Lease rentals in small markets to plunge 38%

Written by Sajan C Kumar | Updated: Jul 3 2009, 02:35am hrs
Average lease rentals across micro-markets are expected to correct by about 38% in 2009 from the peak seen in the first six months of 2008 due to a weak demand scenario. Demand deteriorated due to the slowdown in global and domestic economy, with most corporates looking to cut costs and improve efficiencies. For instance, the IT/ITeS sectors are expected to increase utilisation rates of existing commercial space by increasing the number of shifts.

According to Crisil Research, post its 10-city report on real estate market, the micro-markets of Gurgaon (NCR), Central Mumbai, Andheri (Mumbai), Rajarhat (Kolkata) and Hinjewadi (Pune), catering primarily to the BFSI and ITeS sectors, saw a sharp increase in lease rentals between 2005 and the first half of 2008. However, these regions are expected to see the steepest decline in the range of 47-59% from the peak in first half of 2008 to the end of 2009 due to severe impact of global slowdown on the driving sectors.

The micro-markets of the central business district (CBD) of Bangalore, CBD of Hyderabad, the Electronic City (Bangalore) and Marathalli-Sarjapur (Bangalore), which either have limited supply or have relatively attractive lease rentals in the range of Rs 25-40 per sq ft per month, are expected to see the least amount of decline in the range of 17-23%.

Only a marginal decline is expected in lease rentals in 2010 over 2009 due to steady supply and subdued demand. Average lease rentals are expected to correct by about 7% due to huge supply overhang with corporates seeking to have a more cautious approach on expansion strategies.

The micro-markets of Gurgaon (NCR), Rajarhat (Kolkata), OMR (Chennai), Salt Lake (Kolkata) and peripheral business districts of Chennai, which have been faced with a huge supply overhang, are expected to witness a further correction in average lease rentals of 13-20% in 2010 over 2009.

The micro-markets of CBDs in the metro cities of NCR and Mumbai, which have limited supply, are expected to see stable average lease rentals in 2010 over 2009.

Outlining the boomtime and the subsequent fall of the commercial real estate market, the Crisil note says that the demand was on an upswing between 2005 and early 2008, driven by exceptionally high employee additions in the IT/ITeS sector.

The strong demand from domestic IT/ITeS companies and captives of large global players was a result of increased business, primarily from the US and European markets. A strong domestic economy with GDP growth rates in the region of 7-9%- together with aggressive corporate expansion plans led to healthy demand from sectors such as BFSI, media and entertainment, etc. Furthermore, limited supply of quality office space led to a sharp increase in lease rentals for commercial office space in most micro-markets, with an average increase of 108% between 2005 and early 2008.