India's office market performance report

India's office market performance report

The recent economic survey has also highlighted focus on continuing economic reforms towards making India a US$5 trillion economy by 2024. This Knight Frank report presents a comprehensive analysis and impact of this survey on the office market performance across the country’s top eight cities

Knight Frank, Office market, India', India real estate, Report

It has been an eventful year so far with the government getting a fresh and stronger mandate by the country for another term, signaling stability of policy direction. In addition to the 75-bps reduction since February this year, the RBI has also changed its stance from ‘neutral’ to ‘accommodative’ in response to the dire need to boost aggregate demand and reinvigorate private investment activity. The apex bank has also implicitly stated its intent to aid the NBFCs facing a liquidity crisis and protect banks that have large exposures to them. The relaxation of GST rates from 5% to 1% for affordable housing and from 12% to 5% for others, also shows the government’s will to aid the beleaguered sector.

Regulatory and financial measures taken by the government have played their part in supporting end-user sentiments in the residential segment. The Indian real estate market has also shown tangible signs of stability, as developers have been reconciling to the new normal since the implementation of RERA and GST and increasing supply gradually. Albeit marginal, the residential market has now seen the third consecutive half-yearly period of YoY growth in demand as well as supply during H1 2019. However, this has been largely based on the volumes generated in the affordable housing segment.

Supply increased by 31% YoY to reach a decadal high of 23.9 million sqft in the current analysis period. Transactions clocked a similar high of 2.6 27.4 million sqft for space transacted in a single period during H1 2019.

The office space market that was constrained due to the comparative lack of supply saw over 24 million sqft get delivered in H1 2019. This is historically the highest quantum of supply coming online during a half-yearly period and prompted a similar record level of transactions at 27 million sqft. Additionally, five out of the eight markets considered in this report experienced double-digit rental growth, reiterating the underlying strength of the Indian office market.

The spurt in demand for higher end roles in the Artificial Intelligence and data security domains have led to a welcome and significant 59% YoY increase in demand from the IT/ITeS sector during H1 2019. BFSI is the only sector that saw a negative growth in transactions YoY and is undergoing a period of strife in the wake of the NBFC crisis and serious NPA issues. It has been actively consolidating its real estate footprint with the objective of liquidating non-core assets and saw space take-up reduce by nearly 8% YoY.

Across the top eight cities, coworking space providers have taken up around four million sqft of office space during H1 2019, which represents a 42% growth over H1 2018 and accounts for approximately 15% of the total space transacted during this period.

The incidence of shared spaces has been growing steadily in the Indian real estate markets, especially in the office markets where coworking operators are experiencing prolific growth in the recent past. The space taken up by these operators has more than quintupled since H1 2017 to 5.5 million sqft in H1 2019. The perception of real estate as a service offering is gaining popular appeal and is gathering traction in the residential market as niche segments such as co-living, student housing and senior living are attracting significant institutional interest.

While the underlying demand for residential property remains strong and recent trends suggest the beginnings of a recovery in market volumes, it is still a long way toward resurrection of the market that is plagued by macro concerns of economic growth. With the developers’ fraternity correcting past mistakes on product and pricing, and the regulator working toward building new benchmarks in the sector, we think that it is a matter of time before consumer sentiment revives along with an improvement in economic momentum.

Office space supply has lagged demand since 2013 as developers chose to commit a majority of investments into residential real estate in hopes of saving existing projects or scoring a comparatively quicker profit, despite a strong underlying demand from office occupiers. Even private equity investors have been more inclined to acquire stabilised assets as an overwhelming majority of their investments have been routed toward the acquisition of already matured assets.

However, investment returns from residential real estate have been hampered by the inception of the RERA in 2016, which has effectively and substantially increased compliance requirements and exit horizons of residential developers. Additionally, the slump in homebuyer demand and the ongoing correction in real estate prices have also played their part in rekindling interest of developers and institutional investors, wanting to capitalise on the tight market conditions in the office market.

Financial institutions are also looking to play a larger role in the operation of their office property investments. Large private equity and pension funds such as Blackstone and Canada Pension Plan Investment Board (CPPIB) are now actively applying their global expertise in the operational aspects of their Indian office property investments.

With this shift of focus from residential to office development, the office space market experienced increased supply in 2018 that continued to gain momentum during H1 2019. Supply increased by 31% year-on- year (YoY) to 23.9 million sqft in the current analysis period, a decadal high.

Transaction levels that were limited largely due to the dearth of viable office space, responded in kind and clocked a similar decadal high of 274 million sqft for space transacted in a single period during H1 2019.

Among the eight markets studied, Mumbai and Chennai saw rental growth at a respective 7.5% and 3.5% YoY growth, while Kolkata rentals grew at a barely positive 0.6% YoY. Average rental values across the seven cities grew at 10% YoY during H1 2019. Ahmedabad did the best at 14.3% YoY rental growth, while Bengaluru and Hyderabad grew at 13.5% and 11.3% YoY respectively during the analysis period.

IT/ITeS sectors’ share in transactions has shown signs of weakening in recent periods, due to macro headwinds in the form of a slowdown in spending as well as an inclination to insource by the US and several European countries. However, a recent surge in hiring since the end of 2018 due to an increase in demand for higher end jobs in domains such as Artificial Intelligence (Al) and data security has increased the real estate requirements of the sector as well. The IT/IT/eS sector accounted for 35% of the transacted volume in H1 2019 as compared to the 28% in the previous period.

  • Contrastingly, the Banking, Financial services and Insurance (BFSI) sector that had seen an increase from 13% in H2 2017 to 18% in H2 2018, saw a decrease to 13% in the current analysis period due to an active focus by Non-Banking Financial Companies’ (NBFCs) and banks with higher NPAs to curb expansion plans and liquidate non-core assets
  • Demand from the Other Services sector has consistently outstripped the IT/ITeS, manufacturing and BFSI sectors on the back of increased take-up by ecommerce and coworking companies.
  • The global phenomenon of coworking spaces is growing in India with companies such as Coworks, WeWork, Daftar India and Awfis taking up space in Mumbai, Bengaluru, Pune and NCR. Across the top eight cities, such providers have taken up around approximately four million sqft of office space during H1 2019, a 42% growth over H1 2018.

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