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2019 Up, Up and Above

I was recently asked what was the biggest difference the real estate market has seen over the past decade. My response was that in 2008-09 developers used to talk about a few lakh sqft as potential development being done by them. Now the same developers talk only in millions of sqft as their future development potential. Today it seems if you are not developing in millions then you are not a developer at all. The next question is, with lakhs of sqft development the last dip (2008-14) in the market was monumental, will the millions of sqft development lead to catastrophic situation. I did not have a ready answer but it got me thinking about where the market is now and in which direction it is likely to move. Predicting the future is the diciest business still it is important to understand.
In the past decade the market has clearly developed on different growth paths for different market segments. Since 2014 the commercial / office market has been on an upswing but this is only recently got converted to a residential upswing. Land remained immune to all action till 2015 and thereafter it has just kept climbing up only. Let us try and understand each of these segments in detail to understand how things are likely to move forward.
SPIRALLING COMMERCIAL VALUES
This component is probably in its best phase now. A decade back the peak Hitec city rental was around Rs. 42-45/sft/month for warm shell space. This went down to Rs. 30/sft/month in the dip years and started moving up steadily. I was surprised to get a quote of Rs. 85/sft/month recently from a leading office space developer. The client with whom we shared the proposal could not believe it and immediately called to cross check if we had made any typo error. Quotations apart it the bigger developers seem to be closing deals way upwards of Rs. 70/sft/month. Even in Kokapet space quotes have reached Rs. 55/sft/month. Ask any standalone five storey building owner about rental quote and invariably they quote Rs. 60/sft/month for bare shell space.
The same story continues for capital values. In a recent deal, we have seen prices of office space move from Rs. 7250/- to Rs. 9500/- in a matter of 6-8 months. Nowadays price quotes and availability situation needs to be checked every week. The current lack of supply and ever increasing demand for office space is fuelling the valuations in this segment. Is this sustainable? Obviously not in the long term.
We should also keep in mind absorption levels for this segment. As per a developer a decade back annual absorption was around 3-3.5 mn sqft, this increased to 6-7 mn couple of years back and now it is about 9-10 mn sqft annually for the past 2 years. The assumption is that absorption numbers would hover around 10mn sqft p.a. going forward.
This exuberance in this segment is attracting more investment / development in the commercial segment. Every developer wants to develop only commercial space today. Supply numbers for future range from 40-60 mn sqft coming up over the next 2-4 years of time. These numbers keep only going up. Presuming the earlier figures for demand and the incoming supply numbers, it is safe to presume that market will have a supply glut coming up in the medium term. The increased demand will ensure that market does not remain unbalanced for long. Rentals and capital values can be expected to come down marginally and settle around to 80% of the current valuations.
ECONOMICALLY DEFIANT LAND
This segment currently defies all commercial logic. Current valuations are at an all time peak. We can see the progress of land prices by looking at some past transactions. As per various media reports in mid 2015, IKEA had bought 13 acres of land in Hitec for Rs. 19.21 cr per acre. Land rates currently in the vicinity of IKEA were being quoted around Rs. 50 cr per acre a few months back. Price quotes would be more bullish now.
As per recent reports, the golden mile allotments in Kokapet seem to have cleared all legal hurdles and realtors quotes in this area hovers around Rs. 25-27 cr per acre. This is the kind of range of price quotes say from centre of Hitec to its outskirts. From the real estate industry point of view, what this range ensures is that residential development is completely ruled out at such high land valuations. Majority landlords and developers in this belt are looking to develop commercial office space only. The already supply glut in retail deters any future retail supply in this belt. Again the current rental / capital numbers and current land valuations do not make economic sense. As is the case always sense and sensibility seem to be first casualty in this bullish rush.
Land prices across the city remain at a peak. The recent Uppal land auctions are indicative of the apparent insatiable demand for land at any possible price. What all will get developed on these land parcels is something which we will have to keep watching.