Suburbanisation and diversification stand out as the prominent features
Spurred by a host of positive factors, the real estate sector gained robust momentum during 2015 with nearly all pointers going up over the graphs. Office space leasing surpassed the 50 million square feet (msf) mark last year in the top eight cities, logging a healthy 7% CAGR over the last five years with the steepest increase coming in 2015 (54 msf).
Giving away blues of the previous years, nearly all sectors within the real estate industry are showing growth with commercial sector still being the major driver. While slackening trend is a widely acknowledged factor with the Chinese economy, India has emerged the topmost real market in Asia. Last year Indian RE constituted 53% of the Asian RE market.
The latest RICS-Cushman & Wakefield Report has enough rosy projections for the year ahead to cheer up realtors. First among these is the decline in the dependence on IT-ITES sector for growth of business. As is pointed out, the sectoral share has gradually become more diverse with pharmaceuticals, healthcare, Banking and Financial Services and Insurance (BFSI), etc claiming larger pieces of the leasing cake. According to the report titled “Commercial Real Estate: Steering Growth in Indian Cities”, the IT-ITES sector’s share was 62% in 2012. It had declined to 46% last year with BFS rising to 11% in 2015 from 6% in 2012. Manufacturing and Engineering share soared to 9% from 6% in 2012.
According to Sanjay Dutt, MD (India), Cushman & Wakefield, decline in dependence on IT-ITES (which could be vulnerable to shifting elsewhere) and diversification should be seen as healthy signs for the Indian RE. He says the industry in India is also helped by the continued upswing in dollar value but foresees decline in demand for office space as automation is causing shrinkage in working spaces.
Concurring with him, Anshuman Magazine, Chairman & MD, CBRE, South Asia says, commercial office space is in for big difference. “Per person demand for office space has declined to mere 70 sq. ft. today due to automation against 300 sq. ft a few years ago”, he adds. Shared space and flexibility in use of space too are emerging as new trends as startups like to work from shared spaces to optimise cost.
While Anshuman still hinges hopes on outsourced IT-ITES jobs to be spurring the growth in real estate, he says some shift of jobs to Poland, Ghana, Malaysia and Vietnam was in the offing. He however feels that vibes were favourable with ‘Make in India’ and ‘Startup India’ throwing up new jobs and thereby demand for space.
The substantial shift of commercial activity to peripheries during the last 15 years has led to suburbs coming alive. This stands out as the distinct feature of the RE scene today. Lack of land parcels in central business districts (CBDs), non-availability of contiguous office space, and investor- and occupier-friendly policies in the satellite towns have invariably taken the economic activity to periphery and suburbs. The report notes with satisfaction that 100 per cent back-up, enhanced connectivity, security, ample parking space, and development of malls, schools and entertainment facilities, have enabled developers to come up with A Grade buildings. “Such nodes are seen to be closer to airports which has become a frequent and preferred transport mode for business travel,” it observes.
Business shifts from CBDs to suburbs also get reflected in relocations and renewals which stood at 16.45 msf in 2015, registering a jump of 57% over 2014 with the maximum churn seen in Bengaluru, Delhi-NCR and Mumbai. The trend, pioneered by the MNCs, witnessed Deutsche Bank moving from CBD in Mumbai to Bandra-Kurla Complex (BKC), Microsoft from Nariman Point (both in Mumbai) to Santacruz, Hexagon and Wissen from CBD to Madhapur in Hyderabad, HP and Zee TV Networks in CBD, Chennai, to Taramani and Guindy respectively, and BMC Software and Nvidia, both from CBD in Pune to Yerawada. A cursory glance reveals that those offices expanded enormously after shifting from the CBDs to the suburbs.
Projections based on pre-commitments and trends in industry foresee approximately 27 msf of Grade A space to be absorbed in suburban location by the end of calendar year (CY) 2017. Highest supply and absorption levels are expected in Bengaluru’s ORR micro-market followed by Hyderabad’s Madhapur sub-market. Since last year, both the southern cities have witnessed a spike in leasing of office space. Pune comes behind them with projected absorption of 3.4 msf over the two years (2016 and 2017).
The private equity real estate (PERE) investments grew 61.7% (year on year basis) in 2015. The PERE investments that hovered around $ 1 billion mark until 2013, soared to $ 2.5 billion in 2014 and $ 4 billion in 2015. In numerical terms, the deals grew from 40 in 2013 to 90 in 2015. These have been helped by features such as secured investments, high yields and structured debt strategy. Though demand in residential sector was not very favourable — in fact it slowed down in 2015 — over 71% of PERE investments were made in residential assets in 2105.
RE bigwigs see new opportunities emerging as new jobs are likely to be created in R&D sectors, e-commerce, digital business, designing and warehousing besides growing demand from usual sectors of FMCG, Pharmaceuticals, etc. Sachin Sandhir, Global Managing Director, Emerging Business at the Royal Institute of Chartered Surveyors(RICS), predicts Internet of Things (IoT) to be the next big sector and data centres coming up in India.
As for Overall scenario, there is general unanimity that rentals will go up marginally, vacancies will be going down in CBDs and SBDs (Suburban Business Districts), absorption will stay put at the current level, distress deals will either remain same or will go up, availability of finance and period of investment will go up and, there will be lack of racy sale, lack of capital, transparency will remain a challenge, REIT will prove a big playground for the Foreign Investors Institutions (FIIs), and warehousing, retail and healthcare will be new asset classes.
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