Investors Are Not Showing Interest Toward Commercial Properties

India’s emergence as a leading IT and ITES destination has witnessed a huge demand for high quality office space. Again, the dependence on one sector could also have a serious impact. Knight Frank’s Vakil said that there is already a slowdown as far as commercial property is concerned.

The scenario presents a few interesting constituents. Vakil said, “There is no demand for an outright purchase and a lot of people are going for the lease option. In a falling market, that is a more practical solution”. IT and ITES, according to him, account for 80 % of all commercial space in India. Further he added, “Besides, 70% of that industry is dollar denominated”. That’s exactly what is affecting Bangalore, India’s IT capital and to an extent Hyderabad as well.

Retailers themselves are going easy and a lot of large players have been pretty vocal about it. With higher rentals, the pressure on margins is far greater. Retailers form a significant part of the overall commercial scene and that proportion is merely getting larger. Kishore Biyani, managing director, Future Group said, “Ultimately, it is a question of affordability in retail”.

There are not too many ways to get past the zooming commercial rates. Biyani, when questioned about this, points out that his group signed up for properties much before the boom. He added, “To that extent, we were protected. Actually, we have been quite docile over the last six months”.

A significant development was actually when five plots were offered for sale in Bandra Kurla Complex (BKC), Western Mumbai’s business district. That was in March this year. Out of the five plots, two each were for residential and commercial while one was reserved for a clubhouse. One of the commercial plots was picked up by Jet Airways at Rs 3.44 lakh per square meter against a reserve price of Rs 3 lakh. Strangely enough, there was no other bidder in the fray.

Both the residential plots were won by Star Light, a joint venture between the Ajay Piramal Group and Suntech Realty. Here, the price paid was in excess of three times the reserve bid price. The story did not quite end there. The worrying part was that one commercial plot and one for the clubhouse remained unsold. These two plots together had an area of a little over 12,500 square metres with a reserve price of Rs 3 lakh per square meter.

A report put out by Enam Securities after the bidding process was completed makes a clear mention of what could possibly have gone wrong. “The lack of interest among developers for commercial space in BKC, while disheartening, is primarily attributable to the high reserve price.

Indiabulls was another player in the news when a significant amount of mill land in central Mumbai was put on the block. That was in 2005 when the company acquired an impressive 22 acres of land for what was then a massive Rs 720 crore.

Today, with so much of talk on a slowdown in real estate — in more pessimistic quarters, the whispers of a crash as well — it will be interesting to see how the company has viewed that investment. Mr. Gagan Banga, CEO, Indiabulls Financial Services, declared, “We have had an encouraging response. We are getting rental offers at around Rs 300 per square feet which is in line with what we had set out for ourselves”.

He added, “Suburban Bangalore is witnessing a slowdown. Here, there has been a 5-10% drop in rentals”. In the overall scenario, there could be some serious challenges.

2 Comments

  1. Posted July 24, 2008 at 4:13 am | Permalink

    Sensing a correction in the real estate sector, commercial banks have become selective in lending to new residential and commercial real estate projects. Besides increasing the lending rates, some banks have asked the promoters to increase their share in project funding in an attempt to mitigate the associated risks. Banks have already turned selective in taking up new funding proposals. The Reserve Bank of India has already declared the real estate space as a sensitive sector under its prudential norms. The sector thereby attracts higher risk weightage (banks have to set aside higher amount of capital for real estate exposure) and the lending is closely monitored. Keeping with the rising cost of funds and the need for additional capital for risky assets, the banks have increased the lending rates for real estate projects. The real estate companies are now paying prime lending rates (PLR) for new projects. The growth in loans to commercial real estate remained high, notwithstanding some moderation, RBI said in its macro-economy report for 2007-08.For more view- realtydigest.blogspot.com

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    Posted August 15, 2008 at 1:39 pm | Permalink

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