Though the opening of the Indian retail sector to foreign direct investments may have brought cheers to the commercial real estate sector in the country, it is expected that the supply of distressed properties within the commercial segment will increase during the second quarter of 2013, according to the RICS India Commercial Property Survey Q1 2013.

The marked pick up in the activity around distressed properties in the first quarter and the subsequent hike in their supply in the second quarter could prove to be a dampener on the extent of gains in capital values going forward. Even so, capital values expectations recorded their third consecutive quarter of positive readings, which is best run since early 2011.

Problems such as lower sales, cash flow crunch, expensive loans, high cost of labour and inflation are putting builders into a situation where they are forced to go for a better selling asset. Thus we see such examples, where developers are either reformatting their commercial project into a residential project or are looking for an exit.

Commenting on the trend, Sachin Sandhir, Managing Director, RICS South Asia said, “From the occupier’s point of view, commercial spaces often involve more capital. As there is huge demand for housing, small affordable to mid-income residential apartment projects sell faster than a commercial project.” Even investors— considered a good source of funds for developers– now prefer residential over commercial.

On the occupier side, it appears that the slowdown in economic growth over the past year is still taking its toll on occupier demand, although the economy is expected to tick up over the remaining part of the year 2013. However, in comparison to the last quarter, the occupier demand rose modestly in the first three months of 2013.

Commenting on the findings of the report, Simon Rubinsohn, Chief Economist of RICS said, “Developers within the commercial space are facing problems of funding. Meanwhile, India has not been able to attract a lot of foreign investments in comparison to other countries such as China and Malaysia within the region. Ongoing issues such as high inflation, large budget deficit and the slow pace of regulatory reforms are weighing down on business sentiment.”

The survey does note that investment enquiries increased modestly in the first quarter of the year compared to the previous quarter. “It is expected that the investment scenario will improve as the year progresses with the benefits of the recent regulatory announcements beginning to be felt,” he added.

On the supply side, inventory continued to rise but at a slower pace than the previous quarter. As a result the gap between the change in demand-supply recorded during the first quarter of this year (Jan-Mar) has further narrowed to the levels of the second quarter 2011.