Can't Kiss The Sky

CIRCA 1996. Pankaj Kumar, a property broker in Delhi who restricts himself to the rental business, has never had it so good. Nokia, Siemens, Motorola, Ericsson, LG, Daewoo...you name a transnational, and it's sure to be at Kumar's door, either scouring for housing for their senior expatriate executives, or in search of office space to accommodate their ever-increasing staff strength. That year, Kumar's firm PK Associates notched up a turnover of Rs 16 lakh.

It's all a distant memory now. We're approaching November '98, and PK Associates hasn't struck a deal all of this year. "TNCs don't call me up any more. The only calls I receive are from desperate landlords, whose properties have been lying vacant for nearly two years now," says Kumar. He's no exception. Delhi broker R.P. Iyer, of Iyer and Co, shares his woes. "In '96, each of my five staff members had an appointment a day. Today, we're lucky if even one of us manages to force an appointment upon a reluctant customer."

In today's plunging real estate market, property brokers aren't the only ones to suffer. Consider the case of Narendra Sarin, a retired government employee, who owns a two-storey house in Delhi's posh New Friends Colony. While Sarin himself stays on the ground floor, he rents out the second-floor duplex apartment. His previous tenant vacated in March '97—just a short while after the slump in real estate values began. And that was the beginning of Sarin's nightmare. "I thought I'd sit back and wait for brokers to call me. Nothing of that sort happened. In fact, I had to make 10-12 calls every day to the brokers." It wasn't until seven months later that Sarin found himself a tenant. And not on the terms he desired. "The monthly rental is roughly half of what I was expecting. Plus, I was hoping to get a year's rent in advance, and a security deposit equivalent to another year's rent. That, I thought, would be sufficient to buy myself a Zen. Instead, the best offer I got was for a three month advance payment," says Sarin. He's still nowhere near buying his Zen.

So what's happened? Didn't the ever-soaring real estate market assure to double your money every few years? For instance, during the peak years of '94-96, one could have purchased a three-bedroom flat in Delhi's upmarket Vasant Vihar for about Rs 80 lakh. But that investment would've translated into an immediate return of Rs 36 lakh. That's because the going rental rates were Rs 1 lakh a month, with three years' payment in advance. In commercial property too, the scenario was roughly the same.

That's exactly what killed the market, says Sudhanshu Tandon, general manager, northern region, at Colliers Jardine. Especially in commercial property. "During the boom years of '94-96, people were making a killing on the stockmarket, exporters were raking in tax-free money, and domestic businesses were booming. That coincided with the entry of TNCS into India, who needed rental accommodation for staff and offices. Most investors, therefore, saw real estate as a ripe investment opportunity," says Tandon.

But the good times were too good to last. This increased investment activity caused a huge increase in the supply of office space in the market, while the supply of residential property increased by a slightly lesser extent. "Between '98 and 2000, we expect about 5 lakh sq ft of office space to be added in Delhi's central business district of Connaught Place," adds Tandon. Demand, though, has failed to catch up.

BLAME it on two things. To begin with, TNCs decided to relocate out of the central business districts of Delhi and Mumbai. In Delhi, a host of companies—Coca-Cola, ICI, GE, Pepsi, Hughes Software, DuPont, SmithKline Beecham and Hindus-tan Lever—have either moved, or are moving to Gurgaon on the outskirts of the city. While in Mumbai, Citibank's decision to move to the Bandra Kurla complex by this year-end is expected to encourage other companies to follow suit. Take Coca-Cola for example. Till late last year, it had offices in two buildings in Delhi's business district Nehru Place. Now, it occupies 80,000 sq ft in a Gurgaon building that houses its staff of 90. Says Rahul Dhawan, Coke's director (external affairs and corporate communications): "We needed to consolidate our operations under one building. It would've been difficult to find so much area within the city." Then, there's the added benefit of lower rents. According to market sources, Coca-Cola should be paying a monthly rental of Rs 65-70 per sq ft for its Gurgaon property. While at the International Trade Tower (ITT) in Nehru Place, it was supposedly paying in the region of Rs 265 a sq ft.

In Mumbai's real estate market, exorbitantly high rentals are what account for the current slump. Effective rentals at south Mumbai's Nariman Point are now in the region of Rs 150-160 per square foot per month. At their peak, they had crossed the Rs 300 mark. "It was inevitable. There weren't going to be many takers at those high rental levels," says a Mumbai broker.

If this shift to the suburbs wasn't bad enough, it coincided with the economic recession that enveloped the country last year. And that's reduced the inflow of TNCs. Even those who were here have reduced their operations. "Delhi, for instance, saw a huge influx of foreign telecom executives in '96. But now, with the telecom sector in the doldrums, a lot of them have been sent back," says Raju Sikka, a property broker.

With the result there's virtually no demand from TNCs either for office space, or residential accommodation. Little wonder then that the office space Coke vacated at ITT is today reportedly going abegging at Rs 150-175 per sq ft a month. While in Conn-aught Place, space is available at Rs 80 per sq ft, in sharp contrast to the Rs 200 per sq ft, during the heydays.

A situation made worse by the Southeast Asian crisis. With the Korean chaebols being forced to tighten their belts, their Indian subsidiaries had to follow suit. "Executives from Korean companies have seen a 40-50 per cent reduction in their rental allowance," says a senior executive at a Korean company.

Hear the story of H.S. Kang, general manager, marketing support, LG Electronics India. "I had a monthly rental allowance of Rs 90,000. And I lived comfortably in a first-floor flat in Delhi's Vasant Vihar. But after the Korean crisis, my allowance was reduced to Rs 50,000. So I needed to move out." But there was one hitch: the landlord wasn't willing to return the deposit. Thankfully for Kang, the landlord's second-floor flat was vacant, and this April he moved there on a monthly rental of Rs 50,000. It's slightly smaller, but Kang believes he can make do till things get better.

At LG Electronics, Kang is still better off. Koreans at some other companies have been known to move into DDA flats, and sometimes even share accommodation. "None of the TNCs can pay the rents they paid earlier," says a Delhi broker. Adds Tan-don: "That has caused a 30 per cent slump in rental levels for residential accommodations, and 40 per cent for commercial. "

But Delhi's better off than Mumbai. "The fall in Mumbai's rental rates is greater, because Mumbai prices were higher in the first place," adds Tandon. Besides, most of the residential properties in Delhi are owned by retired government servants, who had made their investment eons ago. So they can hold on to their properties, rather than rent them at the low rates that prevail today. In contrast, a lot of Mum-bai's residential property is owned by builders, who've constructed on borrowed money. And are thus forced to rent out at the prevailing low rates, to ensure regular cash flows.

So, has the crash bottomed out? By general consensus, it has. Though, a further 5-10 per cent slump in select properties can be expected. That's another cause of worry for Pankaj Kumar. Perhaps, he—and others of his ilk—should consider shifting base to Hyderabad. India's new cybercity is almost the only place where rents aren't declining. If anything, they're on an upswing.