Office market trend looking up

Office market trend looking up

Period between 2014 and 2016 can be considered memorable for Indian office market with quality locations seeing strong demand and rentals increasing by up to 50% in preferred micro-markets. However, demonetisation in later part of 2016 and uncertainty caused by introduction of GST and RERA, put a break on growth though temporarily

Scenario for Indian office market has changed dramatically during last five years or so.  In fact, India’s office market was a laggard between 2008 and 2013 wherein lease rentals had gone down by 40-50% from 2008 peaks and continued to stagnate owing to supply outpacing demand. It was the time when the Indian residential market was seeing a strong recovery with prices doubling across cities within a matter of few years. However, the scenario changed completely for two sectors from 2014 onwards.

Year 2014, a turnaround year

Surprisingly (or due to strong government at the Centre), in 2014, net absorption of office space witnessed strong recovery for the first time with 39% YoY growth to 30msf. This momentum was maintained next tow years when the absorption rates were 32.6msf and 32.9msf, respectively. Strong leasing demand in Bengaluru and Hyderabad were the main reasons for this strong performance though there was demand in other centres too.

IT-ITES were the demand drivers

It should be noted that the IT-ITES sector has remained top-most in terms of share of office occupancy across major Indian cities. Even today, the sector maintains its lead with 35-40% share in office occupancy. However, surprising drop is in the demand from start-ups. ECommerce companies too have seen substantial drop in demand as they only accounted for 3% of demand in 2016. In another interesting development, in 2016, share of leasing by US-based firms jumped up to 42% from 32% in the previous year led by expansion of many companies such as Amazon, Microsoft, Google. Domestic firms continue to account for a third of demand.

Thus, period between 2014 and 2016 can be considered memorable for Indian office market with quality locations seeing strong demand and rentals increasing by up to 50% in preferred micro-markets. However, demonetisation in later part of 2016 and uncertainty caused by introduction of GST and RERA, put a break on growth though temporarily. However, in the second half of 2017 there was smart turnaround in absorption levels and pre-commitments. But net absorption level at 24 msf saw a sharp decline compared to earlier years. However, higher supply infusion of 30msf in 2018 has helped year’s net absorption to increase to 27msf.

Year 2019, despite the slowdown in the economy, is expected to create a record sort of thing for the industry as the net absorption in first six months has already crossed 20 msf which is already 70-80% of annual net absorption levels of the previous year. This is largely owing to majority of upcoming supply being already pre-committed.

There are multiple factors driving office demand in India and some of them are as follows:

  • While the domestic IT/ITeS companies are affected by slowdown resulting in lesser fresh recruitments which in turn will lead to sluggish leasing demand, this is more than made good by hiring by Global In-House Captives for higher-end jobs.
  • Further, co-working spaces have emerged as an additional driver and according to a report by Colliers India, India has more than 160 co-working space operators running over 350 centres in India. Of this, majority of the centres are based in Bengaluru, Mumbai and NCR having occupancies of 60-80%. As per industry estimates, co-working spaces accounted for absorption of 3-4msf each in CY17-18 with another 9-10msf of space expected to be absorbed over CY19-20E.
  • Unlike the residential market which has relatively lower entry barriers in India, the Indian office and mall market is a capital-intensive business requiring developers to have adequate balance sheet strength. As a result, there are limited number of developers capable of building quality rental asset.

Further, the trend has now shifted to office campuses with larger plot layouts which require adequate planning. The few notable names are DLF, Prestige Estates, K Raheja Corp, Embassy Office Parks, Brigade Enterprises, RMZ Corp and The Phoenix Mills. Institutional money flowing into Indian rental assets and emergence of REITs are also expected to keep the growth momentum upwards in the coming days.

1 Comment

  1. The trend is quite positive in the current economic scenario and would help the professionals to work on projects

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