Indian Commercial Office Space: 2013 Wrap-up
India’s economic performance for the year 2013 stands in contrast to the high-growth years between 2003 and 2011. A gradual revival was visible from the July–September period, however,when the economy grew by 4.8%—largely on account of improved performances in agriculture, financing, insurance, real estate and business services, and select infrastructure sectors.
In a bid to bolster demand and inject liquidity into the sector, the Reserve Bank of India (RBI) revised base rates twice by about 50 basis points during January-March 2013; and then again reduced base rates by 25 basis points in May. Although the repo rate was raised by 25 basis points again in September; they were left unchanged at 7.75% during the December Monetary Policy Review. (One basis point is one-hundredth of a percentage point.)
The move, appreciated by the industry, was quickly followed by banks lowering new home loan interest rates. The very fact that RBI decided to keep repo rates unchanged despite persistent inflationary conditions is indicative of the RBI beginning to address larger economic growth, consumerism and investments. Going forward, the RBI may be expected to maintain stability or reduce base rates. All in all, a positive signal for the investment climate in India’s realty sector; and a likely indication of a gradual economic recovery.
India’s office market continued to take cues from the prevailing economic sentiment in the country throughout the year. With cost reduction being a primary focus, occupier sentiment remained cautious; and most corporates continued to review expansion plans by focusing on improving existing space utilization to control costs.
The first quarter of 2013 saw fresh office space supply of approximately 10 million sq.ft across the leading cities; while absorption stood at about 6.6 million sq.ft. Transaction activity was dominated by Mumbai, Bangalore, Chennai and the Delhi National Capital Region (NCR), representing about 90% of the total transacted space during the quarter.
By the first half of 2013, more than 20 million sq.ft of new office space had been added, with supply growing by 16% year-on-year. Absorption, however, stood at approximately 14 million sq.ft in the first half of 2013.
The top three cities of Delhi-NCR, Mumbai and Bangalore continued to dominate transactions in the first half of 2013. By the third quarter, less than 3 million sq.ft of office space entered India’s prime real estate market—supply dropping by more than 75% quarter-on-quarter; and by nearly 50% over the same period last year. The July–September period witnessed the lowest addition of office space over the past several quarters, according to CBRE Research.
This rationalization of office space supply across the top urban centres of the country was largely attributed to prevailing vacancy pressures in completed projects and weak commitment levels for under-construction properties.
The last few months of the current year, however, seemed to have witnessed the beginning of a gradual recovery curve for the economy at large; and by extension the commercial office segment.
According to estimates made by CBRE Research, the year (2013) may end with a total office space absorption in the range of 25–30 million sq.ft, as against 26 million sq.ft of office space absorption in 2012.
Transaction activities seem to have improved slightly over the last few months, as market sentiments have begun to revive to some extent.
Although the IT/ITeS sector continues to dominate the commercial market as major occupiers of corporate space, new sectors have opened up too—especially BFSI (banking, financial services and insurance), consulting and research, as well as the engineering and manufacturing sector.
More interestingly, despite small and medium sized transactions (of less than 20,000 sq.ft of space) having dominated the commercial office market segment in India’s top cities in 2013, the year saw a healthy mix of quite a few big ticket deals too.
The SEZ (special economic zone) story too continued to survive, with more than 5 million sq.ft of deals getting finalized in 2013 alone.
Outlook: 2014
Against the current economic backdrop, demand for commercial real estate is likely to remain cautious in the medium term. Companies are expected to continue their focus on optimal space utilization and cost cutting measures and transaction activity is expected to be mainly restricted to take up of small and medium sized space. Recent indications of revival in the global and domestic economy, however, should contribute to better performance and improved economic prospects towards the second half of 2014.
The commercial office segment of India’s top cities is expected to see fresh supply addition of about 140–150 million sq.ft by end-2017. With a considerable level of this upcoming supply lined up for 2014–15, rental values of select micro-markets—such as Gurgaon, Outer Ring Road (Chennai), Thane and Navi Mumbai—are likely to remain under pressure.
This projected expansion of the commercial office realty segment, however, is subject to an effective utilization of the potential opportunities for growth and implementation of relevant policy measures to resolve bottlenecks bothering the sector. Reforms are specifically required in areas, such as slow project approval processes, supply logjams, opening up key sectors like retail to foreign direct investment, and infrastructure creation through private–public partnership projects.