Investor interest in commercial real estate has shown small improvement in the past few months and may be a harbinger of an economic turnaround, analysts have said.
The demand is likely to give a boost to the still-struggling residential sector and also help developers address the problem of already existing inventories. And with most job portals, including Naukri.com, expecting companies to hire more this year, rising incomes are likely to aid the sector’s growth.
Around 38 million square feet of office space was leased out in 2015 against 33 million square feet in 2014. an 18% growth year-on-year, said Ram Chandnani, managing director, transaction services, CBRE South Asia Pvt. Ltd.
Information technology (IT), banking, financial services, engineering, FMCG, and new-age sectors like e-commerce took up most of the office space leased.
“The commercial office space is gaining momentum as companies are looking to expand due to improving business sentiment,” said Rajeev Talwar, CEO, DLF. “In 2015-16, we witnessed demand for commercial space in our properties. Samsung has leased a large area from us this fiscal. Overall, across the country, particularly Hyderabad and Chennai saw healthy absorption of commercial space.”
National Capital Region (NCR), Mumbai, Chennai, Bangalore and Hyderabad are seeing the maximum demand in commercial real estate.
Companies such as Google, Uber and Apple that have taken large office spaces in Hyderabad. E-commerce firms, including Amazon and Snapdeal, have also taken significant amounts of space in Bangalore and Gurgaon.
Among the biggest office space deals last year, financial giant Wells Fargo leased around 860,000 sq ft at Embassy Tech Village, Bengaluru, at an annual rent of 75 per square feet or R72 crore. IBM leased around 500,000 sq ft of office space in Bhartiya City, in Bengaluru, at an annual rent of R45 a square feet or R27 crore.
”Large companies held back office expansions in metro and smaller towns, in the middle of an uncertain economic environment,” said Arvind Subramanian, president, strategy and alliances, Lodha Group. “Such decisions, which were deferred until a couple of years back, are now becoming more pressing. On the other side, supply of prime office space has been constricted with very few new developments over the past two years, particularly in cities like Mumbai. With new sources of patient capital now accessible, we expect commercial development to accelerate, which will serve the pent-up demand.”
Developers are adding capacity to cater to the growing demand. Lodha Group has already delivered more than 4 million square feet of commercial office space till date and has another 3 million square feet under development, which is slated for completion over the next two years. Similarly, DLF is adding 2 million square feet of office space in Gurgaon and another 1.4 million square feet in Chennai.
The demand for commercial real estate has also given rise to sub-urban clusters in cities. Examples include ORR in Bangalore, Cyber City in Gurgaon and Hinjewadi in Pune.
“Companies are taking advantage of low rents and ample quality space available in peripheral locations of most leading cities. India’s status as a global back-office destination has also resulted in a lot of companies from the US and the EU outsourcing their operations to India,” Chandnani added.
According to industry analysts, commercial office development will be an attractive growth opportunity over the next one or two years. ”More hiring means more space requirement and vacant office spaces across the country are now getting picked up,” said Ashutosh Limaye, head of research at JLL India.