JLLM Update - OFFICE SPACE TRENDS - Q2-Q3 2009

OFFICE SPACE TRENDS – Q2-Q3 2009

Pawan Swamy, Managing Director ( Western India) Jones Lang LaSalle Meghraj

Since the last quarter, there has been increased office space off-take in the top cities of Mumbai, Delhi and Bangalore. Vacancy levels have actually decreased as a result of a pep-up in office space transactions. This has taken the pressure off rentals, and we have not seen a dip in these values in the recent past. In other words, the hitherto witnessed downward trend in rental values has actually been arrested now. We expect them to stay flat the levels they are right now over the next quarter.

RENTAL VALUE MOVEMENT

In these three key Tier 1 cities, there has definitely been a declining trend from the peak rental values witnessed a year back. Depending on locations, project and sub-market dynamics, this decline has been anywhere between 25-40%. However, values have remained steady over the last quarter, showing no significant decline.

Interestingly, while rental values have remained steady, capital values are beginning to strengthen and the yield has started to compress more. This can be attributed to the fact that a number of office space owners began selling their holdings a couple of quarters ago in response to the liquidity crunch. There has been a significant improvement on the liquidity front of late; Mumbai was the first to witness this, followed by Delhi and Bangalore. The result of the improved fiscal situation has resulted in fresh access to debt for developers and investors, enabling them to assume a holding position on their properties.

DEMAND

In the current context, we note an indubitable improvement of overall sentiments in the commercial space sector. In clearer terms, we are now looking at a significant increase in demand, which is a decisive change from the scenario just a few months ago. The pattern that emerges is one of multinational occupiers beginning to look more favourably at a market where values have rationalized by 25-40% over the last 12 months. These occupiers justifiably anticipate that values are likely to strengthen again over the next 12-14 months, encouraging them to take a position in this market. They are now keen to lock the best of the available opportunities so that their firms can derive consummate value in the long term.

MICRO TRENDS

Of late, we have seen an emerging trend of Indian companies preferring to buy rather than lease space. Religare, the Stockholding Corporation and the National Stock Exchange have already made purchase decisions, and we anticipate that more companies will see the value that the actual possession of office space assets adds to their balance sheets going forward. As of now, multinationals are still displaying a degree of scepticism about taking a ‘buy’ position.

In terms of segments, there been no significant growth in the IT segment - most of the activity we are witnessing is on the corporate side, predominantly among multinationals with multiple offices in the same cities that are looking at consolidation. These entities are now actually signing deals. However, we have noted that most of these are pre-lease transactions, and not necessarily in context with ready buildings.

THE WAY FORWARD

It is critical that one understands that among all the asset classes, the one impacted most the by the global economy is office space. Residential demand has already made a remarkably fast comeback, and capital markets are opening up with the return of liquidity. Hotel rates are also beginning to firm up under the improving economy. However, the health of the Indian office space sector depends on how multinational occupiers fare at the global level. While the sentiments in country in terms of the economy in particular and the market in general are definitely positive now, it will take a while before India sees a significant surge in the rental and capital values of office buildings.

OVERSUPPLY?

There is also a large amount of supply coming in at the Tier 1, Tier 2 and Tier 3 city levels, and we must consider the possibility of an oversupply situation in certain markets. However, if we believe that the markets will make a comeback in next 12-18 months and factor in the consolidation approach by both foreign and Indian firms are taking as well as the expanded demand, there is a good probability that a large percentage of this excessive supply will be absorbed.