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Abundance of office space could spoil the ‘rate party’

Experts caution about an oversupply situation that could jeopardise interests of investors and developers, reports Lalatendu Mishra.

india Updated: Nov 18, 2007 21:16 IST
Lalatendu Mishra
Lalatendu Mishra
Hindustan Times

Though the demand for high quality office space is likely to remain strong in the near future, an oversupply situation could jeopardise interests of investors and developers. This might be the time to exercise prudence, caution experts.

A study conducted by global real estate advisor DTZ across key cities in India in May this year has revealed that A-grade leasehold office space sector is starting to witness an oversupply situation, which would continue in the short to medium term.

“This sector is currently at an all time high, both in terms of the quantum of space leased per annum and the prevailing rental value. Our city level demand supply analysis, seen in conjunction with the micro-economic fundamentals, indicates that office space rentals are likely to hit a plateau in the next six to 12 months,” said the DTZ report. According to the report, baring a few exceptions (primarily the Central Business Districts), the over supply situation would lead to a correction in the office rental value.

The markets that are heading for oversupply situation include Chennai (200 per cent), Pune (146 per cent), Kolkata (66 per cent), Bangalore (38 per cent), Hyderabad (33 per cent), Delhi NCR (20 per cent). But there is good news for developers and investors in Mumbai as the supply is 8 per cent less than the estimated absorption in 2007.

“As per estimates, we expect the demand for Grade-A office space to stay on course in the immediate future. However, given the number of large projects announced recently and under construction, supply may exceed demand across cities. Realisation of rentals, quality of the end product and delivery of professional services would be critical in increasing the occupancy levels in such a scenario,” the report said.

In the case of Delhi, of the total supply of 16 million sq ft projected in the NCR in 2007, 5.6 million sq ft will be in Noida.

This is far in excess of the projected absorption of 3.3 million sq ft and should see rentals fall or at best remain stable.

In case of Mumbai, while rentals will continue to escalate in 2007 due to heavy demand, there is a possibility of stabilisation in early 2008 when several office projects are completed.

“This is particularly in the micro markets of suburban business districts when the mill land development enter the market,” the report said. This DTZ report titled Commercial Real Estate ‘Norwegian Wood (This Bird has Flown)’ sums up saying, “On an overall basis, the Indian office space markets are now close to the second crest of the real estate cycle after 1995-96.”

First Published: Nov 18, 2007 21:13 IST