Office space market in India’s top seven cities will see total supply of nearly 243 million sq ft by 2015 and this would be 17% higher than estimated demand, indicating a clear oversupply, Cushman & Wakefield and Global Real Estate Institute said in a report.

In Mumbai, supply at 78 million sq ft is expected to outstrip demand by 125% by 2015-end and is expected to experience some downward pricing trend going forward, the report said. Of the seven cities – National Capital Region, Mumbai, Bangalore, Chennai, Hyderabad, Pune and Kolkata – only Bangalore will see demand for office space exceeding supply.

Real estate firm Ashiana Housing has announced the launch of an integrated commercial retail complex “Marine Plaza” at Jamshedpur.

The property in Jamshedpur spread over 80,000 square feet, this ground and first floor complex will house 81 outlets and will offer premium brands.

Leasing and sale of office space in Mumbai and Delhi-NCR rose 69% and 18%, respectively, according to DTZ International Property Advisors.

Gurgaon, Noida & Delhi’s South
The DTZ report says 70% of transactions in Delhi-NCR have been recorded in Gurgaon, Noida and Delhi’s south business district.

In Mumbai, most commercial realty projects are coming up in peripheral areas. Noida has attracted large multinational corporations from IT and the banking, financial services and insurance (BFSI) sectors who want to set up back offices, says an office market report from BNP Paribas Real Estate.

Rental values will remain stable
Mumbai’s Bandra Kurla Complex adjoining Santacruz, Andheri, Powai, Vikhroli and Vile Parle has also attracted buyers, says the BNP report. Consultancies say capital and rental values will remain stable in the near term as new Indian commercial projects inundate the market in the next few quarters. “Rental and capital values will remain stable as the markets will witness huge supply in coming months,” said Priyankar Bhikshu, head of research for India at DTZ International Property Advisors. “Increased absorption and reduced vacancy are likely to take place in most Indian cities by the end of this year. However, a complete revival of the rental market is unlikely until mid-2011,” Bhikshu added.

Occupancy level of office spaces in Delhi and the National Capital Regionhas increased during April-June quarter on the back of renewed demand from corporates, who had put their expansion plans on hold during recession.

According to a report by Indian real estate consultant CB Richard Ellis (CBRE), the vacancy levels in the central business districts of Connaught Place fell to 3-4 per cent in April-June from the previous quarter, showing a better occupancy in office spaces.

The vacancy level in NCR property during first three months of this year stood at 13-14 per cent, it added.

The demand-starved Indian commercial office space market is slowly seeing positive signs, with several large and mid-sized US companies looking to outsource their work to India for the first time.

Major Indian cities like Bangalore, Mumbai and Gurgaon have seen substantial business deals in the last few months and this has led to several new India-based subsidies and back offices which may generate substantial employment opportunities as well.

Experts tracking Indian real estate developments say that out of the new jobs being created, 80% will be in the IT sector alone, with the corporate sector accounting for the rest. Also, with new vistas being thrown open by US President Obama’s recent healthcare push—which may trigger an outsourcing spree in health and knowledge sectors—both job and Indian office space markets may see major gains. Though the Indian office space market has not been able to bring prevalent vacancies under control, there is scope for growth for realty, according to experts.

In an interaction with the media, Collin Dyer, president and CEO, Jones Lang LaSalle Inc, says India presents a huge opportunity in terms of attracting jobs outsourced by US firms. India has graduated from being a back office hub for Western companies to housing knowledge process outsourcing centres and research and development wings of multi-national firms. “Asia, which includes robust nations like India, has shown signs of an economic revival, and these are more evident that those seen in economies like the European Union, because of strong banking and financial systems present here”.

According to Jonse Lang’s India Office Map 2010 findings, the demand for Indian office space is gradually improving with opportunistic tenants taking up space at lower rentals. The markets in Mumbai and Bangalore are leading the property cycle and are likely to recover the earliest among office-space markets. Also, the markets of NCR-Delhi, Chennai and Pune are expected to stabilise sooner that those of Hyderabad and Kolkata.

However, the Indian real estate sector, which has been showing signs of a revival, could come under severe pressure if Indian builders resort to a price hike to cash in on the emerging demand in the residential and commercial office space sectors, says Anuj Puri, chairman and India head, Jones Lang LaSalle Meghraj (JLLM). The builders in Delhi real estate and Mumbai real estate may have hiked the prices of residential apartments when sales were picking up, resulting in a slowdown in apartment sales.

Rentals of Indian commercial properties are expected to rise by 10 per cent after the Budget today proposed to bring all lease agreement of shopping complexes, malls and vacant lands under the ambit of service tax.

Besides, development of real estate complexes will also attract service tax, unless the entire consideration for the property is paid after the completion of construction.

“This step will add to the cost and it will be a huge burden on owners. Rentals of Indian commercial property will go up by 10 per cent and it will lead to inflationary pressure,” apex realty body Credai resident director GP Savlani told PTI.

