Office rentals to remain under pressure for a while. Here's why

Mumbai: Decline in supply of additionaloffice space is likely to put pressure on rental values in thecoming quarters, even as the demand is expected to be

moderate, industry experts say.

According to a report, less than 3 million sq ft ofoffice space was added in July-September quarter, which is adecline of nearly 50 per cent compared to the same period in2012, and 75 percent compared to April-June quarter of 2013.

“Owing to a slowdown in construction activity, pent upsupply has been lined up across various micro-markets forrelease over the next 6-9 months, which might result inpressures on asset pricing,” CBRE South Asia Chairman andManaging Director Anshuman Magazine said.

The demand for office space is likely to moderate oreven be low in certain cities, mainly because corporates arenow focusing on consolidation and relocation to qualitylocations with lower rentals.

In Q3 2013, relocation and consolidation were primarydemand generators for commercial office space, globalconsultancy firm Colliers International said in a report.During the quarter, six major cities - Mumbai, DelhiNCR, Bengaluru, Chennai, Kolkata and Pune recorded acumulative rental space absorption of 6.2 million sq ft, whichis 20 percent less than 8 million sq ft year-ago.

“The decreasing demand is a reflection of theprevailing low business and investor confidence. Due to theslowdown in the economy and the political uncertainty in thecountry, companies are deferring their decision to take upreal estate,” Colliers’ Head of Research Amit Oberoi said.

“Also a significantly large percentage of the uptakefor office space is being generated due to companiesrelocating or consolidating their operations to a single

larger but cheaper location,” he said.

According to Colliers, while Mumbai commercial marketrecorded absorption of around 6.5 lakh sq ft of Grade A officespace, only a few mid-sized deals were concluded in Delhiresulting in 1.5 lakh sq ft of Grade A office space absorptionduring the quarter.During the quarter, absorption in Gurgaon was around

1.6 million sq ft, while Noida witnessed an absorption of 4lakh sq ft, which was primarily from IT/ITeS sector followedby banking and financial services sector.

The Chennai commercial market witnessed increaseddemand this quarter with overall absorption of Grade A officespace about 1.68 million sq ft.However, Bengaluru market saw a weak demand thisquarter with nearly one million sq ft of office space beingabsorbed, which is significantly less than the previous twoquarters absorption of 2.9 and 2.7 million sq ft, the reportsaid.

Kolkata’s office market remained sluggish due to theoverall negative economic scenario and recorded absorption ofnearly 2 lakh sq ft, while steady occupier demand from theIT/ITeS sector kept Pune’s office market steady during 3Q 2013as the absorption in the city stood at 8.5 lakh sq ft.“The economic environment is expected to remainuncertain due to overall uncertainties and upcoming electionsin 2014. We anticipate moderate leasing demand across the

cities in next coming quarters.

“In spite of moderate demand, rental values areexpected to remain stable due to limited supply as developersdeferring completion of their projects and refrained fromadding more speculative supply in the market,” Oberoi added.

PTI