Companies sublet space, realtors face the heat

Companies sublet space, realtors face the heat
Business Standard, July 26, 2009, Page 3

Neeraj Thakur / New Delhi

Rentals may go down by 10% in coming quarters: Cushman & Wakefield.

Real estate developers, who are facing oversupply and lack of demand, are now finding new competitors. Many medium to large companies, which had planned aggressive expansion during the boom of 2007 and taken large commercial and retail space on lease from these developers, are now subleasing these assets, creating more supply in the market.

“The subleasing activity by corporates will add pressure on some of the largest developers of the country, especially in Gurgaon and Noida, as there is already a huge demand-supply mismatch,” Kaustav Roy, executive director of real estate consultants Cushman & Wakefield, said. “In the coming quarters, we expect a further reduction in rentals by 5-10 per cent,” he added. Both commercial and retail markets for real estate have witnessed fresh supply in almost all major cities. The National Capital Region (NCR) and Hyderabad witnessed supply of over 300,000 sq ft each from these non-real estate players between January-June 2009.

According to Cushman & Wakefield data, in the first two quarters of 2009, the NCR has seen supply of 305,000 sq ft of subleased space, while Hyderabad has seen 383,000 sq ft of subleased commercial space. In Bangalore, 58,200 sq ft of subleased commercial space was made available.

These corporates had bought space to expand aggressively, assuming that the high-growth trajectory prevailing in 2007 would continue in the foreseeable future. Following the sharp change in the business environment in the aftermath of the global financial meltdown, these corporates are now in a bind. They are now forced to lease out a part of their space, as they cannot get out of lease agreements in the next 12-18 months due to lock-in periods.

“A lot of developers had signed agreements giving companies the right to sublease their space in future. Those companies are using this clause during this downturn to save costs,” Naveen Raheja, CMD of Raheja Developers, said.

Since this well-furnished commercial space is available at a marginal premium, its demand is better than the unfurnished space offered by developers. Companies are offering their space at an average Rs 20 extra on existing rentals.

“The subleased space is well furnished and the companies are quoting very competitive rentals for their space. If the buyer gets an already furnished space at a marginally higher price, naturally we will have to reduce our prices to sell our space in this subdued market,” an executive of a leading real estate company said.