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After witnessing astronomically high premiums, office rents in central business districts (CBDs) of all major Tier I cities are falling and there are some offices available on rent for as low as Rs20 per sq ft, said property dealers.
“The total market revival across the key real estate market, marked by increasing absorption and reducing vacancy is likely to be achieved by the second quarter of FY10 for most Indian cities,” said Anshul Jain, chief executive, DTZ International Property.
The supply in the office space arena is increasing and the demand is suppressed. The slowdown has also contributed to the availability of office space as companies started retrenching staff and reorganising their resources, resulting in additional office space being available with such firms.
According to a report by DTZ, the CBD in Delhi, including the National Capital Region (NCR), has around 52 million sq ft (msf) of office space, out of which 41% is vacant. Similarly, in Mumbai’s CBD out of the total 48 msf, 29% is vacant, while in Bengaluru 23% out of 76 msf office space remains vacant. Kolkata has 13 msf office space, out of which 16% is vacant. Pune and Chennai, with an office space of 36 msf and 38 msf respectively, have the percentage of vacant space at 34% and 36% respectively, the report said.
Even the rates for many Information Technology (IT) parks have fallen drastically. “Old Mahabalipuram Road (OMR), the famous IT corridor in Chennai, quotes a lease rent of Rs20 per sq ft. The rates can’t go lower than this and also won’t increase in the next seven months,” said Sorabh K Jain, principal, Sun Apollo Real Estate Advisors Pvt Ltd.
According to industry sources, the IT Parks at OMR are leasing the space for ceremonies like marriages to earn some money till they can rent it to some tenant. The irony is, during the boom time in 2007, the same location used to attract rents as high as Rs7,500 per sq ft.
In Mumbai too, office rents have fallen and many institutions located at main business areas like Nariman Point are looking at shifting to other places where the rent is lower. Many of these institutions are planning to move to suburban areas instead of paying rents as high as Rs300 per sq ft for Nariman Point properties. Recently, SBI Life Insurance Ltd took about 50% office space in Andheri-based office complex Rustomjee Natraj for Rs80 per sq ft. Earlier, the same office complex developed by the Keystone group used to attract office rent of around Rs140 per sq ft.
Despite falling office rentals, some overseas property investors are planning to invest in these CBDs. Property investment and development group Hongkong Land Ltd, a $12 million company is planning to invest $500,000 in Tier I cities.
— Pallabika Ganguly
Sales of 2&3BHK homes are picking up in Mumbai, Delhi, Pune, Bengaluru, Chennai and Hyderabad
Real-estate developers and consultants have been claiming that one bedroom-hall-kitchen (1BHK) homes were the best-selling product during the July-September 2009 quarter. But this trend does not seem to be playing out in Tier I cities. According to data from real-estate research firm Liases Foras, sales of two- and three-BHK homes are on the rise in Mumbai, Delhi, Pune, Bengaluru, Chennai and Hyderabad.
“In these six cities, 2 & 3BHK homes have reported more sales than 1BHK homes; 1BHK is no longer driving sales for developers,” said Pankaj Kapoor, founder and chief executive officer, Liases Foras.
During the second quarter to September 2009, Mumbai Metropolitan Region (MMR) reported sales of 1,33,416 2BHK units, 5,855 3BHK units and 45,625 1BHK units. In the National Capital Region (NCR), 2BHK sales were 29,838 units, 3BHK sales were 4,932 units and 1BHK sales were at just 1,446 units. Similarly, in Pune, 2BHK sales were 10,843 units while 3BHK and 1BHK sales were 63,008 and 20,108 units, respectively.
The trend is slightly different in Hyderabad where 1&2BHKs are driving the market. The city reported sales of 27,055 2BHK units, 24,966 1BHK units and 1,879 3BHK units. In Chennai and Bengaluru, 3BHK was the top-selling category. Chennai reported sales of 79,756 3BHK units while Bengaluru reported sales of 24,201 3BHK units. In the 2BHK category, Bengaluru reported sales of 19,705 units and Chennai reported sales of 59,047 units.
