Fewer big deals in commercial realty

Written by Shubhra Tandon | Mumbai | Updated: Nov 12 2012, 07:07am hrs
The commercial real estate absorption environment is becoming tepid for big ticket leasing transactions as they become far and few between in key cities like Mumbai, Delhi, Pune, Bangalore, Hyderabad and Chennai.

Some of the few marque transactions in the first nine months of the calendar year 2012 include Ciplas proposed purchase of 1.3 lakh sq ft in Peninsula Business Park in Lower Parel in Mumbai at an estimated R270 crore. Engineering services firm Robert Bosch is understood to be picking up 1.28 lakh sq ft in Bangalore at an annual lease rent of a tad over R7 crore. Broadridge, another US servicing company for financial industry, is believed to have picked up 2 lakh sq ft in Hyderabad, paying an estimated R8.8 crore in annual rent, among other transactions.

Office space absorption declined to about 6 million sq ft in three months of July-September 2012 compared with more than 7 million sq ft in April-June months of 2012, according to global real estate consultant CB Richard Ellis third quarter office real estate review.

With bleak economic sentiments taking a toll on the expansion plans of corporate sector, sluggishness in the IT and ITES segments and falling business momentum in the manufacturing sector, the commercial real estate in the country could be headed for tougher times.

IT, which used to command almost half of the office real estate demand, had shrunk to about 20% in the June to March period of 2012.

Unless there is meaningful improvement in these macro factors returning to the high growth trajectory would be a distant dream for the Indian IT industry, Samantak Das, director (research and advisory services), said in the report.

Cautious leasing will be seen from occupiers in other segments as well. The demand is expected to weaken in most markets, and leasing activity could be limited to small and medium-sized office spaces, CBRE data showed. Also, the supply levels would continue to exert pressure on rental movement and market recovery in most micro-markets. The lack of clarity on existing incentives might dampen the attractiveness quotient of Special Economic Zones (SEZs) as well.

Decision making is taking time as emphasis to run businesses more efficiently is the priority, said Ravi Ahuja, executive director (office transactions), Cushman & Wakefield India, a global real estate consultancy firm. Relocation or consolidation to a new place requires a significant capital expenditure on the fit outs, interiors etc, on which companies are not being able to take a call, said Ahuja.

However, the market for small-sized spaces around 5,500 sq ft, and medium-sized of around 20,000 sq ft to 50,000 sq ft is believed to be buzzing. In Mumbai, Visa, the global payments technology company, recently took around 22,000 sq ft on lease in The Capital building in the upcoming business district of Bandra Kurla Complex (BKC). US-based Bain Consulting, a global management consulting firm, took 20,000 sq ft in BKC at a lease rent of close to R300 per sq ft per month. Global accounting and consulting company PricewaterhouseCoopers leased out 12,500 sq ft in Powai, an extended suburban area of Mumbai, at a rent of about R115 per sq ft per month. CBRE acted as advisor on all three transactions.

The rentals have remained stable to soft in the first nine months of the calendar year. There is a 10% reduction in rentals in BKC and other micro markets in Mumbai. Delay in projects and approval and execution delays are all leading to further reduction in the investment sentiment, said Nikhil Bhatia, co-head (capital markets), CBRE India.

But analysts say the requirement for large-sized space has not gone away and the tides would swing back once the challenging business environment improves.