Rents fall as commercial real estate vacancy rates soar

[Lahore_Real_Estate]

KARACHI: Commercial real estate vacancy rates have reached as high as 50 per cent in Lahore and Karachi, according to Business Monitor International, a London-based research firm.

The slowdown in the economy has hit the commercial real estate sector particularly hard, with many businesses cutting back on renting expensive offices and choosing to make do with make-shift facilities in residential properties instead.

“The fundamental problem is a lack of demand from potential commercial tenants,” said analysts at BMI, in a research report issued earlier this month, alluding to the ability of most prospective tenants to make do with non-commercial properties for office space.

Demand for real estate, particularly commercial real estate, in Pakistan has tended to remain low owing to a lack of financing options available. The recession seems to have caused the entire sector to have taken a turn for the worse.

The impact of the downturn, however, has not been even. While Lahore and Karachi have seen vacancy rates hover between 40 and 50 per cent during the year 2010, Islamabad has seen vacancies reach only 10 per cent, largely due to a higher incidence of recession-proof government clients. Property values have fallen across Islamabad and Karachi but not Lahore. Most observers, including those at BMI have been unable to explain the phenomenon.

Development of commercial real estate, however, seems to be continuing apace. Large projects such as Centaurus in Islamabad and the Harbour Front buildings in Karachi have continued to add to the glut of capacity. While some of the higher end projects have been able to attract tenants, largely due to a more consistent supply of electricity and better security, smaller projects have continued to struggle to find tenants. The pattern of new developments is also uneven. New projects backed by Middle Eastern companies have slowed down somewhat in the aftermath of the financial crisis in Dubai. Local developers such as Bahria Town and the military-owned DHA, however, have continued apace.

BMI analysts attribute this difference to the fact that local developers are more familiar with market conditions and also have fewer options if they do not continue to invest in Pakistani real estate.

As a result of the rise in vacancy rates, rents have fallen across all classes of real estate and in all major markets across Pakistan. Property values, however, have fallen even further causing rental yield rates to rise.

BMI analysts expect property values to stabilise around mid-2011 and start rising to beyond pre-crisis levels from there on.