Good time to invest in commercial property

Published: October 6, 2009

Anup Nair was a proud owner of a 1,500 sqft office space in an A grade office unit in Gurgaon. When slowdown hit, he decided to put this space up for lease and move the entire office operations to his South Delhi unit. However, he did not get lease rates anywhere close to what had been quoted prior to the recession. Even at lower rates it was difficult to find a tenant. However, in June 2009, he found a tenant who was willing to pay reasonable rates for fully furnished ready-to-move-in property.

Nair is no exception. The commercial property market today is hugely oversupplied. Says Arun Goel, CEO of Dewan Housing Finance Ltd Venture Capital, “Commercial property markets across India are oversupplied at the moment. However, with business showing signs of a turnaround, take-up is happening today at 40-50% lower rates than in June-September 2008. When supply exceeds demand values are bound to drop.” As a result, real estate-backed private equity firms like DHFLVC are holding back from picking up office projects and going for residential projects which are performing better in the market today.

So who are the new drivers of demand? Explains SC Jaisimha, managing director of international real estate consultancy firm AsiaPac International, “Today commercial property is being taken up by telecom companies, banks which are getting licences to open up credit facilities, insurance and pharma sectors and specialised technology companies such as VLSI, semi-conductor and embedded technologies and video-conferencing companies.”

However, Ashok Kumar, principal and managing director of Cresa Partners, says this is not enough to sustain organisations such as his, which primarily focuses on commercial real estate transactions. “Information Technology, the prime driver of commercial real estate in the country, has taken a back seat and that explains the slump. The real estate was constructed to suit the growing demand of this sector and therefore the slow take-up. ”

However, Jaisimha maintains that this is the best time to invest in commercial property. “The first sellers are liquidating their investment and developers are offering 10-11% returns to new investors as opposed to the earlier 7-8%. This is because the developers need money as first investors exit fearing a downscaling of tenancy rates over the next cycle of negotiation.

According to a Brix Research survey across the country, “In Bangalore office space capital values have gone down by 25-40% and rental values by 25-50%. According to Realtor S Muralidhar Sharma, “In the commercial sector investors are moving towards new localities where property rates are still lower compared to prime localities. He added that in the January-March ’09 period, values had gone down by 25-30% but after March ’09 capital and rental values have been stable.“

Jaisimha says Bangalore and Pune markets have now witnessed take-up of very large spaces like a telecom company that took up 75,000 sq ft in Pune city. These companies require large workstations of 7×6 and so typically move to cities which offer A grade commercial space between Rs 40-60 per sq ft. On the airport road in Pune there are premium spaces available for as low as Rs 30 per sq ft. In Bangalore, Tisco has taken up 700,000 sq ft and intends to expand by another 1.5 million sq ft within the year. He himself helped a client renegiotate lease rentals in Whitefield from Rs 35 per sq ft to Rs 23 per sq ft.

Gurgaon is the market that saw maximum speculative rise during the peak times and a consequent fall now. Developers such as DLF and Unitech, which struggled for the last six-seven months to fill up space, have dropped rates from Rs 140 per sq ft to Rs 55-60 per sq ft and are seeing companies move out of industrial areas such as Udyog Vihar to premium developer properties. While a few months ago 60-70 proposals sent by these developers resulted in just 4-5 companies coming in for discussion and 2-3 signing up for the space, today the scenario is much better. Developers have lowered rates and are even offering to furnish and fit-out the space for good tenants.

The good news is that start-up companies have begun taking up between 4,000-20,000 sq ft of space while those relocating or expanding are taking up 30-50,000 sq ft of office space. Though the rental values have dropped, the market transactions have begun. This gives the developer the confidence to offer healthy returns on commercial property investment.

However, the office market is currently oversupplied by about 25-30% per cent. And additional supply is coming in as well. SEZs that have taken off are doing very well with those such as the Unitech SEZ at Gurgaon showing 70% occupancy and the Panchsheel Developers SEZ Eon in Pune boasting of 75% occupancy. Therefore the scenario is brightening and investments are happening. Funds will still not invest in large commercial properties even now, but for single investors, this is a good time. Developers are wooing them with active interest and the rates of interest too are at levels not seen for a long time.

Source: Economic Times

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