Decreasing GDP Will Increase Pressure on India's Commercial Real Estate Markets in 2012

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As India's economy shows signs of decreasing GDP growth rate, the Indian real estate industry faces its own share of concerns.

Ashutosh Limaye, Head of Research & Real Estate Intelligence for Jones Lang LaSalle India tells World Property Channel that real estate developers are reeling under high debt and FDI inflows have also slowed down. The recent increase in home loan interest rates is expected to dampen the sales even further. Amidst these macro-economic conditions, Indian real estate asset classes across the prime cities of India have seen mixed sentiments.

Limaye's India commercial real estate market recap of 2011 and 2012 forecasted highlights include:

2011 MARKET RECAP

Commercial Real Estate

Leasing activity in the office space realm remained healthy across the major cities in 2011. These cities also saw strong pre-leasing activity in buildings under construction. Occupiers mostly expanded their renewed leases or consolidated office spaces, with an emphasis on the secondary and suburban sub-markets of the prime cities instead of the central business districts because of ample availability of leasable spaces in these areas.

Special Economic Zone (SEZ) spaces saw stronger demand as compared to non-SEZ office spaces in 2011. Due to the prevailing uncertainty regarding the global economy, a marginal slowdown in leasing activity was seen in 3Q11. Office space rents and capital values also increased marginally in some sub-markets in 2011, since vacancy levels remained range-bound.

Retail Real Estate

The retail sector sentiments remained buoyant as retailers continued to expand into both high streets and malls. However, high streets witnessed stronger leasing activity across the prime cities in India. Major retailers continued to expand decisively - not only into the prime cities, but also smaller cities and towns. Malls are also witnessing healthy leasing activity, with pre-commitments in malls under construction remaining healthy. However the demand remained polarized to selected good malls.

Delhi NCR saw the strongest absorption rate, while Bangalore showed strength in high street leasing. Rents and capital values increased nominally in quite a few sub-markets of the prime cities. The prime retail sub-markets of Delhi and Mumbai saw a rise in capital values. The suburban sub markets of Bangalore and Mumbai also displayed a rise in rental values in the light of strong demand from retailers.

FORECAST FOR 2012

Commercial Real Estate

In 2012, several IT companies are looking to pre-lease office space to take advantage of the favorable commercial terms currently being proposed by commercial office space developers. Demand is expected to remain stable. However, the office space supply is expected to outweigh demand in most prime cities of India. Corporate expansions are likely to decrease due to the uncertainties in the global economic situation, which will have an impact on business budgets for next year.

Demand will derive from consolidation in and relocation to Special Economic Zones by large IT occupiers, who will seek to reduce costs and avail of the related tax incentives. Commercial office space rents and capital values are expected to increase across all cities, albeit marginally.

Commercial office space investor sentiments will remain cautious in the year ahead. The suburban sub-markets will continue to be preferred by tenants, especially in the case of the IT sector, due to the cost advantage and availability of substantial supply.

Retail Real Estate

In 2012, enquiries for quality retail space are likely to remain robust as major Indian retailers are seeking to implement their expansion plans in the prime cities as well as select Tier II and Tier III cities. FDI in multi brand real estate, when finally permitted, is expected to catalyze a lot of demand from international retailers. That said, international luxury brands will restrict their growth plans to Mumbai, Delhi and Bangalore.

Both large-format and vanilla retailers are expected to chase deals in under-construction projects that provide good branding and business potential. Transactions will be oriented towards the revenue-sharing model rather than straightforward leasing deals. High streets will continue to give strong competition to malls, and there will be significant high street in 2012. Demand polarization towards selected malls will continue, and this will keep overall vacancy levels high - several poorly-designed and unfavorably located malls will become operational at low occupancy levels in 2012.

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