News & Views on Indian Real Estate

Monday, September 29, 2008

Fallout from US financial crisis hitting rental sector in India

As the US moves towards securing its bailout plan for Wall Street financial institutions the fall out is hitting hard in India.

In Mumbai commercial rentals are beginning to crack and deals for office space have slowed over 30% in the last three months, according to analysts.

Leading property brokers and consultants say things will be worse with prospective tenants asking for a 50% cut in rates and they put the blame firmly on the US financial crisis.

This is because companies, mainly IT and BPO service providers and finance firms, with significant US businesses are cutting back expansion plans and, therefore, the need for prime commercial real estate.

Meanwhile, tighter liquidity in the Asian markets is encouraging companies to defer their property bookings.

'Companies are not signing at the rates asked by developers like they did earlier and transactions are not taking place. We have seen prices correcting sharply in the last month,' said Suketu Mody, president and chief operating officer of Coldwell Banker Goodwill Consultants, a US-based consultancy firm that advises many Indian companies on their property deals.

Battery Ventures, a venture capital firm that has been looking for 3,000 sq ft of space in central Mumbai for the last couple of months, is still waiting in the hope of a further fall in rentals.

'We have seen a 5% correction in rentals in the last three months and expect a 10 to 15% further correction in the coming months. We will certainly wait and see,' said Gautam Patel, partner, Battery Ventures.

Oversupply could also start to have an effect. By early next year, Mumbai and its suburbs will add 15.4 million sq ft of office space, more than the commercial space now available at the Bandra-Kurla Complex or seven times the office space at Nariman Point.

Rentals are expected to fall another 15 to 20% in the next six to nine months. 'Demand will slow from IT, BPO and finance companies that have enough choice in cities like Bangalore and Hyderabad. Rentals will drop to levels from two years ago,'' said Pranay Vakil, chairman of Knight Frank.

However, developers believe demand will come from newer sectors of the economy and at different levels of the property market. 'Though some companies have reduced space requirement I am not worried even if prices correct 10 to 15% because it is good for both buyers and sellers,' said Hemant Shah, chairman of Akruti City, which builds offices and homes in Mumbai.

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