Review of Commercial Property of 2011

By Accommodation Times (www.accommodationtimes.com)

India’s economy expanded by around 7.7% in the quarter ending June 2011, registering its slowest pace in the past six quarters. This was primarily on account of the continuing high interest rate regime and weak global economic conditions. IMF has reduced India’s economic growth prospects from the earlier proposed 8.2% to about 7.8% in 2011, amidst volatile investment activity and weak economic sentiment.
A key challenge for the government in the present scenario has been to control inflation which stood at 9.7% in August, as compared to 9.2% in July 2011. The regular rate hikes by RBI, in a bid to rein in inflation and consumption, have exerted enormous pressure on the cost of funds for banks, besides inflating input costs for real estate projects. The central bank is expected to continue with this monetary policy in the near future, which will continue to force banks towards raising lending rates. This has already impacted real estate demand, especially in the residential sector as also project construction in quite a few micro-markets.

Demand
The third quarter of 2011 witnessed absorption of more than 5 million sq ft of office space across the leading cities in the country, compared to absorption of almost 8 million sq ft in the previous quarter. The National Captial Region, Mumbai, Bengaluru and Chennai were the leading cities; accounting for almost 80% of the entire space getting absorbed in the country.

Supply
The third quarter of 2011 witnessed the addition of more than 5 million sq ft of new supply cross the leading cities of the country. A decline of almost 50% was witnessed in new supply addition when compared to the previous quarter. This can largely be attributed to the slowing pace of construction and projects getting stalled due to the prohibitive level of funding cost.
Another factor for slowdown of construction activity has been the relative sluggish off-take of existing stock. The new supply addition was largely concentrated in NCR, Bengaluru and Pune comprising more than 75% of the entire supply addition in the third quarter. It is expected that supply pressure would be maintained across most of the key IT / ITeS markets across the country, thereby leading to stagnancy in rental values.

Mumbai
The Central Business District (CBD) of Nariman Point witnessed limited transaction activity. No fresh supply was added to the existing stock and absorption was recorded at 15,000 sq ft. Vacancy has been estimated at 5-6%; rental values remained stable during the quarter.
Limited transaction activity was witnessed in the Extended Business District (EBD) of Lower Parel in the last quarter. No new supply was released whilst absorption was recorded at around 0.23 million sq ft. Low demand levels and abundant availability of office space in this micro market led to an increase in vacancy levels and was in the range of 41 – 42%. With an additional expected supply of 1 million sq ft lined up for completion in the last quarter of 2011, vacancy levels are slated to increase further in the coming months, thus putting additional downward pressure on rental and capital values. The micro markets of Worli and Prabhadevi
remained largely inactive due to limited availability of Grade A office space. No fresh supply was added to the existing stock; absorption was recorded at around 10,000 sq ft and vacancy was in the range of 17 – 18%. The Alternate Business District (ABD) of Bandra Kurla Complex (BKC) continued to remain the preferred location for corporate occupiers looking for quality office space to expand. Few midsized transaction closures were witnessed during the last quarter and absorption was recorded at almost 0.11 million sq ft. Rental values remained stable and vacancy was estimated in the range of 11-12%. However with the enormous amount of supply expected to release into this micro-market over the next 3-4 quarters, some pricing pressure could develop in the short to medium term. Limited leasing activity was witnessed in the Secondary Business District (SBD) of Andheri, Ville Parle and Jogeshwari. No fresh Grade A supply was released into this micro market; absorption was recorded at around 35,000 sq ft and vacancy rate remained high at 22-23%. This micro market is witnessing competition from Lower Parel also, with corporates evaluating options in both the micro markets, leading to more pressure on values and supply.
Almost 30,000 sq ft of IT space was transacted in the Peripheral Business District (PBD) of Powai and Vikhroli during this review period. Navi Mumbai and Thane witnessed absorption of around 0.15 million sq ft of IT space during this quarter. Rentals in this micro market continued to remain stable. Few large sized transactions are expected to be finalised in the coming few months. Additionally, approximately 25,000 sq ft of IT space was absorbed in the micro markets of Malad and Goregaon.

NCR
The Central Business District (CBD) of Connaught Place continued to witness demand for Grade A office space, however lack of availability of quality office space is making most of the prospective tenants delay their expansion plans. Around 10,000 sq ft of fresh supply was introduced (a 5 star hotel converted part of its annexe into office space primarily focusing on shortterm usage) into this micro market. Total absorption of Grade A office space was recorded at approximately 31,000 sq ft and vacancy was in the range of 2-3%.
Rental values increased marginally by 2-3% during this quarter. The Secondary Business District (SBD) of Nehru Place witnessed closure of few small sized transactions
with absorption recorded at just 9,300 sq ft. No new supply was added to the existing stock and vacancy dropped to 5 – 6%. Rental values increased marginally by 2-3%, q-o-q.
Saket District Centre did not witness any significant transaction activity. Due to strata ownership of most of the developments, this micro market lacks the availability of contiguous large office spaces, which poses a deterrent for most corporate occupiers. This
micro market witnessed few small size transaction closures with absorption recorded at only around 17,500 sq ft. However, on account of improved market sentiments, rentals witnessed an increment of 7 – 8% during this quarter; vacancy level hovered around 15 Commercial leasing activity in Jasola District Centre remained low during the third quarter. Approximately 17,000 sq ft of second generation space was added to the existing stock, thus increasing the vacancy levels to approximately 27 – 28%, from 20 – 22% registered in Q2 2011.

