JLL Asia Pacific property digest: Delhi NCR

Delhi NCR: Grade A Office

• Leasing activity continued to remain strong in suburban micro-markets of Delhi – NCR, while the CBD and SBD saw moderate activity.
• CBD witnessed a marginal increase in rent at the back of low availability of leasable space and rents in SBD.
• Capital values witnessed a marginal increase and Investor activity was limited.

Demand
Demand was sluggish in the prime office micro-markets of the city in 2Q11. Vacancy rates remained low at around 1.1% in the CBD and all leasing activity, either small or moderate happened in the existing stock. New leasing activity in the CBD was negligible, with no net absorption. There was turnover of occupiers in existing office stock, with Safran Advisers leasing 10,000 sq ft (929 sqm) in the HT House-Press Building. SBD witnessed a net absorption of about 20,000 sq ft (1,858 sqm) in 2Q11, where quality office space remains available and the vacancy rate is in double digits. The SBD accounts for the majority of demand due to its relative affordability and availability of good quality office space, particularly in Saket and Jasola. Occupiers continued to prefer SBD over CBD due to the aforementioned reasons.

Few lease transactions in SBD in 2Q11 were Red Hat leasing of 4,279 sq ft (397.53 sqm) in Copia Corporate Suites in the Jasola Business District and MacAfee’s lease of 4,700 sq ft (436.64 sqm) in Rectangle One in the Saket Business District. Vacancy rate in SBD dropped to 13.7% in 2Q11, down from 14.1% in the previous quarter.

Supply
For the second consecutive quarter, no new supply was recorded either in the CBD or the SBD in 2Q11. Thus, the stock of commercial office space remained unchanged at 2.13 million sq ft in the CBD and 4.8 million sq ft in the SBD.

With construction activity limited in both the CBD and the SBD, the extremely limited supply of good-quality office space in the CBD contributed to the negligible leasing activity, while, in the SBD, large amounts of uncommitted vacant space continued to attract tenants and offer negotiation leverage in the short term.

Asset Performance
Lack of vacant space in the CBD and moderate demand increased the rents marginally in 2Q11. Grade A office rents rose to the range of INR 235-290 per sq ft per month. Meanwhile, rents in the SBD remained stable in 2Q11 on the back of moderate demand. However, the demand was restricted by a high vacancy rate that gave more negotiating leverage to occupiers and sustained rent stabilisation trend.

Capital values in the CBD and SBD witnessed a marginal rise. However, investor sentiment was clearly muted in 2Q11, as evidenced by the slow growth in capital values after a rapid rise in 4Q10 and 1Q11.  In both the CBD and SBD, capital values in 2Q11 rose marginally by 160 bps in the CBD and by 180 bps in the SBD.

12-Month Outlook
The CBD is expected to continue seeing an increase in rental values as long as vacancy rates remain extremely low and demand is strong. As active turnover continues in existing stock, landlords are expected to continue increasing rents to take advantage of market conditions. Meanwhile, in the SBD, a declining vacancy rate and moderate demand are expected to create an inflationary pressure where rents are predicted to rise from the current stable levels over the next 12 months. Investor sentiment is expected to again lead the improvement in the leasing market and capital values are predicted to rise relatively faster than rents, which will compress yields in both the CBD and the SBD.

Delhi: Prime Retail

• Limited new supply and moderate absorption resulted in a slight increase in vacancy rates.
• Rents rose marginally in the Prime South and Prime Others sub-markets.
• Capital values grew in line with rents, keeping yields constant.

Demand
With sustained economic growth momentum, boosting business and consumer confidence, retailers continued to expand. However, retailers continue to be cautious and have strategically restricted their expansions either to retail malls with a good performance history or to new developments that offer good visibility, branding and excellent design, coupled with a pure leasehold model, and an active, professional mall management team.

The pre-leasing activity observed in previous quarters in retail projects that commenced operations in 2Q11, coupled with moderate leasing activity in existing stock, led to net absorption of 385,005 sq ft (35,768 sqm) in the NCR retail market in 2Q11. This was appreciably lower than the 622,001 sq ft recorded in 1Q11 as the level of pre-commitments in new completions ranged between 25-30%. On an overall basis, vacancy rates rose slightly to 30.3% in 2Q11 compared with 29.1% in the previous quarter. The majority of the absorption was recorded in the Prime Others micro-market, where supply outstripping demand and historically high vacancy rates, caused vacancy to jump again in the quarter. A similar trend was seen in the Suburbs micro-market; only the Prime South micro-market, where demand is restricted to existing stock, saw a decline in vacancy rates.

Supply
There were two completions in 2Q11.  Moments Mall – 600,000 sq ft (55,742 sqm) in Prime Others by the Anant Raj Group and Angel Mega Mall – 300,000 sq ft (27,871 sqm) in Ghaziabad in the Suburbs commenced operations in 2Q11. Both malls became operational with occupancy levels in the range of 25-30%.

Asset Performance
On an overall basis, rents rose marginally in 2Q11. Increases in rents in the Prime South micro-market picked up pace due to low vacancy rates in performing malls, while a marginal improvement in rents was observed in the Prime Others micro -market on account of new completions enjoying good leasing activity and cashing in on good pre-commitment levels. Rents in the Suburbs sub-market continued to remain stagnant as good performances in select developments in Gurgaon and Noida were offset by a lack of demand in others.

Over the past 3-4 quarters, capital values have grown in line with rents, which have kept yields near constant across all the sub-markets. The trend continued in 2Q11, keeping yields at 10.7% in 2Q11.

12-Month Outlook
The trends seen over the past 3-4 quarters, including an increase in tenant queries and expansion plans leading to more transactions by retailers, are expected to continue. However, activity will be concentrated in projects that are already seen as performing malls that attract higher footfalls and achieve a healthy footfall-to-sales conversion ratio. Prime South micro-market will continue to see rents surge as vacancy rates fall due to a lack of new supply amid continued demand. The Prime Others micro-market is expected to see a marginal increase in rents as new retail malls drive demand among retailers that are yet to expand in this micro-market. However, the micro-market will continue to see slight downward pressure on rents as more supply is added and vacancy rates rise. The Suburbs sub-market will also continue to see downward pressure on rents as large amounts of new supply is expected over the next 12 months.