Interview of RM in Friday Gurgaon (Nov’ 2011)

Q: What are the factors that you think are holding the commercial real estate market in Gurgaon?

RM : Gurgaon currently has more than 30 million sq. ft of commercial real estate under various stages of planning / development. The investment plans of most organizations, esp. within the IT & manufacturing domain aren’t really robust & aggressive, owing to the overall business environment.

A large part of the blame can be attributed to two factors

(a) Poor planning & execution ability with some of the developers

(b) Liquidity crunch & lack of capital for commercial real estate.

The above two lead to delays in completion of projects, thereby attracting cost overruns. The pricing strategy of commercial real estate hasn’t kept pace with the scientific methodology adopted in the residential sector.

 Q: There is a lot of oversupply of commercial office space in Gurgaon. In such a scenario how do you see the market trends. Is there any major correction in the offing?

RM : In this current market scenario, the larger players are saddled with more inventory, and they are willing to be more competitive on the pricing aspect. This puts more pressure on the smaller developers, whose offtake of inventory necessarily loses the premium.

Most commercial projects in Gurgaon have no discernible differentiator (on product design, specs & quality) with the others, with the exceptions of a few. That takes away the attraction for prospective clients & tenants.

Q: Tight money supply and slowdown in Europe and US has lead to few companies coming to set base and expansion is also low. What do you think is the likely impact.

During the pre 2008 era, organization used to identify spare capacity for forward expansion, which is a casualty in these uncertain times. Most organizations are taking up space on need basis, and aren’t reserving space for expansion, with the knowledge that the supply is adequate.

Also, the SME segment in Gurgaon hasn’t really had anything planned for them by the developers, who today aren’t expanding beyond the next three months requirement. Also, adequate inventory is avaialble in the areas like Udyog Vihar, sector 30-31-32 erc, wherein the building though shorn of the glass facades & central amentities, are adequate for one segment of clients.

The “Eurozone” crisis isnt helping the cause of Gurgaon, and then there are another 7 cities which are giving a tight competition to Gurgaon, not just with the real estate supply, but also with other soft benefits& incentives.

 Q There is also a problem of structural vacancy as many building in Gurgaon are vacant and tenants are not occupying these? What do you think is the solution.

RM :  Many of the commercial projects in Gurgaon, especially by the smaller developers, have been sold to financial investors in smaller space denominations. The developers have either sold on a rental commitment (assured returns) or have altogether washed their hands off the project, except for the maintenance. This situation does not augur well for the owner or the prospective tenant.

The rental expectations are based on the prevalent market price of the product. If the product has been sold on a higher price OR on assured returns, the current rentals don’t support the expectations of the property owner.

Either the consumers have to be offered a lower rentals, OR, the landlords would have to be more innovative by shouldering a part of the capital costs for the furnishings / Finishing by offering perceived benefits to the end user.

 Certes research reveals that 65-68% of the operating expense of a typical commercial office space occupier is towards Power, amenities & operations. The acute power deficiency, coupled with the infrastructure related costs in Gurgaon, compared to some other competing cities, isnt helping either.

 Q Which areas do you think are most promising for investors as far as commercial real estate is concerned?

RM : The Delhi master plan MPD 2021 is also likely to bring in a large supply of land for commercial development. Coupled with the fact that Delhi contributes a substantial part of the work force in Gurgaon, the Delhi challenge cannot be negated.

In the short run, the projects on the Northern periphery Road (NPR) would see an off take, subject to the operation of the road over the next three years.  Most developers who have projects farther away from Gurgaon city have to either offer very competitive pricing, Or, would have to add value to their products, to attract quality customers. The recent labour & other administrative lapses, widely reported by the media, isn’t helping the cause of Gurgaon too.

The interviewee is a director with Certes realty Ltd, a research & advisory firm on Delhi & Gurgaon master plans 2021 & 2025 respectively.

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