Today, the world sees India as a land of opportunity for business and investment. RBI head Raghuram Rajan said in mid-September that while fellow BRICs have deep problems, India appears to be an island of relative calm in an ocean of turmoil. This scenario continues; as per recent government data, economic growth reached 7.4% in the second quarter of the current financial year, riding on a spike in manufacturing and a pickup in investment demand.
Globally positioning India as an investment destination and improving India’s diplomatic and trade relation, Prime Minister Narendra Modi’s foreign jaunts have helped India attract more FDI. From the nations he visited during the financial year 2014-15, India received FDI of USD 19.78 billion. Moreover, foreign direct investment (FDI) in India increased by 27% in 2014-15 to USD 30.93 billion.
In other fronts as well, it is time to retrospect on how 2015 was for the real estate sector, and to crystal-gaze into 2016.
Commercial Real Estate
India’s office space absorption during 2015 stood at 35 million sq ft – the second-highest figure in the country’s history after 2011. The demand for office space in 2011 came from occupiers taking advantage of low rents after the global financial crisis. This time, however, it was the result of corporates implementing their growth plans.
While pan-India vacancy still stands at 16%, realistic vacancy actually stands around 8-9% – the total vacant supply is not always relevant for corporate occupiers. This is because most of them do not consider Grade-A buildings that are strata-sold or located in areas with inherent disadvantages and connectivity issues, or have been vacated from recent occupier exits and no longer match Grade-A requirements.
Cities such as Pune, Bangalore, Hyderabad and Chennai have a vacancy rate of just 5-10%, prompting the need for fresh supply to meet growing demand. Developers have been shying away from commercial projects because, though land and construction costs have been rising, rents have not reached a point where developers can get about 20% IRR. However, as rents climb faster, developers will start constructing – at least in the good markets.
Rents rose across Indian cities in 2015. The pace was faster in the secondary business districts (SBDs) and certain peripheral business districts (PBDs) of tier-I cities than in the established central business districts (CBDs). The micro-markets seeing more leasing activity in different cities in 2015 will continue to see action in 2016, while lesser-preferred locations will see a higher vacancy rate. As and when supply dries up and vacancy drops further, occupiers will start taking up spaces in these locations, as well.
In 2015, office space demand was mainly driven by IT/ ITeS, e-commerce, start-ups and large consulting firms. Players in many other sectors like FMCG, BFSI (front office), manufacturing, telecom and pharma did not come into the market – however, this should happen in 2016 and 2017. Next year will also see demand for built-to-suit (BTS) properties, especially from the larger IT occupiers. While the absorption in 2015 is similar to 2011, it is distributed across new and old buildings; previously, it was largely in newly completed buildings.
Demand will remain consistent over most of 2016, with occupiers showing a positive bias. Given the low supply and continued demand for commercial spaces, corporate occupiers will continue to firm up their expansion plans. While 2016 will bring continued demand for leased spaces, quality supply will be lower. This means that unmet demand will reflect in higher occupancy of Grade-B office spaces.
After the opening up of real estate sector to FDI, the profile of developers, as well as ownership patterns, will start changing. This will lead to a drop of ownership requirements by Indian developers and a rise in ownership by PE funds and MNC developers.
Office Space: Supply & Demand