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Rediff.com  » Business » Office property market yet to beat slump

Office property market yet to beat slump

November 25, 2009 10:15 IST

Office propertyThe office property market, which was hit hard in the aftermath of the global economic slowdown, will take at least a year to come out of the slump as demand for offices is still subdued, say fund managers, consultants and realty developers.

Because of oversupply and rising vacancy levels in cities such as Delhi, Mumbai, Bangalore, among others, rentals are expected to remain stagnant in the next six months or see a further fall of 10-15 per cent.

For instance, in the national capital region, the vacancy levels are expected to touch 46 per cent in the second quarter of 2010 from the current 41 per cent, as there is an absorption of 7.2 million sq ft till the fourth quarter of 2010 against the supply of 17 million sq ft, according to a report put out by property consultant DTZ (see table).

Office rents have fallen up to 50 per cent in cities such as Mumbai, Bangalore and NCR from their peak in 2007-08, as companies and financial institutions deferred leasing or buying office space because of poor demand for goods and services.

Office rents have fallen to Rs 200-250 a sq ft in Mumbai's main business hub of Nariman Point from their peak of Rs 500 a sq ft and to Rs 200-220 a sq ft in Bandra Kurla Complex, another business hub of Mumbai, from Rs 400-Rs 450, as leasing activity has slowed since the second quarter of FY09.

"Office market is still in shambles and it is primarily dependent on economic growth. Since companies in banking and financial services are not expanding into various geographies, there is no fresh demand.

"Existing tenants are renegotiating rents. I think there will be downward pressure on rents for some more time," said Sunil Rohokale, executive director of ASK Investment Holdings, which is on the verge of closing a Rs 500-crore (Rs 5-billion) realty fund.

Adds Rajeev K Shete, vice-president, real estate, at Shapoorji Pallonji & Co Ltd: "Office market has not revived to the extent it was expected, as the infotech sector has not bounced back. It will take at least a year for the office market to pick up,'' Shete says.

Infotech and ITES sectors consume over 50 per cent of office supply in the country, but since the global economic slowdown, IT/ITES companies have also scaled back their plans due to lower business from the US and European clients.

ELUSIVE RECOVERY
City Current 
vacancy
(%)
Projected 
vacancy
(%)
Supply estimate 
(in mn sq ft)
(till Q4 2010)
Absorption 
(in mn sq ft)
(till Q4 2010)
NCR 41 46 (Q2 '10) 17 7.2
Mumbai 29 30 (Q4 '09) 15.3 5.5
Bangalore 23 26 (Q1 '10) 9.3 8
Chennai 36 37 (Q4 '09) 10.5 4.1
Source: DTZ

"Whatever demand is coming in is because there has been no activity since the slowdown. I believe rents will continue to remain low for the next six to eight months and will be flat for another year," says Anshul Jain, chief executive of DTZ, an international property consultant.

Jain says markets such as Mumbai, NCR and Bangalore will revive faster than markets like Kolkata and Chennai, as the former have seen higher correction in prices.

Raghavendra Kamath in Mumbai
Source: