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.

India will face shortage of over 26 million houses by 2012, which would lead to spurt in Indian real estate and housing prices as demand-supply gap widens amid rising purchasing power of the middle class people, a consultancy firm has said.

Ernst and Young Indian report
“With India back on a high growth trajectory, demand for commercial and residential space is likely to witness an upward trend,” consultancy firm Ernst and Young said in a report.

Demand increasing sharply
Demand for residential property in India is rising sharply because of growing young working population, increasing urbanisation, declining household size resulting in more nuclear families with growing household income and improved availability of loans.

Co-chairman of FICCI Real Estate Committee Pranay Vakil said over $1.2 trillion investment was needed to meet the rising demand for Indian residential development.

Indian urban population in India to hit 600 Million
He said that the urban population in India would nearly double to 600 million in the next 15 years from nearly 350 million now, and this would put massive pressure on urban infrastructure, including roads, power and water supply.

India’s macro economics in good shape
The country’s macro-economic fundamentals were in great shape and it was poised to reap huge benefits of growth. “India needs to fix the institutions to attract more private investments, including foreign investments,” Hodcroft said. Comparing the investment climates in India and China, Hodcroft said: “While it is easy for investors to get into China, it is extremely difficult to get out. In contrast, it took time for foreign companies to enter India, but exiting is comparatively much easier.”

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.

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.

India’s capital New Delhi continued to witness a decline in retail rentals of 25 per cent and ranked 69th in rentals among the list of major cities across the world during the first quarter of 2009, according to global real estate consultancy CB Richard Ellis.

Prime retail rentals continued with their downward trajectory worldwide during the period which saw New York maintaining the top slot among cities with high rentals despite a 10 per cent annul decline. New Delhi ranks 69th globally with an average rental of $109 per sq ft each month.

“Demand for retail space has declined in most markets across the world as consumers cut back on spending and unemployment continues to rise in many countries. New Delhi in India saw a 25 per cent decline in a six month period,” CBRE said in its report ‘Global Retail Rents Market View Q1′.

The commercial property market in the Mumbai is expected to take a 20-40 % correction according to a recent Jones Lang LaSalle Meghraj report.

In their report, The Slope of the Decent, JLLM explain developers have constructed extensively across cities from 2005 to 2008. However, commercial rentals have started falling and are expected to drop further over the next two years.

The steepest fall has been predicted in Central Mumbai (Worli, Parel, Prabhadevi, Lower Parel, Dadar), Western suburbs (Malad, Goregaon) and Eastern suburbs (Ghatkopar, Vikhroli, Kanjurmarg, Powai). These areas are set to witness high vacancy levels and a sharp decline of rates of 30-40 per cent from its peak levels in 2008. It attributes the high price correction to the oversupply and appreciation that these areas have seen in the recent past.

The suburban areas of Thane and Navi Mumbai, which have seen huge projects being planned as land was available at lower rates than in Greater Mumbai, are expected to be hit next by the slump. Commercial rentals in these areas are expected to fall by 30-35 per cent.

The commercial business districts are set to be the least affected as they have a low supply. However, since rentals in these hubs have reached unaffordable levels (with a growth rate of 250 per cent), the report predicts a 20-25 per cent correction in such places. These include the CBDs of South Mumbai (Nariman Point, Cuffe Parade, Fort, Ballard Estate) and Bandra Kurla Complex.
The report also says the demand for commercial spaces from manufacturing sectors is expected to increase in future.

Retailers in India could soon benefit from the global slowdown as demand slows.

Large retail chains such as the Future group, Reliance Retail and Aditya Birla Retail are cutting costs and putting pressure on landlords to renegotiate rentals. Many are using the downturn as a good opportunity to rein in costs as they leased or purchased property in India at the peak of the market. This has had a major effect on their bottom line and it is being felt even more so now.

Reliance Retail, one of India’s largest companies is already renegotiating leases across India and hopes this would “bring down costs by about 20%-30%”.

Although suffering from the slowdown, India is will pause for breath rather than grind to a halt compared to the rest of the world with strong domestic demand. Growth in India will increase and move forward after the current crisis and this is when many expect Indian retail to flourish.

CB Richard Ellis, reports that the Indian retail market is now valued at $511 billion with “Organised retail” only accounting for less than 5% of the total retail market in India. KPMG have noted that over the next 4-5 years investment in Indian retail will be around $25-30 billion which illustrates further how far this market has to grow.