Overbuilding promises a kick in the gut for realtors

Demand-supply mismatch in residential, commercial developments intensifies.

MUMBAI: Nipun Sahni, director and global head of commercial real estate at Merrill Lynch Capital, says the number of information technology parks and special economic zones in the 21-km Old Mahabalipuram Road — popularly known as OMR — in Chennai surpasses demand in the entire IT industry in India.

“It will be difficult for builders to raise finances for their other developments and in subsequent phases, projects will also be postponed,” he said at a Ficci seminar recently.
OMR, realty analysts say, is symptomatic of the overbuilding that has happened in far too many pockets.

Two other plum areas that are likely to face the same fate, they said, are Lower Parel in Mumbai and Noida in the National Capital Region, both of which are hotspots for A-grade office space.

They predict high vacancy rates.

Lower Parel has a ready office space of 4.5 million sq ft and will add a minimum 5 million sq ft by 2009, taking the total commercial space to 9.5 million sq ft.

Of this, DLF, India’s largest realtor, alone will add 3.8 million sq ft through office space and a mall.

Indiabulls Real Estate, Peninsula Land and Orbit Corporation are also busy completing their projects in the locality.

To boot, top players such as DLF, Unitech, Emaar-MGF, Akruti City, Puravankara and others have expanded to states they were not present in, and have ended up in close proximity to each other, creating oversupply pockets.

What started as a building boom in 2007 across emerging markets such as Chennai, Hyderabad, Bangalore and Indore is a year later, a very different story thanks to the Reserve Bank of India’s rate hikes, the wealth-depletion effect of falling stock markets and economic headwinds.

The slowdown in the IT industry as a result of the turmoil in the United States has only made matters worse.

“IT companies are not ready to sign long-term lease deals such as for five years. Now, they are signing short-term leases and this trend will continue for the next 18-24 months. This will lead to softening of prices. Deals that were earlier signed for rentals of Rs 275-300 per sq ft are likely to be cancelled,” said an analyst with a local brokerage, who did not wish to be named.

A DLF official said the company would complete its projects by 2009 and look at an average rental of above Rs 200.

In the coming months, oversupply will hit the residential space too, especially in places such as OMR in Chennai, Whitefield in Bangalore and Gurgaon, a recent report by Enam Securities said. The 21-km stretch of OMR Chennai has seen a flood of residential projects by developers such as the Hiranandani Group, DLF and Puravankara.

This led to developers lowering prices to keep the working capital going.

According to an analyst, the stiff rivalry between developers will intensify with oversupply.

But Ramesh Sanka, group chief financial officer, DLF, sees no mismatch. “We haven’t faced residential oversupply yet. Yes, there will be pocket-to-pocket oversupply but that will be at a micro level,” he said.

Kuldip Chawlla, director (asset management) at international private equity firm Red Fort Capital Advisors, says there is a temporary oversupply and it is mainly in the luxury segment in the top seven cities in India.

“Developers have built projects in Delhi that exceed Rs 75 lakh per unit but the demand is in the Rs 25-55 lakh segment. It is the disproportionate demand-supply that is leading to an oversupply in the market,” he said.

The problem isn’t plaguing just metros. Tier II markets are also likely to be hit, says Anuj Puri, the country head of real estate consultants Jones Lang LaSalle Meghraj.
“Top Tier II cities where we are already seeing a slowdown are Indore, Bhopal, Ludhiana, Mohali and Jaipur. These places have also witnessed a steep 45-50% correction in prices,” he said.

pooja_s@dnaindia.net