Even though nobody believes that Indian real estate could collapse, the signs of a crash are all there. Real estate funds are unable to attract investors, developers are finding it tough to sell homes to genuine end users, and commercial realty is in doldrums.
The cash-crunch is so acute that several developers are now turning to professionals like lawyers, chartered accountants , traders and small business owners with compact offices, lower prices and easier payment options to prop up their cash flows, an Economic Times report pointed out today.
In Mumbai's biggest business districts, Bandra Kurla Complex and Parel, office rentals have dipped drastically. The newer buildings in BKC are now commanding rentals as low as Rs 250 per square foot, against Rs 320 per square foot earlier. Swank buildings in Parel, which used to command around Rs 250, are available for between Rs 120 and Rs 150 as competition has resulted in vacancy levels rising over 30 percent.
According to a Mumbai Mirror report, even such low rates are being negotiated as developers are finding it difficult to find tenants. "Offices in known and established buildings like Indiabulls Financial Park and Peninsula Business Centre are available for Rs 150 to Rs 170, and in some new buildings, a few desperate owners are willing to settle for just Rs 100," said the Mirror report.
In an April survey, real estate consultant Jones Lang LaSalle (JLL) showed that cost management was a top business challenge for office occupiers and 45 percent of the organisations have reduced office space per employee recently.
Usually bigger occupants opt for spaces above 500,000 square feet while smaller law firms or accounting firms need only around 1,500-2000 square feet. Such spaces find buyers easily, be it investors or end-users due to the lower-price points. And weak demand from corporates has forced developers like Royal Palms Estates and Wadhwa Group to offer small-sized spaces. While Royal Palms Estate is offering office sizes of as small as 400 sq ft for Rs 24 lakh in the Goregaon suburb, the Wadhwa Group is offering small-size offices of even 1,000 sq ft at its under-construction project, ONE BKC at Bandra-Kurla Complex in Mumbai, and has managed to sell around 2 lakh sq ft in this format even without changing the price point, said the ET report.
Apart from commercial, even retail realty is suffering due to lack of absorption.
A report by real estate research and consulting firm DTZ pointed out that retail leasing activity was more restrained in the first quarter of 2013.
“Although enquiry activity, from both domestic and international retailers, is still comparatively strong, the conversion rate of these enquiries is subdued. Since a transaction of such nature normally takes approximately six-nine months to complete, any increase in take-up is not likely to occur until the second half of the year,” it added.
Lower sales, cash flow crunch, expensive loans, high labour cost and inflation have put realtors in a tight spot, which is why they are either reformatting commercial projects into residential ones or opting for mixed-development projects that includes retail, entertainment, shopping and accommodation within a single building as it helps diversify the tenant mix in the total construction, and also de-risks the developer's investment.
"Mixed used developments have evolved to increase the viability of the projects and to utilize the location advantage. Residential market and office market is witnessing buoyant growth and is considered as more risk free development. A new concept which is also evolving, particularly due to FSI norms, is serviced apartments as an offering within mixed use developments," said Shubhranshu Pani, Managing Director - Retail Services, Jones Lang LaSalle India.
According to an Assocham report, new investments in Maharashtra’s real estate sector have plummeted by over 55% during the last fiscal. The state accounted for only 20% in the total outstanding investments worth over Rs 1.4 lakh crore attracted by the real estate sector across India as on 31 March.