With supply exceeding demand, Indian office rentals will remain stable or even marginally fall in the seven major cities, according to leading real estate consultant CB Richard Ellis (CBRE).

“The supply dynamics will continue to put pressure on the rental value and, therefore, in the short-term, rentals in most micro-markets would remain stable or correct marginally,” CBRE said in the report. The report, which reviewed the prime rentals across key cities in the country in January–March period revealed that rental value in NCR’s Central Business District (CBD) appreciated by 4 per cent while it remained constant in Mumbai, Chennai, Hyderabad and Pune.

The CBD of Kolkata witnessed the highest accretion in rental value of 11 per cent, it said, adding due to limited leasing activity, the rentals in the Bangalore CBD further corrected by 4 per cent during the period. Stating that the demand for office space have picked up in most of the top cities on demand from IT majors, the report said future rental dynamics would depend on the velocity of absorption of existing demand. “The interesting dynamic to watch out for over the next few quarters would be the leasing activity that IT companies undertake in both STPIs and SEZs – in the background of uncertainty of the extension in the STPI parks,” it said.

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.

Excess supply has made office rentals in key commercial centres in Mumbai and Delhi come down by half over last year, and realty analysts fear that with business houses waiting for economic activity to pick up speed and a raft of new commercial facilities nearing completion, the rates could head further southwards.

Residential prices have firmed up after the lows they hit late last year, but the recent uptick in macro economic activity is yet to trickle down to sectors such as retail. Realty consultants said in Mumbai there are vacant commercial properties in Malad, Thane, LBS Marg and Andheri MIDC despite the fall in rentals. Rentals have crashed from Rs 400 per sq ft in December last year to around Rs 250 per sq ft now in Mumbai’s commercial hub, the Bandra Kurla Complex (BKC).

According to sources an FMCG company is asking for rentals at 35% lower rates than what it was a year ago for its 1.5 lakh sq ft office space in south Mumbai. Samsung recently took 90,000 square feet on rent on Gurgaon’s Golf Course Road for Rs 58 per sq feet against the asking price of Rs 80 a sq feet. In another deal, a tenant has leased out 50,000 sq ft at DLF Cybercity in Gurgaon for Rs 45-50 per sq ft while the quoted rent was Rs 60-65 per sq ft. “Since there is a downward pressure on many developers and building owners, one may witness even bigger deals at further lower rates,” said Kaustuv Roy, executive director, Cushman & Wakefield.

Mumbai, which became the second-most expensive office property market globally one-and-a-half years ago at the peak of a real estate boom in the country, has now slipped out of the top-five list, as per a survey of 170 cities by real estate consultant CB Richard Ellis. The Indian city remained at the sixth position among the world’s costliest office rental markets. The cooling realty prices have also brought down New Delhi office rentals from the number eight position globally in November 2007 to the 12th slot in the latest ranking.

“The latest ranking highlights the decrease in office rentals due to a reduction in demand. However, Mumbai continuing in the top 10 list and Delhi being at 12th place globally reflects the shortage of prime office supply in India,” said CB Richard Ellis South Asia, CMD Anshuman Magazine. Office rentals in Mumbai fell 31% since November 2007 from $189 per sq ft a year to $131 per sq ft now. Similarly, office rentals in New Delhi also fell 31% from $126.7 to $86.9 per sq ft a year.

Mumbai ranked fifth in CBRE’s last survey released in November 2008, while Delhi was placed 13th. CBRE conducts the surveys every six month. Tokyo (Inner Central) tops the latest ranking with a rental of $183 per sq ft. It over took London’s West End that led the pack in November 2007 with $329 per sq ft rental, just ahead of Mumbai then. London’s West End is placed second with rentals almost half of what they were at their peak

Serviced office rentals in India on short flexible leases are the way forward for Indian companies in the current climate according to recent coverage of Indian office rentals.

This point was emphasised by a recent report by Jones Lang LaSalle (JLL), which said the decline in property prices in India is expected to continue through the year with office rentals in India expected to fall by 15-20%, as the slowdown-hit realty sector is likely to see a recovery only in the second half of 2010.

Indian office rentals are expected to fall up in the next three quarters, with key cities like Delhi office rentals and Mumbai office rentals are likely to witness a decline . In today’s conditions companies want a more flexible approach when renting offices in India and are moving away from longer leases for fear of uncertainty. Flexibility is key with the ability to rent small spaces and add on rental office space as and when it is needed as opposed to long and cumbersome leases.

Long term office rentals in Chennai, Kolkata, Hyderabad and Pune are expected to decline between 30% and 40% from their peak during the next three quarters, while the same in Bangalore will fall 15-20% from its peak. On the current economic scenario, the report said the recent gains in the equity market propelled optimism in the economy and if it continues, a recovery is expected by early 2010. Although the effects of this upturn would start showing signs in the real estate sector, the gains would definitely come in second half of 2010, when fresh demand again builds up in the market and the latent demand suppressed on fears of a downslide comes back the report said.

In today’s conditions companies want a more flexible approach when renting offices in India and are moving away from longer leases due the economic uncertainty.

Indian office rentals are still in demand in Ahmedabad, the city has registered the lowest vacancy of 5-6 per cent in a recent study by Cushman and Wakefield, but Chennai suffers.

According to the report, vacancy levels had remained largely consistent to last quarter with most IT/ITeS destinations witnessing high vacancy levels. “The lowest vacancy was recorded in Ahmedabad at 5-6 per cent due to limited leasing activities and no new supply in the market. Also many companies moving into the area with the Nano plant coming on in Sanand.

Mumbai office rentals recorded a vacancy of approximately 11-12 per cent while vacancy levels in NCR and Delhi office rentals stayed at a manageable 8-10 per cent. Chennai’s peripheral location (Rajiv Gandhi Salai) recorded the highest office rentals vacancy of approximately 42 per cent while the city average was at approximately 18 per cent.

“The first quarter of the year can be termed as the weakest so far in terms of commercial office take up across major cities in India as compared to a similar period for the last 2/3 years. As evident, markets moved towards an over supply situation mostly in response to plummeting demand from the key sectors such as BFSI and IT/ITeS. Re- negotiations and migration to more cost effective locations has been the norm for the cautiously advancing corporate sector,” said Kaustuv Roy, executive director of Cushman and Wakefield.

Also, rentals across all markets saw a downward trend with a further softening bias in Q1 2009. In terms of new office space supply, while Bangalore office rentals witnessed highest supply of approximately 2.81 million sq ft, Hyderabad and Ahmedabad saw no addition to the current stock.

In NCR, Gurgaon office rentals saw a correction of approximately 19 per cent in first quarter of 2009 due to influx of supply but restricted demand. CBD – Prime in NCR witnessed a correction of approximately 17 per cent largely due to occupants opting for more cost effective options. Markets like Pune, Kolkata and Hyderabad where growth was essentially driven by IT/ITeS and BFSI back office operations, saw a slump in uptake of space leading to rental corrections ranging from 5 –20 per cent. Bangalore market remained the most dynamic through Q1 2009 with restricted corrections in the range of 3- 7 per cent largely due to a decline in demand for SEZ properties.

Global companies may be closing down but demand for serviced office rentals in India is growing as the credit crunch takes hold.

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Flexibility is the key in this downturn and businesses are opening satellite offices on flexible terms, with no up-front capital expenditure. Through the serviced office route companies have the flexibility to change which is helping them survive the downturn better than those with large purchased offices.

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