Bangalore
The Central Business District (CBD) of MG Road, Richmond Road, Residency Road and Lavelle Road witnessed addition of almost 141,000 sq ft of new supply in the third quarter. Limited supply and augmented demand for quality office space led to a rental increment of 5-6%, q-o-q; vacancy level was in the range of 1-2% during the review period.
The Extended Business District (EBD) of Indira Nagar, Koramangala, Old Madras Road and CV Raman Nagar witnessed addition of around 0.15 million sq ft of office supply. Rental growth in this micromarket has been a result of limited availability of quality office space and increase in demand from existing occupiers. Vacancy levels remained at a low of 3% during the last quarter.
During this year, no fresh Grade A office space is likely to be released in the South Bangalore micro market of Bannerghatta Road, JP Nagar, Jayanagar and Mysore Road. Rental values did not witness any increment, q-o-q basis. Almost 66,000 sq ft of office space was absorbed during this quarter, mainly in Grade B developments.

Chennai
Transaction activity in the Central Business District (CBD) of Anna Salai, T Nagar, RK Salai, Alwarpet, and Nungambakkam was low during the present quarter. Absorption of only around 57,500 sq ft was recorded and the rentals values remained stable. No fresh supply was introduced into the market, however there are a few projects in the pipeline expected to be completed in next
few months. The overall vacancy levels in this micro market continue to remain at about 2 – 3%. The Off / Non CBD micro market of MRC Nagar, Guindy and Taramani witnessed increase in demand for office space with absorption recorded at 0.17 million sq ft and 0.65 million sq ft in both IT and SEZ segments. Due to increase in leasing activity in the SEZ space, rental values witnessed an increment of 3- 4%. On the supply side, around 0.5 million sq ft of SEZ space was released into this micro market; vacancy level was around 4 – 5%. The Suburban Business District (SBD) including areas such as Velachery, Perungudi, Mount Poonamallee Road witnessed limited transaction activity with close to 0.13 million sq ft of office space being absorbed during the quarter. No new supply has been released and rentals remained stable.

Hyderabad
Hyderabad witnessed heightened levels of office leasing activity during the third quarter. Primarily driven by the IT / ITeS segment, the IT Corridor witnessed considerable increase in demand for office space as compared to the other micro markets.
The Central Business District (CBD) comprising of Somajiguda, Begumpet and parts of Banjara Hills (Road No. 1, 2, 10, 12) witnessed a marginal increase in demand for smaller format office spaces with absorption estimated at about 62,000 sq ft. Due to relocation of a large number of companies to the IT Corridor, around 74,000 sq ft of second generation space became available in this micro market, resulting in increase in vacancy levels between 13 – 14% in Q3
2011 from 10 -11% observed in the preceding quarter. However due to sustained interest, rental values remained at the same level as in the last quarter.
Office leasing activity in the Secondary Business District (SBD) of Ameerpet, Himayatnagar,
Sarojini Devi Road, parts of Banjara Hills and Jubilee Hills remained dormant during the present quarter; rental values remained stable. The IT Corridor comprising areas of Madhapur, HITEC City, Gachibowli and Kondapur witnessed encouraging transaction velocity as compared to the other micro markets during this review period. Due to increase in demand for office space by IT / ITeS companies, absorption was recorded at around 0.15 million sq ft; however no fresh stock was added to the micro-market. Rental values in SEZ developments witnessed an increase of 3 – 4% over the preceding quarter.
The Extended IT Corridor comprising areas of Nanakramguda, Raidurg and Manikonda
Witnessed a marginal increase in demand for SEZ space primarily driven by expansion
requirements of IT / ITeS companies, consequently increasing the rental values by almost 5 – 6%. On the supply front, a new development added approximately 0.59 million sq ft of IT space in Nanakramguda. The new supply addition led to a steep increment in vacancy level from 15-16% in Q2 2011 to more than 28% in Q3 2011.

Pune
Around 0.1 million sq ft of IT space was released in the Central Business District (CBD) of MG Road, Koregaon Park, Bund Garden, Kalyani Nagar, Dhole Patil, FC Road and JM Road and absorption stood at around 57,000 sq ft during this review period.
Limited availability of commercial office space and increased demand led to a rental increment of 4 – 5%, q-o-q basis. The Off CBD micro market of Viman Nagar, Magarpatta, Aundh, Baner, Shanker Seth Road, S.B Road and Nagar Road remains the preferred destination for most companies due to its proximity to the central areas. Transaction velocity remained high with around 0.1 million sq ft absorption recorded in Non IT space while about 88,000 sq ft in IT / IT SEZ segment during this quarter. Around 0.3 million sq ft of 7 – 8%; rental values remained stable.

Kolkata
Office leasing activity in the Central Business District (CBD) of Chowringhee, B.B.D.Bag, Park Street and Camac Street remained low with absorption estimated at around 010,000 sq ft. No fresh supply came into the market and vacancy was in the range of.





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