India's well-established commercial business districts (CBDs) are likely to face vacancies this year, as the first impact of the global recessionary economy is being felt by the financial and other organisations, according to a real estate consultancy firm.
"We will also see a reversal of the trend witnessed over the past two expansionary decades where large organisations moved from owned to leased assets. Given the drop in prices and availability of choice properties, this will be a good time for surviving organisations to announce their new leadership positions through trophy purchases," Jones Lang LaSalle Meghraj (JLLM) said in a report Predictions for Indian real estate 2009.
The firm believes CBD vacancy rate, if triggered, can add significant pressure to the upcoming and newly developed premises in upcoming front-office districts such as Lower Parle in Mumbai and Nehru Place in Delhi.
While the sentiment in the US and Europe towards outsourcing is positive in the long term, the active decision-taking for expansion by business process outsourcings is totally suspended for the moment.
"We do not expect this to change in 2009. Hence, the pressure on upcoming and announced projects – especially special economic zones (SEZs) – will continue this year," the report said.
In 2009, IT SEZs will also experience further pressure from the fact that the software technology parks' concessions may be extended for another couple of years. While these concessions are important for IT companies' survival during the recession, they will adversely impact SEZ developments.
Moreover, the peripheral areas of metros as well as the tier II/III cities will need to compete with the central or secondary business districts for the same set of talents, thus dissolving the clear segmentation that was emerging and separating various micro-markets over the past couple of expansionary years. Newly developed or announced projects are especially going to suffer and may see continued vacancy.
"The year will also see practices in the real estate business become more organised and professional, as they did in the late 1990s and early 2000s with the introduction of foreign institutions, foreign money and the creation of government-supported large development formats. A similar professional approach may reach warehousing land acquisitions."
Much of the previously anticipated demand for 2009 will not see the light of day due to the confluence of various factors. According to JLLM, developers have only now begun to come down on their rates, and a lot depends on how many of them will follow suit in the coming year. The much-awaited drop in interest rates for home loans has happened, but not at a level sufficient to pull the residential sector out of the doldrums entirely.
In response to the considerable demand for such formats, the company anticipates more national players to launch affordable housing projects this year. However, since different cities will have different costs for land and construction of such homes, developers will have to define "affordable housing" on a city level.
"We expect that at least 20 per cent of the players in residential real estate will begin to think on a portfolio rather than project level. Developers have been pricing their projects according to their expected profit margins vis-à-vis the cost of land in different locations. Buyers are not prepared to consider the initial and appreciated cost of land as a valid component of the price."
According to the report, "portfolio level" means at least one fifth of the developers will now cross subsidise their construction costs internally and sell their project at prevailing selling rates.
In terms of sales volumes and market recovery, there are two distinct scenarios: buyers who were waiting for rates to drop to levels they could afford will make their moves when rates fall into their budget range. Secondly, buyers will continue to wait for the time that delivers the best rates – a point that may come and go without them being aware of it.
The year 2009 will see a good number of capital markets transactions, but the period from March to December will be a "decisive" time.
All business sectors have been hit by the economic meltdown, and many will generate liquidity by divesting non-core assets such as real estate. Types of enquiries are likely to be in the higher risk adjusted return segment with greenfield opportunities seeing limited interest as most investors will be investing in Asia with chasing liquidity and not higher return. Residential projects in the middle-income segment are likely to see renewed interest with interest rates declining this year.
"In 2009, we will also see the decisive arrival of sale-and-lease-back deals, in which owners currently occupying their properties will sell them and continue as lease tenants. Corporates have to address liquidity issues in their core businesses and are now eager to unlock the value of their non-core assets," JLLM said.
The biggest buyers would be foreign direct investment-compliant India-dedicated funds, domestic funds, high net worth individuals and corporate houses.
The year will be guided by dynamics of two contradictory forces: recession trend guided by capital market slowdown, decrease in demand, caution in cost and spending and governmental and social efforts to regain growth momentum. "For the first three to six months the impact of point recession trend will be more significant while in the later half of 2009 support to growth from government and global community will be more visible," JLLM said.