Rush hour in commercial realty as economy looks up
Financial Chronicle | January 2, 2015
Jharna Mazumdar & B Krishna Mohan | Mumbai & Hyderabad
AFTER a lull of more than two years, office space absorption has started picking up in the country and developers hope commercial realty demand too will bounce back in 2015 if the current trend continues.
The office sector witnessed a lot of activity in 2014 with net absorption of 9.3 million sq ft in Q3, 1.58 times more than the year-ago period. This performance was bettered only once before, in 2011. Compared with the September quarter last year, the same period in 2014 showed a 58 per cent growth in office space demand, reports said.
Ahmedabad, Bangalore, Hyderabad, Mumbai and Delhi were the best performing markets. As the economy emerged out of an all-time low and business confidence grew, office markets rebounded. Companies have started expanding and new leases now constitute 75 per cent of all lease deals. Demand has been driven by all sectors, but IT/ITeS was the main contributor, as the e-commerce sector expanded.
Experts said the trend will continue and net absorption will outstrip new supply from 2016. Lease rentals for commercial properties are likely to go up with demand revival.
Rajeev Talwar, executive director of DLF, told Financial Chronicle: “Commercial real estate demand is picking up with companies expanding businesses. Sectors like auto and cement are showing signs of improvement and once they see full-fledged revival, demand will go up further.”
The IT industry, which had seen difficult times due to a drop in clients’ IT spend, is seeing revival in business as demand rebounds from traditional markets – the US and Europe – and firms see large potential in the domestic industry. IT firms are expanding operations, triggering a ripple effect in the realty sector.
“Office space absorption has begun picking up in primary cities like Mumbai, Delhi, Pune and Bangalore. Multinationals are once again exploring entry and expansion in India, and large domestic companies are once more on a hiring spree. There is positive sentiment in the market,” said Anuj Puri, chairman and country head of JLL India.
The rupee-dollar equation, which represents the monetary advantage that foreign firms perceive in entering and operating in India, plays an important role in commercial space absorption, which also manifests itself in the housing market.
US multinational firms dominate India’s grade-A office leasing market, accounting for 45 per cent of leased space. These firms, along with European MNCs that account for 15 per cent of office space leasing, are again bullish about India. Indian companies, accounting for 30 per cent of market share, are slightly behind in executing growth plans.
IT major Cognizant is investing over Rs 500 crore to expand its facility at Gachibowli, Hyderabad. It started operations at this unit in 2002 with 180 professionals and now has about 18,000 people. The company plans to add 1.5 million sq ft, more than six times the existing facility. Cognizant will create infrastructure to house around 8,000 professionals.
Tech Mahindra has added a new IT block in Bhubaneshwar, doubling capacity from 500 to 1,111 seats. HCL Technologies is adding 2.8 million sq ft, including 2.53 million sq ft in NCR and the remaining in Bangalore, to its existing built-up area of 1 crore sq ft. It will add 14,411 seats – 12,676 in NCR and 1,735 at Bangalore — in times to come.
Smaller companies are also increasing their footprints. Pegasystems and Cigniti Technologies have taken up 3,00,000 sq ft and 50,000 sq ft facilities, respectively, in Hyderabad. A bigger campus was needed to accommodate the increasing global demand, said Suman Reddy, managing director of Pegasystems India.
Vinod Rohira, director of K Raheja Corp, said, “Commercial demand is driven by IT/ITeS and other businesses. In India, up to 70-80 per cent of demand comes from IT/ITeS. With the e-commerce boom and other IT-related activities picking up, demand from the sector has revived. For other businesses, there are initial signs of improvement. If the trend continues for 6 months, we can see a full-fledged revival in commercial realty.”
Mumbai and Ahmedabad are also witnessing rise in demand. Earlier, many developers in Mumbai had converted commercial properties into residential or mixed-use properties as demand fell drastically due to a slowdown in the economy.
Boman R Irani, CMD of Rustomjee Group, said, “In the last one year, demand for office space had declined and developers were focusing on residential projects. As a result, the addition of new space declined. Now demand is going up with the improvement in the economy, as many business houses are looking to expand.”
Irani said the existing inventory is expected to get absorbed quickly, as developers have gone slow in new capacity addition. Lease rentals are expected to rise once demand revives.
Cushman & Wakefield in a report said among the top performing cities, Bangalore witnessed 92 per cent total net absorption in 2014, Delhi-NCR accounted for about 45 per cent and Ahmedabad saw a two-fold jump. Hyderabad saw a 84 per cent rise from a year ago, recording net absorption of 3.8 msf. Overall vacancy levels too declined to 18.4 per cent, it said.
Lease rentals too are expected to go up in the New Year. Only 22 million sqft of office space will be ready at right locations against the demand forecast of 30 million sqft. “There is also the possibility of saturation, forcing organisations to open satellite offices,” said Ashvin Vellody, management consulting at KPMG in India.