Commercial realty market on upswing

MUMBAI: The commercial property
market, which had seen one of the biggest falls till May, is slowly reviving as higher government incomes and an

improving economy are prompting customers to invest in such asset classes. Developers who had slashed prices of their commercial projects by 40-50% due to slow demand, say there are now more enquiries from retail investors, while institutional buyers have closed some deals. Many developers, instead of trying to sell off properties are signing rental deals with customers and institutional customers. In one recent deal, global consultant KPMG signed a deal with Lodha Developers for renting out a 130,000 sq ft property at Mahalaxmi in central Mumbai, for a monthly rental of Rs 160 per sq feet. “This is one of the biggest deals in the commercial property market this year, not just for us but also for the sector,” said Lodha Developers director Abhisheck Lodha. “Though rates have fallen in the past three quarters, there is now a lot of interest from customers.” The company has five commercial projects in Mumbai, in areas such as Parel, Worli and Thane. Recently, Lodha also bid Rs 710 crore for National Textile Corporation’s (NTC) 10.3-acre Finlay Mill land in central Mumbai. Similarly, in a recent transaction in the commercial property space, investor C Sivasankaran acquired a 66% stake in a commercial property SPV from DLF for Rs 310 crore. Ackruti City is the other investor in the SPV. Explains Ambar Maheshwari, director investments at DTZ, an international property consultancy firm, “While commercial property rates have been at an all-time low, customers are slowly returning. Many prominent developers are going for lease rent discounting, which not only helps them raise liquidity but also helps them sell the property at a later stage for better valuation.” Under lease rent discounting, developers borrow from financial institutions on the basis of an agreement between the owner and the tenant. The rent from the tenant is then directly deposited with the lender and not with the owner. Industry observers say several realty players who have commercial projects, have adopted lease rent discounting. Market leaders such as DLF and Unitech are known to favour such a model. Both firms had almost stopped work on their commercial property developments in Mumbai. However, according to people familiar with these companies, work has restarted through lease rent discounting. Said a Unitech executive: “Commercial properties give better returns, but there is lot of risk as rates are volatile. But our company is now better placed to manage these risks as far as funds are concerned.” Rates on commercial properties are more sensitive to market conditions than those of residential units, as they depend on returns or rentals. So when rentals in India dropped, so did the rates for commercial properties. Like the office-cum-commercial Bandra Kurla Complex in Mumbai, which enjoyed a premium tag for commercial market. Rentals here were around Rs 450-500 per sq feet last year; now for the same property, the rates are at around Rs 250 per sq feet. Though even as the revival in the commercial property is still beginning, a majority of developers are still cautious. Says Kamal Khetan, chairman, Sunteck Realty: “Capital values of commercial properties are dependent largely on rentals. We believe rents have bottomed out and are already seeing upward movement. A number of investors have started picking up commercial property as it makes good investment sense; it gives a rental return as well as capital appreciation when the markets pick up,” he added.
Courtesy: 3 Aug 2009