to the capital market, he added.

Sarin Raj Anand said that companies which have strong accruals would be through internal sailing, but those who depend on debt and private equity feel the pressure.

A director of a large real estate company said the collection of funds by private developers through equity at the end. He noted that developers are already facing difficulties in obtaining Indian debts of banking and financial institutions.

Lehman Brothers has taken 50% in Thursday Unitech project in Mumbai for Rs 740 crore. He also invested $ 200 million in assets DLF Ltd, which is formed by DLF promoters.

According to analysts and developers residential rentals are hardening, registering a 10% growth. The demand for rented residential space is high as India has very low residential rental yields hovering around 3-6%

At the same time home loan interest rates are around 11% to 13%. While new property sales are slowing down, rentals are showing an upwards trend.

Many prospective home buyers are deferring purchase, expecting a dip in prices, and looking for renting accommodation in the short run.
“People are nervous about spending the capital they have in times of uncertainty. Therefore renting remains the only option. Though India is also unique as lot of people prefer to park money in residential projects and lock up apartments, which reduces the supply of apartments for rent, putting an upward pressure,” says global real estate advisory DTZ director Abhilash Lal.

Ansal Housing and Construction Director Kushagr Ansal points out, “Real estate yields in India are very low, pegged at 4-6%. This makes renting a lucrative option.”

Though new supply is being added to the pool of residential properties, it hasn’t really helped in stabilizing rents. Parsvnath Developers COO Dr B P Dhaka said, “New supply is not coming in the preferred centrally located residential areas. Also maintenance and construction costs have gone up in the last one year. All this has contributed to higher rentals.”

Omaxe executive director Vipin Agarwal points out, “Since residential rentals and lease are long term arrangements, there has not been a significant increase in rentals in last 6-8 months (for people already living in rented properties).’’