Oversupply, Weak Demand Hit Commercial Realty Biz
Prices of commercial property, which includes office space as well as shops in malls and shopping complexes, have fallen 30% from their peak values in 2008 because of a glut in supply and weak demand over the past few years. A fifth of commercial space is vacant in India because a slowdown in the economy has reduced the frequency with which new businesses come up and existing ones scale up. Addition of new space has made the situation worse, say advisors.
According to property consultancy JLL, commercial property prices in Mumbai city have dropped 34.7% from the peak of 2008, while those in the suburbs are down 30.7%. The situation in Delhi is worse, with prices down 38.7%. In Gurgaon’s off-prime areas, commercial space is available at rates 39.3% cheaper than in 2008, while in Noida, the prices are down 19.2%. Among other places, prices are down 7.3% in Chennai and 8.3% in Pune.
The only market that is in the positive territory, though only marginally, compared with the 2008 level is Bangalore, where prices are up 0.2%. Prices have fallen the most for mall space: the average price of shops in malls has more than halved between 2007 and 2013. “Prices of commercial property have fallen more than even residential property,” said Deepak Parekh, chairman of India’s largest mortgage lender HDFC.
Prices in micromarkets within cities differ. According to property research firm Liases Foras, prices of good quality commercial space in the Lower Parel area in central Mumbai, which were hovering around .` 30,700 per sq ft in 2008, are now down to around .` 17,000, a 45% drop. At the prime Bandra-Kurla Complex in the city, prices have dropped 24% from around .` 38,000 per sq ft in 2008 to .` 28,800 today. In the NCR, Noida’s sector 62 area saw prices fall 29% from .` 8,500 per sq ft to .` 6,000 today.
“Our pitch to corporates today is to go and buy an office as prices are still low,” said Vivek Dahiya, chief executive of GenReal Property Advisers. “If they can’t buy, they should lock in long-ter m leases as both prices and rentals will only go up from here.” Start-ups, small businesses and corporates are using this opportunity to buy space. A startup firm in Mumbai recently purchased 3,000 sq ft of space in the Andheri area for .` 11,000 per sq ft. The same location in 2008 was selling for .` 14,500. “Prices of such properties are very efficient today. Many entrepreneurs are considering buying property rather than leasing it,” said Pankaj Kapoor, MD of Liases Foras.
Until the Lehman crash in 2008, which triggered the global economic crisis, office rentals and capital values were posting steady increases and several developers were executing commercial projects across the country. Post-crash, however, prices dropped considerably and the problem was compounded over the next few years as the underconstruction supply came on board, putting further pressure on pricing.