Crisis shadow on realty still not over, but dip in rentals slowing

Written by Sajan C Kumar | Chennai | Updated: Sep 9 2009, 04:54am hrs
As global economic conditions have begun to stablise, property markets across the country have moved closer to their troughs in the second quarter of the current financial year. The rates of rental declines across major office markets have been slowing, after sharp corrections in the first quarter. According to second quarter Asia Pacific Property Digest 2009 of Jones Lang LaSalle Meghraj, the global real estate intelligence provider, Mumbais commercial real estate market had recorded approximately 35% reduction in rentals since the peak in third quarter of 2008.

After a steep decline in the previous three quarters, Mumbai saw two positive signs in second quarter of 2009a slowdown in rental decline and the start of a revival in demand. In the same period, Mumbai recorded about 1 million sq-ft of leasing transactions, approximately 80% of which involved buildings under construction. The majority of these pre-leases took place in buildings that are due to complete in the next six months. This renewed leasing activity is believed to be brought about by demand from opportunistic occupiers that are capitalising on lower rentals, said the digest.

According to the digest, Mumbais commercial real estate market will experience a rise in vacancy and downward pressure on rentals for the next two to three quarters primarily due to the large supply pipeline. Developers of projects that are slated for completion in 2009 will have to be flexible in terms of pricing in order to attract occupiers. Considering the high supply and subdued demand in the market, some developers are expected to announce a change of use from commercial to residential for certain projects.

While banks are still cautious towards real estate lending, some signs of easing credit are appearing amidst improved financial conditions. Lower interest rates, increased liquidity and greater optimism regarding economic recovery helped to lift investor sentiment and triggered a spat of transactions in some markets in first quarter, albeit mostly at discounted prices. Residential markets saw the largest improvement as buyers were of the opinion that prices may have bottomed while discounts by developers, coupled with lower interest rates, also meant prices have become more affordable for long-term buyers, said the digest.

Though the overall demand for office space in Bangalore was slightly improved in the second quarter compared to the previous quarter, the vacancy rate rose to 11.4% from 10.6%. Significantly, most of the increase in vacancy occurred in the suburbs. The commercial market in Bangalore is likely to stablise through the second half of the financial year, led by the expected increase in demand from opportunistic players that are aiming to lock in lease agreements at attractive rentals. Demand for commercial space is expected to rise, evident from the increased number of requests for proposals floating in the market, said the digest.

Compared with the last two quarters, Pune witnessed resurgence in demand for office space, making a transaction of 5,50,000 sq-ft in second quarter of current financial year. The increase in demand was due to a considerable rationalisation in rentals since second half of 2008. The general sentiment in the market was that rentals across the micro-markets are approaching the bottom of the cycle. Although the demand has picked up, the sizeable supply pipeline of about 4.85 million sq-ft for the next two quarters may result in higher vacancy.

According to the digest, following a steep decline in retail space demand in the first quarter of financial year, the rental correction in Delhi NCR market slowed during second quarter. This was due to the rental deterioration witnessed across all the sub-markets during the last two to three quarters, which resulted in a marginal upturn in the number of requests for proposals. Though the NCR region might witness another round of real estate requirement reduction as retailers tend to close their less-profitable outlets, the region is expected to witness additional retail space of close to 4.5 million sq-ft by end-2010, mainly on account of the delays in the completion of retail malls from 2008 and 2009.