Office space glut in India as economy slows

MUMBAI - India's slowing economy has left its big cities with a glut of office space, pushing up vacancy rates, freezing development and prompting some builders to convert commercial projects into housing.

Vacancy rates in the financial centre of Mumbai and capital New Delhi topped 20 per cent in the third quarter, the highest in Asia after Chengdu, China, where 32 per cent of offices are empty, according to broker Cushman & Wakefield. Six Indian cities are among the 10 office markets with the worst vacancies in the region, according to Cushman.

Demand for offices in India has been declining as Asia's third-largest economy - labelled a "dream market" by Mr Warren Buffett two years ago - faces the slowest expansion in 11 years, the fastest inflation rate among large emerging markets, and the risk of its debt ratings being cut to junk.

"India is faced with an intimidating macro-economic landscape," said Mr Anshuman Magazine, chairman of CBRE South Asia, in New Delhi.

Until two years ago, India was a darling of global investors with the economy expanding more than 9 per cent in the year ended March 2011. That spurred 5.1 million sq m of new office space across the country's key cities in 2010, according to CBRE. That compares with 2.7 million sq m in 2011 and 2.78 million sq m last year. For the first nine months of this year, 2.1 million sq mwere added.

The building boom ended as economic growth fell by 50 per cent and investors showed little confidence in a government battling corruption scandals.

"Developers have been delaying their projects to keep pace with the reduced demand," Mr Sanjay Dutt, executive managing director for South Asia at Cushman in Mumbai, said. The increase in empty office space has made rents in New Delhi, its surrounding areas and Mumbai less costly. Mumbai was ranked sixth and New Delhi 13th for the cheapest rents in business districts in Asia- Pacific cities, according to a report from Chicago-based Jones Lang LaSalle in August.

"Indian cities have not recovered from the rental and price correction of between 20 per cent and 40 per cent from the peak in the third quarter of 2008, while other business districts in Asia-Pacific have performed better," said Mr Ashutosh Limaye, Mumbai-based head of research at Jones Lang LaSalle India.

Rising vacancies and declining rents are prompting developers to put off projects.

"We have enough capacity for the next 18 to 24 months, if not longer," Mr Ashok Tyagi, group chief financial officer of the Mumbai-based developer DLF said.

To counter the decline in demand, some developers, are considering converting plans to build offices into residential buildings.

Mr Vikas Oberoi, chairman of Oberoi Realty, said his company will explore the option "where it's structurally possible for us to do so," he said.

Still, private-equity funds continue to favour India's office market because of attractive yields and an anticipated pick-up in demand as the economy shows signs of stabilising.

GIC, Singapore's sovereign wealth fund, and Ascendas said last week they plan to invest as much as $600 million in Indian commercial property.

BLOOMBERG

Source: Straits Times, 27 Nov 2013