Global realty consultant Jones Lang LaSalle Meghraj (JLLM ) country head Anuj Puri also said rentals of office and retail space are likely to increase by 10 per cent.

The Finance Minister said all commercial agreements or contracts between lessor and lessee for rent and lease would come under the service tax net with retrospective effect from June 2007. It will also apply to all agreements for undertaking construction of building or structures on any vacant land for commercial use.

Commercial real estate is hoping for a bounce back in 2010. For 2009 though, the year is ending with a 29% decline in space absorption compared with last year, according to the annual year-end report by real estate consultancy Cushman & Wakefield.

The total absorption of commercial space across major Indian cities stood at 26.3 million sq ft in 2009, compared with 37 million sq ft in 2008. This dip was primarily because of a conservative leasing approach by the IT/ITeS sector which accounts for majority of commercial office space taken up (60%) in the country.

But the outlook for the coming year is positive. “With the gradual recovery of the economy, the demand for office space is likely to increase by the second half of 2010,” said Sumit Rakshit, executive director, occupier services at Cushman & Wakefield. Corporates have been cautious about expansion in 2009, both because of the recession and also falling office space rentals. Across India, there has been about 4.6 million sq ft of pre-commitments for space due to be absorbed over the next two years. Of this, Bangalore alone accounts for 2.7 million sq ft. This indicates the revival of the IT/ITes segment, which is the mainstay in Bangalore. IT companies are starting to get new contracts which is pushing them to commit to new real estate costs.

Most micro-markets across the country witnessed 15-25% decline in rentals in 2009 over last year. The last quarter though has seen rentals stabilising, except in few locations such as Mumbai’s Lower Parel which saw the highest fall in rentals by 40% in the past year. Even Delhi saw a rental decline between 3-26% during the year. Because of an acute over supply situation, Gurgaon is expected to see a further fall in rentals. Though 2009 saw a drop in expected supply, major cities recorded 51.8 million sq ft of new office space supply. With corporates starting to relook at leasing large spaces, this new supply is expected to be absorbed in the coming year. “Clients are starting to talk positive,” he added. Cushman & Wakefield sees a revival of rentals across all markets.

“Corporates, too, are realising this. This is the right time to buy or lease property as rentals and capital values are still at their lowest,” he said. On the developer’s side, the positive news is that stalled commercial office projects are being restarted. “2009 was a tenants market. In the coming year, things will start to turn.”

MGM Mirage, the Las Vegas Strip’s largest casino owner, is entering India with non-gaming luxury hotels as the struggling gaming and hospitality giant turns to emerging markets like India and China to get over the recession blues.

“India is one of the fastest growing regions for both business and leisure travel. In the next few months, we would launch two of our brands — Bellagio and MGM Grand — in the country,” said Rishi Kapoor, vice president (development), India, at MGM Mirage Hospitality, the non-gaming hotel business of the second largest gaming in the world. “We are in advanced stage of talks with developers for the same,” he added.

Hyderabad office market continued to witness an increase in the overall leasing activity in the third quarter of 2009 as compared with the last two quarters, property consultant Jones Lang LaSalle Meghraj (JLLM) stated.

JLLM said that the central business district (CBD) comprising Begumpet, Somajiguda, and Raj Bhavan Road did not witness any tenant vacating spaces for the first time in the year during the third quarter. However, there were incidents of tenants vacating spaces in the secondary business district (SBD) including Banjara Hills, Jubilee Hills and Hitec City according to the Business Standard.

The overall net absorption witnessed a significant increase in the last three months. Most of this absorption is due to the completion of the buildings that were pre-leased in the previous quarters. The overall vacancy too increased compared with the second quarter of the current year due to the high vacancy in the newly completed buildings in suburbs.

UK-based serviced office provider Avanta, which blocked properties at the peak of the realty boom in India and started offering office space to clients during the downturn, is in the process of shutting down its Mumbai operations after incurring significant losses.

With the closure of the Mumbai operations, Avanta will be left with just one-fifth of its total one lakh sq ft office space in India.

“We are closing down our office in Bandra Kurla Complex (BKC) purely because it had become unviable. While our cost remained high as we had leased space at the top-end of the real estate boom in 2007, the rentals for workstations had fallen 60-70% in Mumbai,” said Avanta sales & marketing director Amit Bansal. Avanta is shutting down its 50,000-sq ft office at BKC in Mumbai after landlord Wadhwa Developers refused to bring down lease rates.

Mr Bansal insists that Avanta is not exiting India for now and will search for joint venture partners in India to provide services from now on as it will reduce its capital requirement. Avanta, which initially had a target of opening 10 business centres, has invested $10-12 million (approx. Rs 55 crore) in India so far and incurred a loss of Rs 20 crore in a little more than a year. The banks in England have now refused to release fund making it difficult for Avanta to absorb further losses, Mr Bansal said.