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Supply glut keeps realty rates low

Ankita Sarkar in New Delhi | May 05, 2004 09:19 IST

Commercial real estate prices have fallen in the last six months and are likely to soften further, according to real estate consultancy Cushman & Wakefield.

This comes at a time when corporates have reported improved earnings and several companies, specially in the information and information technology enabled services sectors, are taking up large volumes of office space.

A city-wise analysis shows that in cities like Delhi, Mumbai and Bangalore there has been a decline of about 3 to 14 per cent in the rental and capital values of central business district and suburban areas.

In Delhi, the rental values of CBD prime areas have plunged 4 per cent in last six months, while the prime south Delhi rentals have dipped a whopping  14 per cent.

In the IT-hub Bangalore, rentals of CBD have dipped 7 per cent in last one year and suburbans have seen an erosion of 13 per cent in values over last year. Mumbai reflected a similar declining trend with greater geographical and industry wise segmentation.

But, what is most surprising in the fact that Hyderabad, where real estate industry continues to be driven by IT and ITES services, has seen a zero per cent change in rentals and capital values over last six months.

Despite more IT, biotechnology and pharma companies like Wipro and Sigma Aldrich taking up huge spaces in the city, the rentals are likely to remain stagnant and may even weaken in the future.

"The stagnancy in the rentals is primarily because of the excess office space supply in suburbs of the cities. Also, there is a lack of demand in the CBDs as most of these cost conscious IT companies prefer satellite regions and do not take up space in CBDs," Sanjay Verma, joint managing director of Cushman and Wakefield, said.

With the second stage of development in Gurgaon, there is more supply in the Delhi market. So is the case with Bangalore's peripheral and suburban  regions where new areas are coming under development.

Mumbai's lesser known regions like Goregaon, Vikhroli and western regions are attracting IT  companies. "These fresh regions are resulting a equilibrium in the markets checking a rise in prices," Verma added.

Political developments can also have strong implications on the real estate prices. "The issue of outsourcing and the decision of US legislators are key to the demand trend in India. Demand might pick up over the next few months with positive indications from the US law makers," Verma said.

There has also been a dip of 1 to 4 per cent in the capitals values of the CBDs and peripheral areas.

Verma attributes this sharp decline to the fall in income yield from real estate developments. The yield has considerable decreased from 11 per cent to about 9.5 per cent, which is making investments unattractive adversely affecting the capital values, Verma said.


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