Need office space? Bargain now in NCR, wait a while in Mumbai

During the past two-three years, rental rates for office space have been rising relentlessly in the major metros.

During the past two-three years, rental rates for office space have been rising relentlessly in the major metros. The reason: indigenous businesses have been expanding and a large number of foreign companies have also entered the market. Moreover, the IT-ITeS sector, which accounts for about 75 per cent of the demand for office space, has been growing at above 30 per cent. Together, these factors have augmented demand. While demand has grown, supply has failed to keep pace as it requires at least 18 months or more to develop a modern office building. The result: supply shortages and escalation in rentals. But that may be changing now.

NCR: Rentals slowing

In Delhi, the growth of rental rates slowed down during the third quarter of 2007. According to Sanjay Verma, executive managing director of real estate consultancy Cushman and Wakefield, “The slowdown in rental growth happened owing to a combination of factors. In the central business district (CBD) of Connaught Place, rates have already reached high levels. At other places like south Delhi, Gurgaon and Noida, the slowdown has occurred due to new supply becoming available.”

In the CBD, rental rates in quarter 1 rose 26 per cent over the corresponding period the previous year. That has come down to 5 per cent in quarter 3. In south Delhi markets like Jasola, Vasant Vihar and Saket, the rate of increase was 12 per cent during quarter 1 and has come down to 3 per cent in quarter 3. In Gurgaon, the decline in rental growth has been quite drastic: from 30 per cent in quarter 1 to 1 per cent in quarter 3. “With over 4 million sq ft supply having entered the Gurgaon market by quarter 3 and another 1.6 million sq feet planned for the last quarter, the growth in rental values has slowed down,” said Verma.

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In Noida, with demand outstripping supply, rental growth has slowed down from 10 per cent to 1 per cent from the first to the third quarter of 2007. “In the medium term, we expect rental values in the NCR to stabilise or soften,” said Verma.

Mumbai: Still strong

In the Mumbai market, however, rentals continue to increase at a robust rate as demand continues to outstrip supply. “We expect to see rentals stabilise in some micromarkets of Mumbai in 2008,” said Verma.

Abhishek Kiran Gupta, senior manager (research) with real estate consultancy Jones Lang Lasalle Meghraj, offered an additional reason why supply has been slow to catch up in Mumbai, besides the traditional constraint, which is lack of land. “The Mumbai Metropolitan Region Development Authority has been considering an increase in FSI. So a lot of builders whose office buildings are near completion are not getting their completion certificates. If the increase in FSI comes through, they will be able to reap a windfall by adding a couple of more floors to their buildings,” he said.

In Mumbai, rental values in all micro-markets increased between January and September 2007, though the rate of increase was lower compared to the corresponding period of 2006. Rental values at Nariman Point, Worli and Lower Parel appreciated by 33-34 per cent between January and September 2007 as demand in these central areas continued to be strong, especially from the banking and financial sector. Rental values at the Bandra Kurla Complex rose 22 per cent between January and September 2007. In recent times, the Bandra Kurla Complex has emerged as a preferred destination for corporates due to the availability of larger floor plates, better quality properties and proximity to employees’ residences.

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In future, while rentals at Nariman Point are expected to remain strong, areas like Lower Parel (with new supply from mill land development), Bandra Kurla Complex, Andheri and Malad are likely to see rentals stabilise by quarter 2 or 3 of 2008 because of fresh supply. “By the second half of 2008, both in the NCR and in Mumbai, supply of IT-ITeS space located within SEZs will also start coming into the market — putting pressure on rentals,” said Gupta.

The bottomline: corporates looking to expand within the NCR should bargain hard for better deals as the demand-supply dynamic has swung in their favour. In Mumbai, by postponing their expansion plans for a while, corporates should be able to land themselves a better deal.

Realty roller coaster

Place:Rate*

Delhi CBD-Prime:317

Delhi CBD-Others:210

South Delhi-Prime:217

S Delhi-Micro mkts:159

Gurgaon-Prime:113

Noida:50

Central (Worli):400

Central (Lower Parel):295

Suburban (Andheri):165

Suburban (Powai):100