Demand for office space improves by more than 30%


By:Anshuman Magazine, CMD CBRE South Asia

Anshuman magazine, CB Richard Ellis, India real estate news, Indian realty news, Property new, Home, Policy Advocacy, Activism, Mall, Retail, Office space, SEZ, IT/ITeS, Residential, Commercial, Hospitality, Project, Location, Regulation, FDI, Taxation, Investment, Banking, Property Management, Track2Media, Track2RealtyTrack2Realty: Positive market sentiments and a gradual global as well as domestic macro-economic recovery may finally be signaling the beginning of a revival in India’s corporate real estate segment. Various corporate firms, who had put their office space consolidation and expansion plans on hold over the previous couple of fiscals, finally began their transaction processes; and many concluded the same during the penultimate quarter of 2014.

The office markets of Bangalore, the Delhi National Capital Region (NCR) and Mumbai attracted more than 70% of such office space requirements during the third quarter of the year; while Chennai saw a strong quarterly growth of more than 50% in Grade A office space take-up, followed by Mumbai (~15%).

This trend reflected a sustained improvement in office space leasing sentiments across most cities. With the expected increase in India’s GDP growth, the commercial real estate market is likely to witness accelerated activity in forthcoming months.

Office space transactions on an upswing

The third quarter of the year saw stable, yet significant demand for office spaces on a quarter-on-quarter basis across the country’s leading urban centers—clocking in a total absorption of about 8 million sq. ft. during the period—signaling the generation of steady employment opportunities.

On an annual basis, investment-grade office space take-up also rose by around 31%. New Grade A office space addition, meanwhile, fell by about 3% q-o-q across key cities, to stand at about 6.7 million sq. ft. during the same period—helping to balance out the supply/demand dynamics across the country’s key corporate real estate locations.

The period attracted incremental demand from corporate occupiers seeking office space in the Delhi NCR. The region accounted for more than 25% of the total space transacted in the third quarter. Mumbai’s office market attracted an upswing of enquiries from corporate space occupiers in the third quarter of the year.

The overall market sentiment in the city remained more optimistic over the previous quarters, which was the main trigger behind the significant absorption rates seen during Q3 2014.

Going forward, absorption rates in Mumbai are likely to get better in subsequent quarters. The Kolkata market also saw favorable traction during the period, experiencing significant demand growth for office space across most commercial districts. With quite a few transaction closures anticipated in the city in forthcoming months, the market sentiment is likely to remain positive in the remaining quarter too.

An exception to this trend was the Bangalore market, which saw absorption rates declining by about 21% q-o-q. The micro-markets leading demand for Grade A office space in the city remained the Outer Ring Road (ORR) stretch and Whitefield. Other locations, such as South Bangalore and Electronic City displayed healthy absorption levels too.

The quantum of absorption in the Central Business District (CBD), however, was negligible as strata-sold commercial properties posed a major hindrance to space take-up. Although the city experienced a drop in absorption rates in the third quarter, a significant quantum of large transactions is expected to reach closure in the coming quarter.

Office space demand drivers

The IT/ITeS sector continued to lead demand-drivers for corporate real estate across major cities. The IT sector in Bangalore continued to remain the key demand driver, followed distantly by the pharmaceutical sector, financial services and back-end office requirements.

In the NCR too, the sector accounted for the majority of space take-up in Gurgaon. Demand for Grade A corporate real estate in the city was dominated by the IT/SEZ space, largely led by small to medium sized transactions during the third quarter of 2014.

Meanwhile, Noida continued to be perceived as a cost-effective option for the IT/ITeS sector in the region. Major office space occupiers in Chennai and Hyderabad also remained the IT/ITeS sector. Even for Mumbai, where the banking/financial sector has been a traditional stronghold, its peripheral micro-market has emerged as the preferred choice of large IT firms.

Market trends to watch out for

Although the IT/ITeS sector continued to remain the main demand driver for commercial office space during the quarter, the fledgling e-Commerce segment was seen to be the newest addition to the usual mix of corporate real estate occupiers across the leading cities.

Investment-wise, meanwhile, the Securities and Exchange Board of India’s finalization of norms for Real Estate Investment Trusts in India is likely to lead to fund flows into Grade A office space. The move is expected to arouse enhanced interest levels from institutional investors as well as development firms towards buying into income-generating real estate funds and core assets.

Stable rental values across markets

Rental values for commercial office space remained stable for the most part across cities such as Delhi NCR, Bangalore, Pune and Kolkata; while appreciating across select micro-markets of Chennai and Hyderabad. Sustained occupier interest in prominent SEZ developments of Chennai led to rental rates rising in the range of 12–15% during the quarter.

Similar demand trends also led to rental appreciation in select developments along the IT Corridor in Hyderabad. Conversely, subdued demand levels and existing vacancy pressures caused values to dip by 2–3% q-o-q in Mumbai’s Nariman Point and Bandra–Kundra Complex.

Rentals across the NCR maintained their equilibrium over the previous quarters in most prominent office developments in the Central Business District of Connaught Place. Most locations in the secondary business district of Nehru Place, Saket and Jasola saw stable rental movement as well.

The quarter also saw stable rental values across commercial office as well as IT/SEZ segments of Gurgaon and Noida. Rental values across Pune’s office districts remained stable too. Going forward, rentals are likely to remain stable across most markets due to a significant pipeline of under construction projects.


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