Realtors wary of commercial space

Since 2008, most real-estate developers in the listed space have scaled down their exposure to the commercial property segment. Instead, they have turned their attention to residential development sale of plots too.

Even if they did venture into commercial projects, quite a few preferred to sell the property than hold them as assets and lease them.

In the last one year, for instance, DLF's rental business hardly added any fresh-leased assets and, in fact, scaled it down a bit.

Why have realty players stayed away from building a portfolio of lease assets and deriving rental income from them, like their peers in the Asian countries?

Sluggish demand

A look at the demand-supply scenario suggests that poor absorption of space is one reason. A report by consultant Jones Lang Lasalle states that 24 per cent of the office space that was built in 2011 in the top seven cities, remained vacant. To put that in perspective, over 2005-07, this number was lower than 8 per cent.

In a booming economy, all sectors — IT, financial services and manufacturing — take up more realty space. The first two are the key drivers of volumes, together accounting for over 60 per cent of leased volumes in the last five years. But there has been a dip in space occupied by these sectors in the last one year, according to data by Knight Frank India.

However, there was a strong pick up in the manufacturing sector. Clearly, manufacturing cannot be expected to drive volumes in a sustained manner.

Quite a few IT companies have used the price slump to set up their own offices in SEZs or outside. The recent Rs 985-crore commercial space deal by the Citigroup in the Bandra Kurla Complex is also evidence to the buying trend. That means, these companies will actually vacate leased assets, thus increasing supply.

In the retail space too, close to a third of the projects completed in 2011 remained vacant. Mumbai, Delhi and NCR make up for two-thirds of the retail mall space in the country. And these are the places where fresh additions are happening. They could, therefore, run the risk of oversupply unless FDI in multi-brand retail takes off soon.

Pricing power

Sluggish demand scenario means pressure on price. While prices in top cities remained flat for a good part of 2011, data from companies such as DLF, over the first half of 2011, suggested weakness in both the sale price and lease rates of commercial complexes. Even over the last quarter, rentals in some of the Central Business Districts of Mumbai dipped 3-4 per cent.

We are developing

It is not just the demand and pricing aspects that have kept commercial space development muted. Real-estate developers, like their cousin infrastructure developers, are at a stage of building/constructing and not merely owning assets.

And construction requires massive capital; one that cannot be locked in to fixed assets for too long. Simply put, they need cash to buy land and build.

And unless the built properties are sold, the players cannot think of replenishing their land inventory or ploughing fresh working-capital into new projects.

This is one of the primary reasons why companies, including traditionally asset heavy players such as Phoenix Mills, Unitech or DLF, have been guarded in their strategy.

Despite a reasonably large lease portfolio, DLF's annuity income accounts for just about a fifth of its sales. Clearly, it is the development and selling activity that provides sufficient revenue and cash flows to carry on business.

On the other hand, while Phoenix Mills continues to actively let out retail space, it adopts a strategy of selling all its office space and not leasing them to ensure that it does not lock too much capital. In the retail space too, it has only large licensees as tenants, who can also absorb any hikes.

Others such as Unitech, which already suffer from severe cash crunch, delivered negligible projects in the non-residential space. Residential demand is less affected by economic activity, as evidenced by reasonably steady off-take of home loans.

REIT possible?

It is for this reason that a real-estate investment trust — where a pool of leased assets generate cash flows and are listed — may not be possible by the Indian developers.

But investment companies are taking a step towards the REITS model by buying property in the current sluggish scenario. The recent office space deal by Singapore-based investment group, Xander, in Chennai, is an example. The same will be let out, adding to its income-generating assets in India.

> vidya@thehindu.co.in

COMMENT NOW