BOMBAY, 18 November 2002 — The Indian commercial property market is undergoing a turmoil. A whirlpool churns up the water, causing all the scum from underneath to rise to the surface and once all settles, the face of the water, though calmer, seems new.

Similarly, the Indian real estate market which went through a major boom in 1994, has been undergoing a change over the past few years and now, though the scene has not exactly settled, the scenario which has emerged is totally new.

Nariman Point was considered to be one of the most expensive pieces of land not just in Bombay but all over India. Now this status of being a prime property seems to have changed. As per the latest reports, real estate prices there have fallen to levels prevailing at the Bandra-Kurla Complex, Bandra (East). While rental rates at Nariman Point are currently in the region of Rs.75 to Rs.125 per square foot, they range from Rs.80 to Rs.100 per square foot at the Bandra-Kurla complex. What is shocking is that rental rates at Nariman Point were more than Rs.300 per square foot.

Ownership rates at Nariman Point are now in the region of Rs.8,000 to Rs.13,000 per sq ft, while at the Bandra-Kurla Complex they are from Rs.7,000 to Rs.9,000 per sq ft.

So why have these rates of the prime properties changed? Real estate dealers say that this fall has been a result of the exit of at least seven major offices or organizations from Nariman Point in recent months.

Prominent companies that have moved out of Nariman Point in recent months are Larsen & Toubro, IDBI Bank, IDBI, Great Eastern Shipping, Bank of Indonesia, Maharashtra Metal and Minerals Trading Corporation.

The Arvind Mafatlal Group has also sold prime real estate assets in Bombay to settle its dues with banks and institutions. It sold a part of the remaining floors at Mafatlal center and Mafatlal House, two of its commercial buildings in Nariman Point.

In addition to this, it also disposed some floors at Mafatlal Chambers, located in the city suburb Lower Parel. Real estate industry source said that the company’s Nariman Point property would have fetched the company around Rs.16,000 per sq ft. And it is said to have mopped up around Rs.2.70 billion through the sale of properties.

And these organizations have been moving out of Nariman Point mainly due to the economic slowdown and the heavy municipal taxes and duties occupants have to pay. Moreover, Nariman Point has parking and traffic problems, which is also one of the reasons for those who move out. And now there is also talk of a cut in the water supply.

Another new scene has emerged. Many Indian banks, rather than buying property as an investment which was the best option earlier, have now opted for property-for-rent as the most favored investment option.

This has opened a new line of business for banks who are taking advantage of low real estate prices for future gains. The stable returns apart, the security deposits can be reinvested elsewhere.

ICICI recently concluded a Rs.600-million real estate investment deal for large chunks of prime commercial space in Bangalore and Hyderabad.

ICICI has bought 1.7 lakh sq ft in Bangalore’ Futura building from Raj Menda’s RMZ Corporation. It has in turn rented it out to HSBC for Rs.23/sq ft. The bank has also purchased 1.86 lakh sq ft in Hyderabad’s Cyber Gateway from Larsen & Toubro which has been leased out to GE Development Center. The guaranteed rentals from these two properties will each fetch a 14 percent return to the bank.

ICICI is the second bank to have opted for this route. Last year, HDFC invested close to Rs.1.00 billion, in properties which were leased out to top-end tenants like Sun Microsystems, Cisco, Shopper’s Stop and others.

According to property consultants, banks are parking funds on commercial properties because new companies prefer rented space to outright purchase of real estate. The new mindset among companies is that given the vagaries of the business, they do not like to lock money in expensive realty.

And in all this, another fact which has emerged is that despite the sluggish rates experienced, the average returns on investments in commercial property in India is one of the highest in the world. Real estate management company CB Richard Ellis compared the average yields of 12 countries/cities and found that the year on year returns on commercial properties in Bombay is the highest at 13 percent, Delhi is at 12 percent and Bangalore at 11 percent. While the average returns from property prices in London is pegged at 5.3 percent, it is 5 percent in Frankfurt and 4.8 percent in Singapore. The average yields from commercial properties in Sydney and Bangkok are a little better at 6.3 percent and 9 percent.

So what is the outlook for the Indian commercial property market in India over the next two years? Most of the real estaters confer that the going looks optimistic. They all are of the opinion that the Indian infotech industry and ITES sectors in India have continuously outperformed the global industry and thus the demand from this segment is likely to remain high in the near future.