Real estate players have said that high commercial borrowing rates coupled with over-supply in the commercial space could be detrimental to the sector's development in the near term. Industry sources say that defaults may rise in the commercial category if the tight borrowing situation is not corrected soon.

“We primarily look at the repayment capacity of the developer. Most of them have high debt on their balance sheets and offer land as collateral. Even then they have to grapple with shortage of working capital,” a bank official said.

The official said that commercial borrowing rates may vary anywhere from 14-20 per cent.

High construction costs

Real estate players said that the cost of construction of commercial property is high and the returns invariably take longer.

“The current cost of construction for commercial property stands anywhere between Rs 1,200 and Rs 4,000 per sq feet depending on locations. The retail and BFSI sectors are driving the demand. There are many unfinished projects and delivery delays,” Mr Navin M. Raheja, Managing Director of Raheja Developers and President, National Association of Real Estate Developers, said.

Also the commercial sector, which till 2010 had seen steady investments, is now witnessing a massive dip. Many private equity players are exiting the business due to low return on investments.

A JLL Real Estate Intelligence Service report said, in 2011, a retail real estate supply of 13.8 million square feet hit the market, with 10.7 million square feet getting absorbed.

Over-supply

Mr Om Chaudhry, Founder and CEO Fire Capital and Chairman, Astrum Homes, said, “Cash flow projections are stretched out. There is lot of over-supply in the market. Many commercial projects get into the funding trap and are half built. Hence in large markets there are millions of square feet of space lying unutilised, though there is demand.”

Another developer DTZ, too, notes that the proposal to bring commercial rental under the service tax ambit is also adding to the woes.

“Commercial rental, which is a cost to the retailer, was brought into the ambit of service tax in the 2007-08 budget. Retailers had challenged this levy in high courts but failed to secure a relief. If implemented, this additional levy will put huge burden on the retail segment, which is already operating with low margins,” DTZ said.

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