Price negotiations begin as commercial rents tend southward

Published: April 24, 2009

Bangalore / Mumbai: After two failed attempts to pre-sell its Hafeez Contractor House development in central Mumbai over the past two years, real estate developer Orbit Corp. Ltd has decided to build premium residences instead of corporate offices on the 250,000 sq. ft property. The move comes as demand for commercial space across India, and especially in central Mumbai has shrunk, resulting in a fall in prices.

“There would be no takers for expensive commercial property in Lower Parel in such a negative scenario, so we had to think of a different format. Also, we realized that demand in the residential segment is more than (in the) commercial space,” said Pujit Aggarwal, managing director of Orbit.

Property prices and rents for commercial space have dropped hard—between 25% and 35%—in the first quarter of 2009 across seven Indian cities, including the metros, primarily as financial and technology firms pare real estate expansion and give up excess space to curb expenses, realty services firm CB Richard Ellis says in its April report.

The fall in commercial property prices is also because of a fresh supply of 11.5 million sq ft. of space in the same period, outstripping absorption of 5.78 million sq ft., property advisory Cushman and Wakefield India says in its April report, based on a survey of eight major cities. “Liquidity for the real estate sector is not going to improve for the next two-three quarters and commercial properties will be battered the most,” said Sunil Rohokale, executive director of ASK Investment Holdings Pvt. Ltd, which is raising a Rs500 crore domestic real estate fund.

And central business districts have been hit the most, say property consultants. Connaught Place in New Delhi, the city’s central business district, saw a rise in vacancies as tenants relocated to cheaper properties in the city. And in Mumbai, around 350,000 sq ft. of space is going a begging in premium buildings such as Free Press House and Maker Chamber VI in Nariman Point, the country’s oldest business district.

Other parts of Mumbai haven’t been spared either. Lower Parel, also the heartland of Mumbai’s defunct textile mills, has seen the sharpest quarter-on-quarter fall in rents for office space—37% in the first three months of this year —Cushman and Wakefield says in its report.

Office rentals in Worli and Bandra-Kurla Complex (BKC), two other business hubs in the city, fell by 37% and 29%, respectively, during the period, adds the report. And the National Capital Region that includes New Delhi recorded its highest fall of 17% in rentals in three years.

“As rents keep going southwards, in the coming quarter, we will see tough negotiations between tenants and developers to bring down rents further,” said Kaustuv Roy, an executive at the tenant strategies and solutions practice at Cushman and Wakefield. While rents in the commercial sector were declining since the last quarter of 2008, Roy forecasts a further 15-20% fall over the next six-eight months as more office space becomes available. The first quarter primarily saw companies renegotiating prices, deferring taking up space and re-evaluating their expansion plans, he added.

“Negotiations are on rental, property tax, maintenance cost and car parking,” said the head of a financial services firm, asking not to be named. As new tenants negotiate prices, existing tenants will want to renegotiate prices, said an expert.

Source: Live Mint

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