Thursday, August 27, 2009

Commercial real estate rentals seem to be bottoming out

Mumbai continues to be the second costliest city in Asia Pacific in terms of prime rental rates. With rent of about USD 800 per sq metre per
annum, Mumbai is ahead of the likes of Tokyo (USD 750 per sq metre p.a.) and Singapore (USD 625 per sq metre p.a.) as per the latest report of real estate
consultancy firm Jones Lang LaSalle. This is despite a 40% drop in rentals from its peak values. Delhi comes fourth in the ranking with USD 725 per sq metre per annum.

With GDP growth expected to bounce back in 2010, India and China would outperform the global markets with a 7-10% growth rate. The early signs of recovery are visible in Delhi and Mumbai markets. Having dropped by 24% in March’09 quarter over the preceding quarter, Mumbai’s decline in June’09 was well below 10%. Delhi followed with an 8% decline, which was half of what it was in the quarter before.

The average decline for India in June’09 was 8.3% as against 19% in the quarter prior to that. This showed that the rate of decline in rentals has also slowed down in the June’09 quarter as compared to March’09 quarter. It is believed that rents in these cities have bottomed out. Pune outperformed with just about a 4% decline.

This trend is likely to improve by 2011 when the absorption rate would overcome the supply. With 57 million sq feet of office space expected to be operational by the end of 2009, vacancy rate would continue to be high at 27% in 2010 till it comes down to a little above 20% in 2011.

Talking city wise position, Bangalore is expected to relatively outperform other cities with a low vacancy rate as it has received good response for pre leasing properties.

Companies form telecom and pharma sector seem to be fast taking advantage of the low rentals and expanding their geographic reach. For example recently Aircel and Telenor Unitech wireless signed more than 50000 sq feet of real estate space. As rents become more affordable, we could see more companies scaling up their expansion plans.

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