Developers will be keenly tracking the ongoing uptrend in the 2&3BHK segments. “This kind of data will help us to know which segment is reporting more sales, so we can design products and increase our supply accordingly,” said Niranjan Hiranandani, chairman of Hiranandani Constructions.
At the end of the September 2009 quarter, Chennai reported an inventory of 550,821 3BHK units and 321,984 2BHK units. Bengaluru had an inventory of 35,922 3BHK units and 212,887 2BHK units. NCR had an inventory of 3,31,023 3BHK units and 2,03,519 2BHK units. Hyderabad had an inventory of 2,88,771 3BHK units and 3,69,369 2BHK units. Pune had an inventory of 25,442 3BHK units and 3,65,017 2BHK units. MMR had an inventory of 3,04,344 3BHK units and 61.8196 2BHK units.
The improving market sentiment has reportedly prompted a few developers to increase prices by 5%-10%. However, they seemed to have learned a fundamental lesson during the economic slowdown of the past 18 months: that a sharp increase in prices is counter-productive.
— Pallabika Ganguly [email protected]
Pranay Vakil, chairman, Knight Frank India, highlights 10 home truths that the real-estate industry realised during the downturn that lasted around 18 months
1. Liquidity is vital: Developers realised this when sales volumes declined drastically due to the liquidity crunch. Developers who were selling, say, 40 flats a month could sell only around a tenth of that volume during the past 18 months. Liquidity was taken for granted by developers during the bull run. And when they could not repay their loans, they tried to sell off their land banks to raise cash.
2. Focus on the customer: The slowdown gave customers ample choice. Consequently, developers started looking seriously at the requirements of the buyer: What does he want? And what is the price he is willing to pay?
3. Investors are ‘fair-weather friends’: An investor is ‘with you’ in good times; when property prices go up, volumes go up. But during a downturn, when you need him the most, he becomes your ‘competitor’. Many developers were impacted by falling volumes because investors were selling their inventories at lower prices.
4. Sell ‘ready’ products during a slowdown: Developers who were the least affected by the slowdown were those who had ready products to offer. If your project was under construction or there was just a hole in the ground, it was difficult to find buyers. So, developers realised that they had to first complete the project before trying to sell it. Also, there were no takers for information technology parks during the slowdown.
5. Contracts can be broken: Developers witnessed customers back-tracking on legal contracts, especially in the commercial segment. Even big companies which had signed legal contracts and completed the registration procedure wanted to renegotiate or exit deals before the lock-in period ended. This had a cascading effect because many developers had raised money against the expected cash flows. As their loan burden increased, confidence in the industry was shaken.
6. Spiking prices is counter-productive: A few developers offered properties for as high as Rs1 lakh per sq ft. They discovered that a steep or sudden increase in prices can make customers postpone their buying until there is a correction. On the other hand, healthy growth can be sustained by a gradual increase in prices.
7. High-value transactions hyped by the media are not the ‘real’ market: When the media hypes a few high-value transactions, it creates an atmosphere wherein customers begin to feel that prices are too high. For instance, a retail property that is sold for Rs2 lakh per sq ft is an exceptional transaction and does not reflect the broader market. If such deals are hyped, it creates an artificial market and drives away prospective investors.
8. Innovate sales strategy: Developers tried to find innovative ways of driving sales as volumes dropped. A Bangalore-based developer created an escrow account to reassure customers that funds would not be diverted to other projects. Another developer promised to buy back the properties if prices declined over the next three years. Why didn’t the developers come up with this solution earlier? And why weren’t customers buying? Customers stopped buying because of two reasons. First, they expected prices to fall further; and second, they weren’t sure whether developers would complete ongoing projects.
9. Over-dependence on the information technology industry in the commercial sector can be suicidal: IT office space and malls comprise 80% of the commercial market and over-dependence on this customer segment will dry up volumes because the IT industry is one of the worst affected during a slowdown.
10. Do not try to penetrate a market where you lack expertise: Many developers tried to expand into tier-II and tier-III cities but failed to find buyers because they could not match the market knowledge and experience of the local developers.
– Pallabika Ganguly, [email protected]