Commercial realty segment to remain subdued: CBRE

Demand for commercial real estate is likely to remain subdued in the medium term as corporates continue to be in a consolidation mode while excess supply may put pressure on capital and rental values, according to property consultant CBRE.

The economic downturn has subdued office and retail markets that has affected sales and put pressure on capital values as well across major cities, CBRE South Asia chairman and managing director Anshuman Magazine said in a statement on Tuesday.

In the residential segment, he said the buyer sentiments have remained largely cautious due to relatively high price points and sticky borrowing costs, amid an uncertain economic climate.

He said that investment has slowed considerably across segments resulting in weaker construction activity in most cities.

"Against the current economic and political backdrop, demand for commercial real estate is likely to remain subdued in the medium term... Corporates are expected to continue their focus on optimal space utilisation and cost cutting measures, and transaction activity is expected to be mainly restricted to take up of small and medium sized space," Mr Magazine said.

He was also of the view that supply backlogs could exert pressure on rental and capital values as well.

He, however, said that recent indications of revival in the global and domestic economy should contribute to better performance and improved economic prospects towards H2 2014.

In the office space segment, CBRE said the demand declined during the third quarter of 2013, because corporates focused on consolidating and downsizing their space portfolios, and/or relocating to peripheral markets.

Office space absorption in the top seven cities fell by about 14 per cent in July-September of 2013 at over 6 million sq ft compared to over 7 million sq ft in previous quarter. Absorption of prime office space of top seven cities stood at over 25 million sq ft in calendar year 2012, while total absorption is over 19 million sq ft in the first three quarters of 2013, according to CBRE.

While subdued demand and high vacancy levels have led to rental stability in most markets in recent months, CBRE said weak absorption numbers has resulted in a decline in office space supply over previous quarters, weighing in on future investment plan.

To boost commercial real estate segment, Magazine pitched for reforms in areas like slow project approval processes, supply bottlenecks, opening up key sectors like retail to FDI, and infrastructure creation through PPP projects.

"Looking beyond the results of the upcoming General Elections in April 2014, the economy will not only need a clearly defined vision and competent economic management, but will also require proactive, industry-centric decision making along with sweeping reforms in a number of areas to drive faster growth," he said.