DELHI: Despite odds, the Delhi NCR’s commercial realty market is still considered as one of the most favourable investment destinations. This owes a lot to the political heft that Delhi commands—being the national capital, the city houses the headquarters of major political parties, as well as all administrative offices. Naturally, this attracts corporates wanting to be in close proximity to the bureaucrats and other decision makers.
Apart from central and south Delhi, the commercial activity is mainly concentrated in prominent locations of Gurgaon and Noida. Within the retail space too, there has been more supply, as there has been a marked pick up in distressed properties earlier this year. This has kept the capital values under control.
The demand is now more for high-street locations, compared to organized retail spaces, where occupiers have greater ease of doing business and a wider catchment area to cover.
In terms of office stock, the NCR is the biggest market in the country with 110 million square feet of office stock, of which 88 million square feet is occupied, resulting in a vacancy level of 19.5%. While IT/ITeS and manufacturing sectors account for 42% and 22% of the total occupied office space, respectively, BFSI (banking, financial services and insurance) accounts for 15%.
The increased activity within the commercial space throughout the year has brought in more supply, in offices and retail, keeping prices under control. The prices will be under control for the next few quarters due to deteriorating levels of growth in the economy, high retail inflation, and rise in key policy rates
A report forecasts that nearly 50% of the expected supply of 45 million square feet will be added between 2013 and 2017. Hence, vacancy levels will peak during these years before they stabilize at around an estimated 18.8% by 2017. This coupled with huge availability of contiguous land parcels will keep rentals under check in the NCR market.
The comparative strength of a city’s office market is primarily dictated by factors like availability of talent pool, quality infrastructure, domestic and international connectivity, and favourable government policies among others.
In terms of office stock, the NCR—especially Gurgaon region’s Golf Course Extension Road, Gurgaon-Sohna Main Road, and the area along the Delhi-Jaipur highway—is the biggest market in the country.
With incremental demand and supply of 37 million square feet and 45 million square feet, respectively, over the next five years, the vacancy level is expected to recede marginally to 18.8% by 2017. A recent report says CBD (central business district) Gurgaon Zone-A, CBD Noida, and CBD Greater Noida would provide the best investor return in the NCR-11% per annum each-from 2013 to 2017.
Shishir Baijal, country head and MD of Knight Frank India, says: “The real estate investment in India has garnered superior returns in comparison to other asset classes over the previous five years. However, in most cases investment decisions in real estate are based on gut feeling and tips which result in poor returns. At Knight Frank, we consciously help you make intelligent investment decisions with our research and expertise. The purpose of this report is to provide a detailed analysis of India’s commercial market scenario.” The supply of commercial spaces has grown relatively faster than the demand in the last 10 months.
Due to an oversupply situation in certain key markets, the capital values of office spaces have bottomed out. Rents, on the other hand, have remained stable or flat. The sentiment of occupiers has been hit on account of deteriorating levels of growth in the economy, continuous fall in the rupee value, high retail inflation and subsequent rise in key policy rates.
But in the future, rents and the capital values will continue to hold on account of these factors. If the situation persists, there could be a drop in transactions in the commercial segment in the New Year and vacancy rates will increase further.
Outlook for commercial market
A RICS India Commercial Survey says that high retail inflation, high interest rates, and a continuous fall in the rupee value have been slowing the overall growth and have continuously hindered the investment sentiment in the market during the entire 2013. However, the recent decline in current account deficit (from 4.9% of GDP during April-June to 1.2% of GDP in July-September) and slight rise in industrial and agricultural output have given marginal relief.
To curb inflation, the RBI has been consistently raising the repo rate since September. Some nationalized and private banks like State Bank of India and HDFC Bank followed suit and raised their lending rates for retail borrowers, making the capital costlier. It is expected that the RBI, in its next monetary policy review, will revise the key policy rates to keep inflation under control.
The mega trend for the economy during 2013, however, was the currency fluctuations in the last six months. Between May and August 2013, the currency dropped sharply from Rs 53 to a dollar to Rs 68 per dollar—a net drop of 22%. This further raised the trade deficit-a measure of outflow of domestic currency (Indian rupee) to foreign markets—leading to the weakening of the country’s economy.
The recent policy announcements like the Real Estate Regulation Bill 2013 and the draft guidelines on SEBI (REITs) Regulations 2013 have the potential to change the fate of the sector.
If implemented, these will not just bring greater transparency in the sector but will also help boost investments in the sector. Their enactment as a law may take time. Thus, the overall economic climate, coupled with inflation and high interest rates, is keeping buyers at bay.