Office space rentals decline at slower rate

While there has been a drop in the rate of decline in office space rental rates in the country in the second quarter of the current fiscal,the absorption rate has shown an uptrend for the first time in four quarters. This is according to a recent research report State of the Office Sector by financial and professional services firm Jones Lang LaSalle Meghraj JLLM. The report shows that the rate of decline,as a national average,has slowed to 8.3 per sent in the second quarter,compared with a dramatic drop of 18.8 per cent in the previous quarter. Nation-wide,rates had dropped sharply in the first quarter of this fiscal as compared with an 8.6 per cent drop in the last quarter of the previous fiscal.The reports author,JLLM research head Abhishek Kiran Gupta has attributed slowdown in rate of decline of office space rental rates to four factors that have helped shape the Indian economy over the past six months. The factors pointed to are: Firstly,increased liquidity in the market due to fiscal measures taken by the government. Secondly,a sharp rise of 4,536 points in the Sensex in the first six months of this fiscal. The index has risen over 50 per cent after hitting a low of 8,451 points on November 20 of last year post the Lehman Brothers-led global financial crash. Thirdly,strengthened political stability with the UPA governments being sworn back into to power and sweeping the elections by a large margin. The government has also shown its resolve in boosting the economy with a string of fiscal measures as well as its decision to disinvest large public sector undertakings. And lastly,green shoots that are now being seen in the affordable segment of the residential sector. There has been a rise in the number of developers embarking on affordable housing projects across the nation. The study covers seven cities Hyderabad,Mumbai,Delhi,Kolkata,Bangalore,Chennai and Pune. It,however,does not include Chandigarh. While only Hyderabad has shown a steady decline in office space rentals quarter-on-quarter from -5.8 per cent in Q4 of the previous fiscal to -7.6 per cent in Q1 and a further drop to -10.4 per cent in Q2 of this fiscal all other cities,except Pune,have shown a drop in the rate of decline. In Pune,the decline in office space rental rates has been witness to a gradual slowing down from -17.3 per cent in Q4 of the previous fiscal,to - 12.9 per cent in Q1 of the current fiscal,to a weak -4.2 per cent in Q2. The countrys financial and political capitals Mumbai and Delhi have seen a drastic drop in rate of decline. Both cities have seen a near-13 percentage point drop in rate of decline of office space rentals. Gupta contends that the factors that led to the slowdown in decline,coupled with the gradual revival of opportunistic demand,have led to strengthening of absorption rates.

After decreasing since Q2 of the previous fiscal,absorption rate at the pan-India level has picked up for the first time in a year in Q2 of the present fiscal inching from a low of 7 per cent in Q1 of this fiscal to 13 per cent in Q2. The JLLM study notes: Net Absorption of office space in Q2 stood at around 4 million square feet,doubling from the previous quarter. About 1.8 million square feet of absorption in Q2 is contributed by pre-leased projects of SBD small business development Bangalore,which became operational in the quarter. Gupta,in the report,goes on to state that considerable rationalisation of rents in the information technology IT as well as non-IT spaces has resulted in opportunistic demand led by domestic occupiers who have expanded their real estate portfolios in various Indian cities. Apart from IT/ITES and BFSI banking,financial services and insurance sector,other sunshine sectors - like telecommunications,pharmaceutical and automotive are leasing out office spaces in various Indian cities.

The seven cities covered in the nationwide survey witnessed completions of 7.5 million square feet of office space in Q2 of the current fiscal,taking the total operational office stock to 200 million sq ft. While vacancy in office space decreased at the country-level from 12.6 per cent in Q1 of the previous fiscal to 11.1 per cent in Q2 of the current fiscal on account of completion of a few projects and better absorption it has witnessed a year-on-year rise of 490 basis points, says Gupta.

There are also chances of high vacancy levels in micro-markets through 2010. As total operational office stock continues to grow,the vacant space available in operational projects continues to augment itself to massive proportions.