The reality of realty

India’s office market spaces are growing as the construction boom continues to spread its tentacles across the length and breadth of the country, thus ensuring demand outstrips supply where businesses continue to grow and multinational companies make a beeline for India. 

However, investment-grade office space demand slowed down in the first quarter of 2014, with around 6.3 million sq. ft. of grade A office space getting absorbed across the leading cities of the country. Transaction activity was dominated by the National Capital Region (NCR), Bangalore and Chennai. Special Economic Zone (SEZ) developments in Gurgaon, Bangalore, Hyderabad and Pune also saw traction during Q1 2014. 

The market witnesssed slow transaction activity and a low level of new completions in the first quarter, and leading cities continued to experience caution from corporate occupiers in the first three months of the year. Most investments by private equity (PE) groups in the sector during the period were structured debt deals, with a preference for residential projects or well-leased commercial projects. Land and/or development sites for residential and mixed-use projects in the peripheral locations of leading cities also attracted investor attention.

Since business sentiment had recovered slightly towards the end of 2013, it is expected to improve further following the verdict of General Elections. Market demand is likely to pick up gradually. Occupiers will remain focused on optimal space utilisation and cost savings. Peripheral and decentralised locations such as the NCR’s Gurgaon and Bangalore’s Whitefield will continue to experience strong demand. 

According to CBRE South Asia Pvt Ltd chairman and managing director Anshuman Magazine, office space occupiers from select sectors such as IT/ITeS will cautiously expand, but only in small to medium sized spaces. Larger size requirements will likely remain limited to a few back-office expansions and consolidations alone.

Occupiers in the IT/ITeS, financial services, engineering, manufacturing, telecommunications and pharmaceuticals sectors will drive office demand. Back office space will continue to see high demand, while front office take-up will remain comparatively limited. The bulk of leasing activity will likely take place in peripheral and secondary locations—such as Gurgaon in the NCR, Whitefield and the Outer Ring Road in Bangalore, Lower Parel in Mumbai, and the secondary business districts of Chennai and Hyderabad. Significant supply of fresh office space expected to reach completion in the coming months is likely to push up vacancy levels, however, keeping rental values range bound.

About 6.6 million sq. ft. of office space was completed in the first quarter of 2014, where Bangalore led these project completions, followed by Delhi NCR and Mumbai. New supply in 2014 for New

 Delhi, Mumbai and Bangalore will total 30 million sq. ft. net floor area (NFA) 

with another 21 million sq. ft. NFA in the pipeline for 2015—mostly concentrated in suburban markets. 

Rents across major micro-markets like Noida (NCR), Whitefield and Hitec City (Hyderabad) are likely to remain stable. With considerable supply lined up in the short to medium term, however, rental values in micro-markets such as the 

Bandra–Kurla Complex in Mumbai could witness marginal pressures from oversupply concerns.

Capital Market 

Trends : 2014

Investment activity in India is expected to pick up during the year, as market sentiment improves with a better economic outlook, following a new political dispensation after the General Elections. It is expected that central bank may relax its monetary policy, which could trigger more investments in the sector. The Rupee fluctuation, and the weak economy in 2013, had forced some foreign funds to exit the market. However, several new foreign funds have entered the market in recent months as financial markets began to stabilise. Blackstone was among the most active private equity players in the country in 2013, while other significant players included the Xander Group and Red Fort Capital.

Oversupply is still a concern in many key markets. Investors will seek to lock in capital in well-leased office assets, including IT parks and SEZs in prominent locations. The price of such assets could either stand firm, or display some growth. Investment may also take the form of structured debt deals.

The introduction of Real Estate Investment Trusts (REITs) in 2014 is expected to be the single most consequential change in the country’s investment climate. 

Kolkata’s office market witnessed low demand in Q1 2014 with transactions likely to improve in the medium term, while demand for investment-grade office space across leading cities in India slowed down in the first quarter of 2014, with around 6.3 million sq. ft. of grade A office space getting absorbed. The market witnessed slow transaction activity and a low level of new completions in the first quarter and leading cities continued to experience caution from corporate occupiers in the first three months of the year. 

While the Kolkata commercial real estate market attracted reduced demand for office space during the first quarter, enquiry levels from prospective corporate occupiers indicate that office transaction activity is likely to pick up in the coming months. On the supply front, the peripheral locations of the city are likely to witness significant supply addition by the end of 2014, and office space rental values are expected to remain stagnant across most micro-markets of Kolkata in the coming months, according to Anshuman Magazine, CMD, CBRE South Asia Pvt. Ltd.

During the first quarter of 2014, Kolkata’s Central Business District (CBD) of Chowringhee, B.B.D Bagh, Park Street and Camac Sreet witnessed a low level of commercial leasing activity in the first quarter. On the supply front, around 30,000 sq. ft. of office space was added to the existing stock resulting into a marginal increase in vacancy levels. Rental values remained largely stable in this micro-market.

The secondary micro-markets of EM Bypass, Kasba–Gariahat, Topsia and Sarat Bose Road saw sluggish transaction activity during the quarter. There was no addition to the office stock in this micro-market, and vacancy levels remained largely stable over the previous quarter.

The peripheral micro-markets of Salt Lake and Rajarhat observed a decrease in demand for office space, with office space absorption recorded at 37,000 sq. ft. in the first quarter of 2014, as compared to 55,000 sq. ft. recorded in the previous quarter. There were no significant project completions in this micro-market during Q1 2014. Vacancy levels remained high, and were estimated in the range of 18–20 per cent. India continues to see a wave of new shopping center development, despite some developers pushing back completion dates due to financing issues. According to CBRE research, New Delhi is ranked 21, Hyderabad  23, and Bangalore 31, among global cities with the maximum shopping center space under construction in 2014.

Around 500,000 sq. m. of new retail space is under construction in New Delhi. The largest two projects, DLF Mall,  NOIDA (204,385 sq. m.) and Logix City Center Mall (111,483 sq. m.), are both located in Noida. Buoyant occupier demand is pushing a strong development pipeline in New Delhi with 500,000 sq. m. of new retail space currently under construction. 

Among tier II cities in India, Hyderabad is the most active market with a current supply pipeline (483,000 sq. m.) three times greater than its existing stock, according to the latest Global Viewpoint from CBRE Research.

 Commenting on the findings of the report, Anshuman Magazine, Chairman and Managing Director of CBRE, South Asia Pvt. Ltd. said, ‘Strong economic growth in many Asian markets has been attracting an increasing number of cross-border retailers. Even though China remains by far the most active market for shopping center development, the tier I and II cities of India are also among the most active globally. Unfortunately, however, there continues to exist a dearth of quality shopping space in many of our market places. Along with the large-scale urbanisation of our leading cities and a burgeoning middle class population, it is this that has been driving shopping center development forward.’ 

 ‘The scale of new development in Asia and China in particular is staggering but there are a number of quite understandable factors behind it. Chinese cities, and many others in Asia, present a physical environment that lends itself to environment controlled shopping centers. Outdoor shopping can be too hot, too humid, too cold, too wet, too unsafe or too dirty and polluted—modern shopping centers are none of these when managed properly,’ said Sebastian Skiff, Executive Director of CBRE Retail.