Commercial real estate stirs back

The commercial real estate business, which had seen a slump for most of last year owing to the economic slowdown, is showing signs of a revival, although growth is nowhere near as steep as in the 2007 cycle yet.

Some big corporates have entered lease deals for top-level office space of late, albeit at lower rates.

Last month, Samsung took 1.7 lakh square feet (sq ft) on lease at Gurgaon and Noida.

Sutherland and First Source also inked a deal for a 1 lakh sq ft property in Chennai.

Many other international firms are in talks for similar deals.

DLF, the largest developer according to market capitalisation, leased 2.1 lakh sq ft last month across the country.

“Leases are happening but the market has not fully recovered,” a DLF spokesperson said.

Anshuman Magazine, chairman and managing director, CB Richard Ellis, South Asia, said full recovery will take time. “Delhi NCR region and Mumbai are really active and

Bangalore is also picking up. Supply of office space is up, but rentals would remain competitive.”

Sanjay Dutt, CEO-business of real estate consultancy, Jones Lang La Salle Meghraj, expects demand to pick up from the third quarter of the fiscal.

“At present, there is a lot more supply than demand and thus pressure on value remains.”

Analysts say most of the deals signed are those that have been on the backburner since last October. “The leases are those that were negotiated earlier. It will be another six months before new deals happen,” said an analyst with a domestic brokerage.

In the peak of 2007, corporates leased 40 million sq ft of top-level space. This has fallen to 35 million sq ft in 2008 and to 25 million sq ft in 2009. 

But if there is a pick-up in demand owing to lower rentals, there could be a shortage of top-grade commercial space.

The project supply that is going to hit the market in 2010 is 57 million sq ft.

“Of this, if even 40 million sq ft supply comes in the market and there is a demand pick-up in 2010 due to competitive rentals, then, come 2011-2012, there would be shortage of Grade A office space. All the developers have altered their commercial development plans into residential,” said the analyst with a domestic brokerage.

According to a quarterly report by CB Richard Ellis, office rental in Gurgaon has moved up 8% year on year. However, rentals in Chennai and Pune have fallen 6%.

Another trend that has set in is that companies are going for outright buyouts of office space.

Wadhwa Builders, which is developing commercial office space on a land bank of 10 lakh sq ft in the Bandra-Kurla Complex, for one, has started selling portions of the development rather than wait for leases to happen. The building will be ready next year.

Having started selling space at Rs14,000 per sq ft, it has now raised this to Rs25,000 per sq ft.

“We thought it prudent to sell at lower prices rather than raise debt and be burdened with interest for the rest of the period. As the sentiments improved, the market steadied and picked up, we have increased the rates,” Vijay V Wadhwa, chairman, Vijay Associates (Wadhwa) Developers said.