>INDIA PROPERTY (MORGAN STANLEY)

Ears On The Ground 9 – Commercial/Retail Demand Remains Subdued

What are we seeing in Investment Property market: 1) Commercial/retail demand continues to be frugal, 2) rentals continue to be re-negotiated (and roll down), however, 3) commercial complex sales (strata based sales to end users) demand is good (small city centre project). Investment Project Tracker introduced inside.

Retail projects first – Whereas construction starts for the new projects have been postponed by several developers (such as DLF, UT etc), ‘specialist companies’ with rental models (Phoenix, Ishaan, Anantraj) continue execution for their ongoing projects, albeit with extended timelines. Pre-leasing volumes have stagnated for the last 6 months – Inorbit Pune (27% locked in), Inorbit Hyderabad (65%), Pune Market City (25%), Kurla Market City etc – though enquiries
from retailers are picking up now.

Rentals continue to correct – Importantly, several old pre-leases have been negotiated down – 15-20% - and mgmt teams are guiding to 20-30% lower rental expectation (Lower Parel – Rs225 psf, Kurla – Rs80-85, Bangalore/Pune/Chennai/Hyderabad – Rs50-70 psf) for
the un-leased portion (versus Jan’09). In addition, retailers want mall developers to share the business risks, and, therefore, revenue sharing (4-20%) is getting increasingly common (in lieu/in addition to minimum fixed rental). Interestingly, while on the renegotiating table for old pre-leases, most mall developers chose to lower rentals rather than forfeiting deposits (6-12 month rental) paid by the retailers, highlighting demand scarcity.

Commercial projects – SEZ pre-leasing remain scarce (or even cancellations of earlier contracts), as indicated by Ishaan, UCP, Anantraj, etc, although there appears to be good (strata sale) demand for small block (100 to 300ksf) well located office complexes (UT’s Chambers
in Mumbai, Signature Tower II in Gurgaon etc) by end users (professionals such as CA, lawyers etc).

To see full report: INDIA PROPERTY