Downturn to force major correction in realty retail: study

Written by Sajan C Kumar | Chennai | Updated: May 26 2009, 06:30am hrs
Taking cue from the lingering downturn, the real estate market across the country is rapidly undergoing major correction in the commercial space sale. While prospective occupiers are waiting for prices to adjust further, worsening market conditions are taking toll on realtors, finds a study by the real estate services firm Jones Lang LaSalle.

The Asia Pacific Digest for the first quarter of 2009 predicts that retail sales in major regional markets are likely to weaken further in the next 12 months due to the deteriorating job market conditions and a slowdown in tourist numbers. The lack of interest in commercial space can be attributed to the difficult trading conditions faced by the retail industry, particularly those at the higher-end. They have become cautious towards expansions and instead started focusing on existing store operations.

According to the study, rentals fell in most prime retail locations in India's tier I cities in first quarter of 2009. Delhi rentals were down 16.7% over the previous quarter, and Mumbai down by 10.5%, with many retailers relocating from malls to high street locations.

The first quarter of 2009 was one of the most discouraging quarters for Delhi's retail realty market. The sluggishness in the last two quarters of 2008 continued in first quarter and resulted in hefty decline in demand for retail mall space. Declining footfalls coupled with fledgling sales volumes resulted in further squeeze in retailers' margins which further pressurised existing occupiers to not only vacate less-profitable micro-markets, but also put off expansion plans for a few months.

Jones Lang LaSalle in its outlook for Delhi's realty market foresees that the revenue-sharing model will continue to be the most-preferred lease model, though the occupiers will stress upon pure revenue sharing. The supply stream will continue to put pressure on existing rentals and it is expected that the rentals will further decline by the middle or end of the year.

In Mumbai, retailers were seen negotiating firmly with developers on their existing deals, shutting unviable outlets and cancelling pre-commitments in under-construction malls. The pressure on retailers to cut costs trickled down to mall developers as occupiers have started looking at available options to cut their operational costs. With rising vacancy levels and strong future supply in the pipeline, retailers have more options to choose from and have more leverage in negotiating with the developers, says study.

On outlook for Mumbai, the study says that considering the diminishing demand, huge supply pipeline, rising vacany levels and asset pricing is expected to see further correction in short term. Retailers are not only negotiating on reduced rentals but also on higher rent-free periods. There are high possibilities of project completion delays and more instances of projects being shelved.

Overall vacany levels in prime malls of Bangalore rose to 1% in first quarter of 2009 from 0.5% in Q4 of 2008. This can be attributed to dampening demand for mall space. The city witnessed negative absorption in Q1, 2009, which pushed its vacancy levels from 0% in Q4, 2008 to 1.7% in Q1, 2009. The study says though these figures seem small and insignificant, they indicate an emerging trend in the Bangalore's retail market.

On outlook for Bangalore, Jones Lang LaSalle says the future supply of malls expected between 2009 and 2011 stands at 6.5 million sq-ft. Owing to huge future supply, overall rental values are expected to decline further during the next two to three quarters.

In Kolkata, developers remained cautious and have started re-valuating their development plans. Some of the proposed malls have been shelved, while the usage of few others has been changed from retail to retail-cum-office or retail-cum-hospitality type, says the study. Average rentals in the city continued to fall, registering a decline of 9.1% over the quarter. Malls in prime area witnessed a rental correction of 23.1% and the outlook for the city foresees more downward trend in rentals as demand remains sluggish and future supply struggles for pre-leasing.