Follow Us:
Friday, January 28, 2022

Even as demand takes a hit, office markets gain steam

Relocation and consolidation of office spaces has been the major driver of the realty segment with majority of the contribution coming from outsourcing industry

November 1, 2014 3:38:22 am

By Shishir Baijal

With a stable government at the Centre, stakeholder sentiments have witnessed a remarkable improvement over the last few months. The first budget under the leadership of Narendra Modi offered several positive surprises for the realty sector, with special focus on housing that is expected to infuse life into the ailing sector. The change in sentiments has also been reflecting in our quarterly findings of the FICCI-Knight Frank real estate sentiment index with most stakeholders being optimistic about the near future. However, given the extreme volatility that the real estate sector has been witnessing over the last few years, it will take a while before things begin looking up.

Factors such as a slowing economic growth, rising interest rates by banks, high inflation and the weak rupee, among others, had contributed towards building a negative sentiment among home buyers that resulted in a dwindling sales volume. Cities like Mumbai and NCR have borne the brunt, with demand levels in each of them falling drastically since early 2012. Unfortunately, the trend seems to continue in 2014 as well, with the sales volume decreasing by 25 per cent and 37 per cent in Mumbai and NCR respectively, during the first six months of the year. The developer community has been taking cognisance of this, and have curtailed fresh launches since 2013.

The unabated demand-supply gap especially in the Mumbai market has created a pile-up of 2,13,742 unsold units. We estimate that it will take more than 12 quarters for the Mumbai market to exhaust this kind of unsold inventory. While the inventory two years ago was mainly on account of under-construction projects, the share of ready-possession projects is rising this time around. Opportunistic investors, including some private equity fund firms, have started to exploit this new investment avenue presented by the residential market. Going forward, the unsold inventory level is expected to reduce gradually on the back of higher demand and limited new launches.

On the other hand demand for homes in the NCR region is projected to drop by 17 per cent, from 71,400 in 2013 to 59,000 during 2014. Hence, despite an impressive recovery projected for the second half of this year, overall sales volume in 2014 is touted to be much lower than the previous year.

The roller coaster ride in demand and supply does not seem to have had any significant impact on pricing levels, as prices continue to move upwards, albeit at a slower pace. The weighted average price in Mumbai & NCR has risen by 8 per cent and 5 per cent respectively in the first 6 months of this year. The significant build-up in unsold inventory and the availability of a large number of ready-possession apartments have restricted the price growth to single digits in these cities.

The festive season too, has not brought in the expected cheer to the real estate sector, with markets reporting “not so-encouraging” sales over the past two weeks. Unlike the boom years, stakeholders this year had resisted the temptation to launch new projects in the season, focusing instead on reducing the inventory that has piled up over the past few quarters. Markets like NCR and Mumbai have not even seen regular investments coming their way and seem to be waiting for the new government to execute reforms which may help improve the situation. Keeping in view the current situation we expect at least 6-8 months before actual transactions begin picking up.
Though stakeholders are hopeful that this will change before the said time period, which is in line with the latest findings of the FICCI-Knight Frank Sentiment Index report for Q3 2014 (July- September).

The office market performance on other hand has been in line with our expectations with uptake happening across all regions. Relocation and consolidation of office spaces has been the major drivers of this segment with majority of the contribution coming from the outsourcing industry.
Unlike the residential segment, vacancy levels within premium office buildings across prime locations have been constantly reducing with chances of a further drop in the near future.

As per our first round of survey during October – December 2013 sentiments were slightly negative for the office market until June 2014, in reality this sector has performed better, both in terms of new office completion and leasing volumes during the same period. Going forward, it remains to be seen if the sentiments continue to show a positive outlook in the coming quarters as we begin to experience actual economic revival and the implementation of policies.

Chairman & Managing Director, Knight Frank India

📣 The Indian Express is now on Telegram. Click here to join our channel (@indianexpress) and stay updated with the latest headlines

For all the latest Business News, download Indian Express App.

  • Newsguard
  • The Indian Express website has been rated GREEN for its credibility and trustworthiness by Newsguard, a global service that rates news sources for their journalistic standards.
  • Newsguard