There is good news for the commercial real estate sector in this festive season. According to recent reports, the demand for office space in India’s seven major cities has touched a new high after thirty months. Office space absorption in the country reached 11 million square feet during July-September 2016, an increase of a whopping 9% from the previous quarter!
In the first nine months of the current year, prime office space absorption in India’s seven leading cities, including Bengaluru, Delhi-NCR, Kolkata, Chennai, Mumbai, Pune and Hyderabad was about 28 million square feet. The demand was the highest in Bangalore (24 %), followed by Hyderabad (17 %), Mumbai (16 %), Chennai (16 %) and Pune (13 %). Although, it was expected that the occupier focus would be primarily towards the micro-markets of these cities, yet the suburban and peripheral areas, where supply is high and rentals low, have witnessed reasonably high demand. As these suburban areas will have upgraded infrastructure and amenities in the near future, they are seeing an increase in investment in office spaces as well, on account of better expected returns.
The hike in office space demand In Indian cities is attributed to the overall positive economic scenario in the country. The corporate sector is upbeat, with both domestic as well as International companies looking to expand their operations, thus creating a need for workspaces. India is one of the most sought after destinations to set up Business Process Outsourcing (BPO) units, due to the low infrastructure and human resources costs as well as availability of talented professionals. This is a main contributive factor to high demand for prime office space by global companies. And, almost all major Indian cities, particularly Bangalore, Delhi-NCR and Mumbai, are witnessing emergence of start-ups. This too has spurted the demand for office space.
The Government has introduced well thought-out changes in its policies, rules and regulations, increasing the trust factor amongst the corporates and enhancing their willingness to scale-up operations within the country. The anticipation around REITs (real estate investment trusts), and the expected compliance of developers under the Real Estate (Regulation and Development) Act 2016 (RERA), have provided the much needed positive momentum to the commercial real estate sector.
A major contributor to the high office space demand is the Information Technology (IT) sector. IT and IT-eS i.e. Information Technology enabled services firms saw significant consolidation this year and thus, are estimated to account for 50 to 70% of the office space demand. Due to IT sector, demand for large offices has increased manifold. Besides IT and IT-eS, BFSI (banking, financial services and insurance) companies have registered gains and thus, accounted for 10-11 % share in office space absorption in the last quarter. Engineering and manufacturing firms’ share has been close to 10-11% in workspace demand as well. BFSI, manufacturing and engineering sectors have witnessed significant growth in the cities of Mumbai and Chennai.
In the past few months, demand for all types of office spaces - Large, medium and small, has witnessed an increase in metros as well as smaller cities. To meet this growing demand, developers in the commercial real estate sector are delivering well connected and well equipped office spaces, which play a major role in increasing employees’ productivity. During the last quarter, cities of Mumbai and Chennai witnessed the highest supply of fresh, completed office spaces. Both the cities accounted for 65% of the total new supply of office spaces, followed by Kolkata at 16%. With no dearth of supply as well as demand for commercial properties, this year is anticipated to create some new records as far as office space in the country is concerned.