In the past two years, companies have had to curb their expansion plans owing to rising real estate costs. Now, a report by international property consultancy DTZ predicts an oversupply in the commercial property segment in the next one year. The report says that Pune and Chennai will be the cities leading the list with an expected oversupply of 68% and 66% respectively.

The report predicts an oversupply in all major cities, except Mumbai, where demand will continue to exceed supply by 9%. Experts say, this may cause rentals in certain pockets to fall by up to 25%.

Experts in this field are of the opinion that in Pune, it will be quite choppy in some IT known areas like Hinjewadi or Baner, like the one in Bangalore in the Whitefield area. There will be a lot of supply that will suddenly come up in the next one-two years and there won't be enough demand off take to absorb this. This will result in prices becoming softer and properties taking a longer time to completely lease out.

According to the report, most of the anticipated supply will be in the IT/ ITES segment. The seemingly insatiable demand from the IT sector led developers to go on an overdrive and build more space than was required. More supply will hit the market when SEZs finally take off and this may put pressure on developers of non SEZ IT space.

But this oversupply situation may not be as drastic as it seems. Experts say only half of these projects will see the light of day and most of this supply will be built to suit. They expect the rest to be absorbed over the next few years.
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  • Oversupply pulls down commercial rentals

    Commercial real estate market, which has been witnessing an unprecedented bull run for the last couple of years, will soon face a bearish phase. The oversupply of office space in most of the grade A cities in the last six to 12 months may result in a fall in rentals and capital values. According to a report by real estate consultancy firm all the metros, except Mumbai will have oversupply of 20% to 200% of estimated demand in 2007.

    The city-level demand-supply analysis in conjunction with the macro- economic fundamentals indicate that office space rentals are likely to hit a plateau in the next six to 12 months. In the central business districts (CBDs), the oversupply situation will lead to a correction in office rental values. The lack of fresh supply in the CBD because of non-availability of land will not create oversupply scenario in these areas.

    The leasehold office space markets are currently at an all time high—both in terms of the quantum of space leased per annum and the prevailing rents. Lease rentals in NCR had gone up by over 200% in the last two years. The study finds that rising capital and rental values and easy availability of capital have led to the start of a large number of projects at major locations. The increased pace of supply of quality commercial real estate is likely to outstrip the demand in the short-to-medium term.

    However, it is expected that the oversupply position will reduce over the longer term as growth in demand continues and supply tapers off. So, stakeholders like occupiers, investors, developers and intermediaries will formulate their strategies accordingly. There are various factors that will define the degree and timing of this rental value correction. The threshold for this correction has been brought closer by the two recent interest rate hikes in the first three months of 2007. Degree of inflation and consequent measures taken by RBI in the money market will play an important role in the real estate sector. The government and RBI have sought to stem speculative interest in the sector and reduce inflationary pressures in the economy by curtailing availability of capital and increasing the interest rates. These measures will certainly impact new projects as developers/ builders seek new sources of capital and private equity or venture capital funds.
  • Commercial Rentals Rise Upto 20% Every 3 Months

    Limited supply of office space is leading to an increase in commercial rental rates by 10-20% on a quarterly basis in most Indian cities.

    While Delhi has registered an increase in rentals by 7-8% (in central business district) and 15-20% (in the secondary business district), in Bangalore it is to the tune of 10-20%.

    Chennai has seen a moderate increase in commercial rental rates by 8-15%, Hyderabad by 5-10%, Kolkata by 10% and Mumbai by 15%. Pune is the only exception, with rentals showing no appreciation owing to high vacancy levels in the city.

    According to real estate consultants DTZ, rentals continued to increase in the Delhi due to steady demand generated by expansion plans of companies. Rentals in CBD have increased by 7-8% on a quarterly basis and by 50-80% on a yearly basis. The quoted rentals in the SBD are in the range of Rs 170-225 per sq ft, per month and have witnessed a considerable increase of about 15-20% quarterly and 50-70% yearly.

    “However, in an exceptional case the quoted rentals have also touched Rs 325 per sq ft per month for a building in SBD region (Nehru Place). The rentals in Gurgaon prevailing at about Rs 100 per sq ft per month have increased by 20% quarterly and about 100% yearly in select grade A buildings due to shortfall in immediate supply,” says the consultancy in its city-wide snapshots. The rise in rentals in Bangalore, on the other hand, is not very steep compared to the last quarter. The average rentals for CBD and SBD are Rs 75-90 and Rs 42-45 per sq ft per month respectively, an increase in the range of 10-20% on a quarterly basis. In Chennai too, rentals have increased throughout the city with CBD at a high of Rs 70 per sq ft, showing a moderate increase of 8 -15% quarterly. As far as Hyderabad is concerned, rental values have increased in the range of 5-10% quarterly with the SBD being at a high of Rs 50 per sq ft per month.

    Source: FinancialExpress