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Office rentals to stabilise


Office rentals to stabilise

Last updated: September 19 2007
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  • Office rentals to stabilise

    After rising steadily for the past decade office rentals in most Indian cities show some signs of stabilising.

    With booming industry, especially the IT and BPO sectors, rentals have been on the rise in most Indian cities for the past decade. This is especially true of commercial office space. So much so that real estate in Mumbai is now more expensive than even Manhattan. But, perhaps, it is time for a correction.

    Real-estate consultants DTZ had predicted in a report a few months ago that oversupply would lead to correction in office rentals in some of the major Indian cities. In the second quarter of financial year 2006-2007, there has been only a marginal growth in rentals in most important markets. In the third and fourth quarters, when a lot of new supply will hit the markets, analysts expect rentals to slide further. In Q2, already, absorption of grade A office space has come down in a few cities.

    Although the rentals in the CBD [central business district] of Delhi continue to increase by 7-8 per cent due to lack of fresh supply, rentals in SBD [suburban business district] have risen by 5-7 per cent, compared to about 15 per cent growth in the last quarter. The rentals in Gurgaon have shown a modest appreciation of 5-6 per cent based on transaction value, pre-committed deals getting settled at lower rents. Rental values in Noida have risen marginally by 2-3 per cent.

    Absorption of grade A office space in Delhi has come down to 0.81 million square feet in this quarter, compared to 1.5 million sqft in the last. In tech city Bangalore, rentals in the CBD, off-CBD and suburban areas increased 9-15 per cent over the last quarter. With continued corporate interest in the city and limited fresh supply coming up, the rentals are expected to continue their rise. In Hyderabad, rental values in the SBD have increased five-eight per cent over the last quarter, while that in the CBD rose higher, at 10-15 per cent. But with rising capital values in micro-markets, yields have declined in the second quarter to around 9-10 per cent. In Chennai, on the other hand, rentals have increased 20 per cent in the SBD area. However, in the CBD, off-CBD and PBD (peripheral business district) rentals have remained almost stable, and are expected to further stabilize since IT industries are showing a decided preference for the SBD areas.

    Owing to high vacancies (approximately 20-23 per cent quarterly growth), rentals in SBD areas of Pune did not show any appreciation over the last quarter. Vacancies in CBD in Grade A Buildings, however, remained low at around 5-10 per cent. Fresh demand in Pune in 2007 is projected at 5.8 million sqft as against fresh supply of 9.7 million sq ft by end-2007. This oversupply is expected to take a toll on rentals. In Kolkata, rental values in the suburbs of Salt Lake and Rajarhat could remain stable in the short term. However, the increase in supply with relatively low absorption rates might result in oversupply.

    Mumbai is the only exception with rents expected to continue their upward movement throughout this year. They could, however, stabilise in the second half of the year or in early 2008 when several projects in the Bandra-Kurla Complex, Goregaon and Andheri areas are completed. In most cities, a huge amount of new supply is expected soon. In the NCR alone, a total of 41.2 million sqft has been formally approved for IT/ITES SEZs and another 17.7 million sqft notified for IT/ITES SEZs. In Bangalore, a further 20.2 million sqft has been notified as IT/ITES SEZs, in addition to 18.3 million sq ft formally approved for the same. In Hyderabad, another high growth city, the total planned grade A supply over the next five quarters is estimated to be in excess of 15 million sqft.

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