MORE THAN 20 MN SQ FT OF OFFICE SPACE ADDED IN THE FIRST HALF OF 2013; SUPPLY INFUSION GROWS BY 16% Y- OY, WHILE ABSORPTION DROPS BY ABOUT 6% Y-O-Y

Growth has been disappointing in FY2012

India’s economic landscape continued to face challenges in the second quarter of 2013. Growth for the complete financial year 2012-13 declined to a decadal low of 5.0%; this despite the fact that growth appreciated during the January-March period to touch 4.8%, compared to 4.7% during the previous three months. While unveiling its monetary review for the year 2013-14, the Central Bank reduced base rates by 25 basis points in May; however, kept the rates unchanged during the quarterly review in June, indicating limited room for policy easing. This has upset investor sentiments as a falling rupee and declining manufacturing growth continue to point towards a broad based slowdown. On the legislative side, the Union Cabinet recently approved the draft Real Estate Regulation and Development Bill, which is a policy measure aimed at bringing transparency in the real estate sector. The legislation, that is yet to be proved by the parliament, seeks to provide a regulatory authority to review construction of residential projects. Other important policy measures taken by the government included reducing the minimum area requirements for special economic zones and providing clarity to the various provisions for foreign investment in the retail sector.

Supply infusion leads to marginal increase in absorption; however, downward pressures remains

Large commercial and SEZ developments were completed in leading markets such as Bangalore, Mumbai, NCR (National Capital Region) and Pune, contributing significantly to the supply infusion of about 11 million sq ft in Q2 2013. Delayed deliveries from the previous quarters, besides new projects coming on-stream, led to an increase of up to 8% q-o-q and about 16% y-o-y in office supply addition across the country. Bangalore led project completions, followed by Mumbai, NCR and Pune, representing about 77% of the entire space completed during the quarter.

Occupier focus continued to be on consolidation and more efficient use of their existing portfolio. Although well positioned assets continued to attract occupier interest, transactions continued to take much longer to conclude. Absorption increased marginally by 7% q-o-q to touch about 7 million sq ft during this quarter; however, downward pressures continued to persist as absorption was down by about 6% when compared to the same period last year. Transaction activity was dominated by NCR, Mumbai, Bangalore, and Pune, representing about 88% of the total transacted space during the quarter.

Supply pressures dictate rental movement

There was a clear segregation of micro-markets in terms of rental behavior across leading cities. Rents were either stable or appreciated marginally in demand driven micro-markets such as Connaught Place, Gurgaon, Bandra Kurla Complex, Lower Parel and Outer Ring Road. Rental sentiments in supply driven micro-markets such as Thane, Navi Mumbai, Powai and Vikhroli were on a downward trajectory.

Outlook

The prospects for the economy do not appear very bright in the coming couple of quarters; rising fiscal deficit and currency devaluation are expected to dampen the overall investment sentiment. The overall mood in the leasing market is also expected to remain cautious. While few large scale transactions for consolidation or relocation of offices might be reported, majority of the demand is expected to be for small and medium sized office space only. Supply levels should continue to exert pressure on rental movement and market recovery in most micro-markets.