After long, commercial realty shows strength

Commercial realty, or office space, segment is showing signs of improvement on account of stabilised vacancy rates, limited launches and a rise in demand.

Absorption rate, or the rate at which office space is occupied, has shown a considerable improvement in the first six months of 2011 and experts see it improving in the second half as well.

Anshuman Magazine, chairman and managing director, CB Richards Ellis India, a global real estate consultant, attributes this increase in absorption to diversification in demand.

“Diversification of demand from IT/ ITeS to other sectors like FMCG, financial services, pharma and telecom has helped this improvement in office space take-out, especially in the metros,” he said.

A few experts watchers believe the worst is already over for the sector.

“The cycle for the commercial real estate sector is bottoming as supply declines. We observe downward trends in vacancy rates although they remain high at around 20%,” Puneet Jain and Aditya Soman wrote in a Goldman Sachs note on the office space sector on Wednesday.

Commercial vacancies have been rising since 2005-06, from below-10% to more than 20% in September 2009. However,
they have stabilised at close to the 20% rates for more than a year now.

“A large number of commercial starts in 2006-07 due to buoyant IT demand and new SEZ policy created a supply overhang on commercial real estate. However, we see this scenario slowly correcting, aided by low new commercial starts. Incremental quarterly commercial supply has reduced to sub-10 million square feet, a drop of 30% over the last 10 quarters,” the Goldman Sachs analysts said.

“This has resulted in incremental absorption of 85% of incremental supply in Q2 of calendar year 2011. In addition, new commercial starts have fallen sharply and are currently well below incremental demand. This will likely lead to minimal completions after mid-CY13,” they said.

On a quarterly basis, according to data available with Jones Lang Lasalle India, a global property consultancy firm, vacancy rates fell 90 basis points from 19.1% in 1Q11 to 18.2% in 2Q11.

Samantak Das, national director, Knight Frank India said, “The euphoria which we experienced at the beginning for the year has subdued due to downward revision of economic growth expectations. However, the sector is still better than the other asset classes like residential and retail space,” he said.

Himadri Mayank, AVP - Research and Real Estate Intelligence Service, Jones Lang LaSalle India said, “Over 35 million square feet office space is expected to get absorbed in 2011, recording an increase of 17.7% over 2010.”

However, demand growth has not translated into incremental rise in rentals. Going forward, growth in rentals is expected to be more micro-market driven, experts said, adding that the rentals at prime locations in cities like Mumbai and Delhi are expected to see an uptick.