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Over-supply plagues residential market

Submitted by on Tuesday, 30 September 2008No Comment

NEW DELHI: For those who thought the worst was over, there’s more bad news. The slowdown in the real estate sector is far from over. Rather, the worst seems to be knocking on the door, with retail and office rental prices across the country witnessing a sharp drop. In fact, current market stats reveal that there has been a drop in both retail and office rental values in the last two months which varies from 25% to 50% in some micro markets such as Gurgaon and Greater Noida, where malls and office space have seen a dip of 25-50 %, and Saket (south Delhi), where the rates have dropped by 30-35 %. Overall, the rental rates in cities such as Kolkata, Chennai, Mumbai, Pune and Bangalore have also dropped by 25-30 %.

Kishore Biyani, CEO of the Future Group, feels the rentals may see another 25-40 % drop. The market is going to witness a 25-40 % drop in the retail rentals as all big or small retailers are finding it tough to survive in this very high rental market, Mr Biyani told SundayET. “Many smalltime or vanilla retailers may have to close their shop in this kind of condition. We have changed our business model and are now operating on a revenue-sharing model in malls.

Productivity is a key factor for any retailer to operate efficiently in a mall, in case of a leased deal,” he added.
According to industry sources, initially most malls in the same micro-market had similar rental rates. But as they became operational, the rentals started to get aligned with revenues and footfalls. In the office space, the second quarter of this year witnessed a total supply of 4.3 million sq ft in the NCR region, of which 60% was for IT/ITeS but interestingly, the demand was down to 3.3 million sq ft only.

Too many homes up for grabs

It’s pouring bad news for the real estate industry. In a market where prices are moving southwards, over-supply is the new problem which has come to plague the residential market. According to industry sources, there has been a 35-40 % over-supply in residential apartments in the last eight months. And the reason is evident — a dip of as much as 30-40 % in the transactions this year as compared with last year.

Says Raminder Grover, CEO of Homebay Residential, Jones Lang LaSalle Meghraj: “The rise in interest rates has affected the demand for residential space. Higher interest rates have combined with certain other factors such as temporarily reduced buying power due to stock market fluctuations to reduce the demand for high-end residences. Most of the over-supply consists of higher-priced residential units in prime localities that investors cannot resell quickly, since the demand for them has been impacted.”

In fact, both investors and end users of the residential property sector are anticipating a blanket correction in prices in the wake of the over-supply situation leading to a further slowdown. To offer a solution to the oversupply situation, various developers have started to offer discounts and freebies to attract buyers.

There have been tie-ups between the developers and financial institutions also to ease the burden of high EMI payments on the end user. There are also instances of banks in tie-up with developers easing payments with deep discounts on down payment options or longer and easier construction-linked payment plans. Some smaller developers are exiting by offloading their stake.

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