Call it the domino effect - after residential property market got into a recovery mode, the nation’s commercial property segment has also started showing signs of revival, driven by a spurt in office space and retail sectors. Neeraj Bansal, associate director (advisory services) at KPMG, says, “Commercial real estate transactions, considered a key indicator of economic activity, are now showing some signs of movement in the real estate sector since the end of the 2nd quarter. The confidence and sentiment, relatively low in the first quarter of 2009, has improved after the formation of a new government, thereby contributing to the movement in the commercial sector.”
Among positive signs, lease rentals both in peripheral areas as well as the central business district (CBD), are showing early signs of settling down and ‘conversions’ have begun to happen. There has also been a rise in demand for less costly premises in the sub-markets and landlords have been forced to increase incentives to draw tenants in the past few months. But more than anything else, the revival this time is being witnessed largely in the office space and retail sectors.
This has also been established by several studies conducted recently. A recent Cushman & Wakefield study, for instance, says the demand for corporate office space in Q2 of 2009 (April-June) registered a growth in excess of 65% over the previous quarter to settle at 5.66 million sq ft. And the increase in demand was due to factors like improving economic sentiments and rising confidence of the corporate sector. While Bangalore saw the highest demand of about 1.29 million sq ft, the other significant rise was noted in Mumbai where demand rose by 191%. NCR, on the other hand, saw a rise in demand by 43% over the last quarter.
During the slowdown period, companies with expansion plans had stayed on the sidelines anticipating bottoming out of the market. The lack of transactions was due to the general negative sentiment in the market, the cut on global-IT spend for companies and the delayed decision-making process. During this period, companies adopted various strategies like renegotiation of contracts along with rationalization of their current space layout, resulting in higher efficiency.
“Q1 of 2009, however, witnessed a revival in demand with companies closing out deals due to good rates resulting from the broader market being close to bottom. Q2 of 2009 again maintained the absorption levels of Q1 of 2009, primarily due to companies getting corrected rates in various micro markets,” says Bansal.
And the beginning of the third quarter has seen a further rise in demand for office space in the small-to-medium segments. With the rentals having been corrected over the last one year to more ‘realistic figures’ (rentals in secondary business districts (SBDs), for example, have corrected in the range of 11%-20% over the last 4-5 months - there is some movement that is being witnessed in the corporate sector with respect to enquiries for ‘leasable space’.
Moreover, buildings that were launched in the last 18-20 months are now moving closer to their ‘completion stages’, which would again foster some movement in the commercial office space. “However, with the trend being for organizations demanding for office space more from a relocation and consolidation perspective in the 2nd quarter, the trend now seems to be changing to organizations going in for an expansion — deals happening for office spaces in the range of 15,000 sq ft to 50,000 sq ft are now shifting to the 50,000 sq ft plus category going to as large as 150,000 sq ft. This, in turn, would imply creation of job opportunities and subsequently demand for residential space,” says Bansal.
Apart from office space, a lot of action is also being seen on the retail front, which is expected to contribute significantly to the revival of the nation’s commercial property segment. According to a report by Colliers International, office rentals dropped 10-40% between Q1 of 2008 and Q1 of 2009 in Mumbai, Delhi, Noida, Chennai and Bangalore as demand shrunk. This has renewed retail investors’ interest in commercial property once again.
Anyway, retailers and mall developers are already upbeat on the retail segment. A report by Images Retail estimates the number of operational malls to grow more than twofold, to cross 412, with 205 million sq ft by 2010, and a further 715 malls to be added by 2015, with major retail developments in Tier-II and Tier-III cities in India. A recent study jointly undertaken by KPMG and Assocham has also projected that about 315 hypermarkets are likely to come up in Tier-I and Tier-II cities by 2011.
Confirming such developments, Gaurav Marya, president, Franchise India Holdings Ltd, Asia’s leading integrated franchise solution company, says, “Mall developers across the country firmly believe in the retail story and are now looking at taking the mall culture to smaller cities to offer a perfect organized retail experience.”
According to Marya, growth in the nation’s Rs 45,000-crore organized retail industry has revived by 10-15% in the first quarter of 2009-10 after slowing down to 5% in the fourth quarter of 2008-09. “Indian retail growth has revived on account of real estate corrections in major metros. Malls are, therefore, going to be required to feed the consumption, by way of convenience. And the mall story, thus, is here to stay,” he adds.
Another noteworthy development being that domestic property-focused funds — which earlier targeted residential projects — are also looking at commercial properties now. For instance, Red Fort Capital Advisors Pvt Ltd has invested Rs 400 crore in three commercial properties in New Delhi and Mumbai and is looking for more. Similarly, high net worth individuals (HNIs) are putting money mainly into office and retail spaces. This is largely because during the economic crisis, commercial realty became the worst hit segment in the sector and lease rental and property rates fell by 30-40% in the metros and bigger cities. The lower prices, in turn, have triggered a path towards revival in recent months.