Are commercial rentals headed downwards?

After touching record highs, commercial rentals have started softening. Real estate analysts and consultants are predicting an annual correction of around 5-10% over the next three to four years. CNBC-TV18’s Nayantara Rai reports that if the economy slows down further, developers may be on shaky ground.

The realty index has fallen 45% this year and this is expected to start reflecting in commercial rentals. Analysts say rentals are likely to correct by 5-10% annually for the next four years. International brokerage house CLSA believes commercial rentals will move back to recent highs only in 2012. According to Cushman & Wakefield, rentals in Mumbai's Nariman Point, Worli, Lower Parel and Bandra Kurla stagnated in the last three months. In fact, rentals in these areas have consistently recorded a single digit increase every quarter.

Gulam Zia, Head-Advisory Svcs, Knight Frank said that there has been a rationalization of 10%.

Analysts are also expecting a glut in the commercial property market. IT and ITES makes up 75-80% of the demand for office space. A slowdown in this sector is bound to trickle down to the property market. According to Deutsche Bank, the cumulative supply of 497 mn sq ft planned by the top 14 listed developers by 2013 is 133% more than the actual demand.

Sanjay Verma, Exec MD-South Asia, Cushman&Wakefield said, “There has been some rectification on account of supply increasing.”

Developers however do not agree. Realty giants DLF and Unitech rubbish these claims and say rentals will continue to head north. AS Minocha, Chairman, DLF Commercial Developers said, “Rentals will continue to shown an upward swing.”

However, if the slowdown continues developers may have to eat humble pie.