Commercial real estate market, which has been witnessing a bull run over last couple of years, will soon face a bearish phase. Oversupply of office space in most of the grade A cities in last six to 12 months, may result in a fall in rental and capital values.

According to a report by global real estate consultancy firm DTZ, ctites like Delhi, Bangalore, Chennai, Pune, Kolkata, and Hyderabad, except Mumbai will have oversupply of 20% to 200% of estimated demand in 2007. Mumbai will continue to have supply shortage.

The city-level demand-supply analysis in conjunction with the economic fundamentals shows office space rentals are likely to hit a plateau in next six to 12 months. Correction in rental values will not be driven by lack of demand but due to oversupply. The leasehold office space markets are currently at an all time high — both in terms of quantum of space leased and rents. Lease rentals in NCR has 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 start of large number of projects at major locations. The increased pace of supply of quality commercial real estate is likely to outstrip demand in the short-to-medium term. It is expected that the oversupply position will reduce in long term as demand grows 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.

RBI tried to stem speculative interest and reduce inflationary pressures in the economy by curtailing availability of capital and increasing the interest rates.
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