Real-Estate Blog

The Indian real estate sector has seen some unprecedented expansion in the last two-three years in terms of demand, supply and prices. While the overall outlook in the medium/long-term remains strong, the next 12-18 months are expected to witness some pronounced movements that could mature the market. There is already some price correction and rationalization taking place in certain parts. Further consolidation is likely, whereby marginal players will be further marginalized.

In the commercial office sector rentals are stabilizing, and in certain pockets even correcting. The co-relation to an unstable US economy is strong, as is the uncertainty on the demand side this year. While pure corporate office space remain in short supply across most cities, an abundant supply of IT parks (non SEZ), in conjunction with the STPI sunset clause, is cooling IT space rentals in these locations. Simultaneously, the demand for IT SEZs has picked up, but while demand may not be met in 2008, a larger supply for IT SEZs in 2009 and onwards could lead to some correction in rentals for these spaces. For IT parks however, the situation look bleak, with non-occupancy likely to increase, which will cause rentals to slow down.

The residential sector is starting to see a constriction in demand, mainly due to extremely high values which is effecting affordability for end-users and rising mortgage rates that are making it dearer to own a home. Hence, most suburban locations have been witnessing a lower-off-take. while the face purchase prices have held, developers are looking at innovative techniques to attract customers through disguised discounts. There is a stand-off situation as end users/investors adopt a wait-and-watch policy, hoping that developers will lower prices. Developers, on the other hand, are under pressure with funding getting scarce and expensive. Interestingly, the prime segment (in terms of quality and location) continues to see strong demand and prices, a dichotomy that is creating confusion in the sector.

On the retail front, the rentals have remained strong, and in some places they have even increased. This is mainly due to a lack of supply in high street destinations as well as in malls. This year, there will not be any major supply infusion for malls, and this is expected to keep the rentals steady. High street locations will continue to see increased rentals, though at a lower rate than in the past. On the demand side, many retailers have been wary of the rapidly escalating rentals. They are evaluating the situation closely and many of them are even re-working their expansion plans. While this year will see stabilization, it is unlikely there will be any reduction in pricing. However, 2009 may be different if more malls are completed in 12-18 months and there is a significant churn among all occupants.

In short, there will be gradual transformation of the market from being supplier-led to one that is more demand driven. This is good news for the demand side, as prices will see rationalization after the rapid appreciation in the last 2-3 years. On the supply side, there will be more to choose from. However, the market is maturing with increasing institutional participation and corporatization of established players. The next 12-18 months will be more dynamic than before and will set the pace of the Indian real estate market in the medium-to long-term.

Taken from Outlook - Profit magazine