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.

Commercial Space - is india priced out ?

Indian office space has witnessed one of the fastest appreciations in rentals, in the world, the latest survey by global consultancy firm Cushman & Wakefield reveals. Consultants and experts feel that this is a matter of concern as it clearly suggests that supply of office space is not keeping pace with the demand.

Office space in Nariman Point, the central business district of Mumbai, and Connaught Place in Delhi, rank fifth and 10th among the costliest commercial sites of the world. Both of them have moved up by two ranks, since last year. The occupancy cost, including all the maintenance expenditure, for Nariman Point, is Rs 546 per sq ft per month, and for Connaught Place it is Rs 423 per sq ft per month. These rates have nudged Nariman Point and Connaught Place past the costliest areas in New York, Washington, Shanghai and Zurich.

MD of CB Richard Ellis (South Asia), Anshuman Magazine, says if the trend continues for some more time, India will loose the advantage of being a cheap destination for companies to shift base from other countries. The fact that cities like Delhi and Mumbai are costlier than New York, Washington, Rome, Shanghai, Amsterdam and Zurich is not a matter of pride, rather an issue to be taken up by the government and civic/development authorities/agencies seriously.

If India has to remain competitive in the international market, its real estate cost must be lower than that in the developed world. A senior consultant said the productivity of Indian workers is normally lower than those in developed countries. And hence, the real estate and other overhead costs should also be lower than those in the developed countries. Therefore, if India has to grow at around 9%, it must remain competitive in the global market, the consultant argues. As real estate has become an important ingredient in service sectors like information technologies, call centers, education and hospitals, keeping costs under check will help the country remain competitive in the global market and also in achieving high economic growth.

In 2007, Indian cities witnessed some of the highest growths in rentals, as shown in the chart. But, as rentals have gone through the roofs, many companies are shifting their bases to other cities, and in some cases, particularly, in the call center segments, to other countries. So, at the present price points, it seems there will be a situation of over supply. This, some consultants feel, would lead to price correction over the next 12 months.

As against India, its competitor China as a whole delivered a steady performance. Rents in mainland China registered an average growth of 5% over the year. Beijing is currently facing oversupply of high-grade space, and in consequence, rental growth was marginal.

Shanghai also experienced an increase of 10% in rentals. Rentals at the best locations in Beijing and Shanghai are $48.43 per sq ft per year and $61.62 per sq ft per year, respectively. As against these, the highest rentals in Mumbai and New Delhi are $166.04 per sq ft per year and $124.53 per sq ft per year, respectively. Though the economic returns from the space in India and China are almost the same, the high rentals in Indian cities make them uncompetitive in the global market.

Executive managing director of Cushman & Wakefield (South Asia), Sanjay Verma, says most micro markets in Mumbai saw an upward trend in rental values, largely due to lack of new supply because of project delays. Similarly, in Gurgaon in the National Capital Region of Delhi, prime supply has essentially met the pre-committed demand. Therefore, the fresh demand only pushed the rentals.

However, the good news is that the high rental values witnessed across the country would not be sustainable beyond 12 months because of large supply that is going to come during the period.

Among the Indian cities, Bangalore has witnessed one of the lowest growths in rentals, in the country. While rentals have increased by 20-26%, here, they are still among the lowest in the country, with prices ranging between Rs 44 per sq ft per month to Rs 73 per sq ft per month. This is mainly because of large supply of quality space in the city. Interestingly, Bangalore is witnessing one of the highest demands for space in the country. As against this, other cities like Kolkata witnessed one of the highest rises in rentals, at Rs 65 to Rs 70 per sq ft per month. Such rise in rentals is mainly due to the entry of better grade supply in a constrained office market.



Contributed By : Ramprasad Padhi
Pinnacle Realty (http://www.mumbaiproperties.com/) Suite # 24, Royal Tower, I.C.Colony, Borivli West, Mumbai 400 103 Board Nos: 2893 3333, 2892 5252, Cell : 9820 1515 00 Email : ram@pinnaclerealty.in