Industry watchers say low demand, high interest rates and less clarity on long-term prospects could be the reasons.
There are very few takers for office space, even for ready-for-fit-outs. A key reason for this is sluggish demand from the IT and banking and finance sectors. Industry watchers say high interest rates and want of clarity on Special Economic Zones' long-term prospects could be the added reasons.
IT AND ITES SECTOR
Only 4.1 million square feet were absorbed in the first quarter of 2012, as compared to 6 million in that period last year, according to CBRE. “Absorption of office space is largely led by the IT/ITeS sector. However, most leasing activity by these companies was for smaller space. Preference for expansion in early 2011 has given way to consolidation and the average transacted floor plate stood at 20,000 square feet in the first quarter of 2012,” Mr Anshuman Magazine, Chairman and MD, CBRE South Asia, said.
The National Capital Region, Mumbai, Chennai, and Bangalore accounted for more than 70 per cent of the space getting absorbed. Supply continued to overtake demand in the first quarter of 2012, with almost 5.9 million square feet of office space being added across the leading cities, largely in NCR, Bangalore, Mumbai and Chennai.
Accumulation of stock across most office micro-markets led to values coming under some downward pressure in Q1 2012. The IT SEZ segment might lose its attractiveness among occupiers due to want of clarity on tax-related incentives. According to Mr Kejal Mehta, Research Analyst-Institutional Equities, Prabhudas Lilladher, in February 2012, sales registrations were down 11 per cent on a year-on-year basis to 4,203. Sales registrations continue to remain weak, hovering at Rs 4000-4500 levels.
Data from research firm DTZ said sales registrations were down 11 per cent year-on-year at 4,203, while lease registrations moved up 6 per cent on Y-o-Y to 8,515. For Q1 2012, a cumulative take-up across India's seven largest cities dropped by 14 per cent quarter-on-quarter, in Q1 2012. During the quarter, demand was the highest in Bangalore at 3.6 million square feet, followed by Mumbai at 1.2 million square feet.
Mr Anshul Jain, CEO, DTZ, said, “Policy paralysis is taking a toll on the real estate sector. The Government is yet to offer long-term clarity on SEZ operations. The Budget and RBI's Monetary Policy have also not been encouraging. Occupiers are holding on to their decisions to take up commercial ‘A' grade office space, and are likely to continue with their present stance till the third quarter of this fiscal. Rentals will remain stable or increase marginally.” The company said it expects a turnaround sometime around October as liquidity situation may ease a little.