The demand for commercial real estate has dropped around 30 per cent in the past year, prompted by the economic slowdown, according to industry analysts. This, in turn, has resulted in at least a 15 per cent decline in rentals across many locations. In some areas, office rentals have come down by as much as 50 per cent.
In fact, credit to the commercial real estate (CRE) sector grew by just four per cent during June, down from 23.2 per cent in June 2011, suggesting a subdued activity in the office space or retail segment.
In the first quarter of 2012-13, industrial production contracted 0.1 per cent, while exports and imports contracted 1.7 per cent and 6.1 per cent, respectively. The slowdown in economic activity has affected the number of office space deals, as companies are cutting on real estate costs and moving from prime locations to suburbs in many cases. Some are even taking up smaller offices.
A report by brokerage firm Kim Eng Securities suggested that across major cities, demand for office units is at a five-year low and office rentals are down by up to 50 per cent in some locations. The focus of real estate firms has also shifted from commercial to residential.
For instance, Amit Sarin, chief executive officer of Anant Raj Industries, which is mainly focussed on commercial earlier, said: “In the past two years, we have changed our strategy and will focus on residential for some time.”
Even DLF Ltd, the country’s largest real estate developer, has said its focus is only on high-end residential projects and plots as it did not make sense to do commercial in times of an economic slowdown.
Ravi Ahuja, executive director at commercial real estate broker Cushman and Wakefield, told Business Standard the Maharashtra government’s recent amendments of 100 per cent premium for additional FSI (floor-space index) in commercial was a big deterrent for developers. “This will increase the cost for developers, discouraging builders to do commercial, which may impact supply further in the market,” Ahuja added.
According to a Cushman and Wakefield report, Mumbai’s prime office space rentals declined nearly 8.3 per cent in April-June, compared with last year and remained constant compared to the previous quarter.
In the national capital region (NCR), the pace of real estate developments continued to remain slow during the second quarter of the current year. The total supply of 725,000 sq ft of Grade A space during the quarter was the lowest in the last five quarters, registering a decline of nearly 64 per cent over the previous quarter and 45 per cent over the corresponding period last year, said Cushman and Wakefield data.
“Demand across NCR has declined by about 30-40 per cent,” said Anil Kumar Sharma, chairman and managing director of Amrapali Group, a real estate company.
Ahuja of Cushman added this year, they were expecting an absorption of 33-34 million sq ft of office space, nearly no growth from the 35 million sq ft in 2011. “The peak of 2007 saw office space take up 42-45 million sq ft,” he said.
In Bangalore, occupiers have begun to defer their space requirements, thus resulting in lower absorption levels, the data said.
Amrapali’s Sharma said on Sunday, instead of commercial, it was prudent for a developer to go for hybrid or mixed used development. However, Sarin added commercial would bounce back after one-two years.
The retail space story is worse. Due to a subdued demand for retail space, developers went slow on several under-construction projects, and led to a restrained supply in Mumbai, NCR and Bangalore. Delhi-NCR and Mumbai registered double-digit vacancy levels at approximately 13 per cent and 10 per cent, respectively, in the April-June quarter, according to a DTZ report.