Commercial Office Spaces – What Does the Future Hold ?
Going by the reports till the end of 2020 and even from 2021 Q1, India’s real estate market seemed to be a gold mine for investors. With the pandemic still on, how will the offices of the future be?
It is imperative to understand that among all nations that are currently trading blows with the pandemic situation, with a teeming population to bear at the same time, India has been in a rather favorable position. Major lockdowns have not been announced for the whole country, only in certain pockets, strict curfew measures have been implemented, as per the state government’s discretion. That apart, the business has bounced back and almost all sectors have come to understand how to operate while maintaining the directives for the pandemic. As per a recent report by Colliers International India, institutional investments in the Indian real estate market will grow by 14.6% to INR 396 billion in 2021. This compared to the 23% drop that had happened in 2020 certainly bodes well for investors and realtors alike.
Global interest rates are at a historic low and India is the country that is offering one of the highest positive net yields. This has made India one of the top preferred destinations for investments in real estate. From 2018 to 2020, commercial office assets have accounted for more than 55% of total Indian real estate inflows, indicating a higher appetite of investors. The top six Indian cities of Bengaluru, Chennai, Delhi NCR, Hyderabad, Mumbai, and Pune saw an average annual supply of over 35 million sq. ft. while net absorption is expected to stay at around 30 million sq. ft. Investors are generally showing a bullish tendency regarding long-term prospects while targeting an internal rate of return clocked at 17-18%.
As per Siddharth Goel, Senior Director & Head of Research, Colliers International India, 2021 might be a year of consolidation and portfolio optimization, but with the roll-out and adoption of the COVID vaccines, gradually the growing economy shall boost the confidence in the commercial office space market. Vacancy in Grade A office spaces have stayed under the 15% mark since 2017. Even in 2020, when the pandemic struck, the vacancy increased but marginally. With the measures that are now being taken on a war footing by the government, things are certainly looking up and the vacancy is expected to remain within manageable limits even as the days go by.
To put things in perspective, RMZ Corp and Canada Pension Plan Investment Board (CPP Investments) have entered a joint venture to develop and hold commercial office space in Chennai and Hyderabad. To this end, CPP Investments will invest around USD 210 million for the expected development of 10.4 million sq. ft. of commercial office sites.
Additionally, Värde Partners is also investing USD 155 million in two pre-leased offices in the Gachibowli Financial District of Hyderabad. As per Tim Mooney of the company, India has a bright future ahead in the commercial office space and real estate in general, being a market that offers potential strong cash-flow visibility, multinational tenants, and strong absorption. Mordor Intelligence also forecasts the real estate sector in India to contribute nearly 13% of the country’s GDP by 2025. Now, these numbers are saying something definitive.
While there is a comparatively short-term uncertainty considering commercial real estate, owing government initiatives and programs are expected to add to the demand for real estate infrastructure. Despite the ongoing WFH (work from home) routine followed by many companies, the IT sector is seeing robust hiring and as per Karan Singh Sodi of JLL, IT companies with their last two quarters hiring plans have begun to commit huge spaces in Mumbai and Noida, in addition to southern states’ capitals. Companies are adding space overall. Around 25 million sq ft. of RFPs have been floated in the markets of Bengaluru, Chennai, Hyderabad, and Pune, as per Juggy Marwaha of Prestige Office Ventures. IT companies that are consolidating their office spaces to one or two centers in a city are adding to their savings, while large occupiers are considering the hub and spoke model of working to add to cost efficiency across their office portfolio. This opens a whole new avenue of offices in peripheral micro-markets, closer to the talent pool, while reducing the cost burden on companies. But it still adds to the fact that more office space is still going to be in demand.
All things considered, 2021 is already seeing an uptick in the commercial office space market, even if the initial months did see some reduction in employment and some decline in office space demand in Hyderabad. However, with the projects mentioned above and more underway, and the high confidence of businesses in the improving situation of the pandemic, investment in commercial office space still looks to be a wise decision for retail as well as institutional investors. If the forecasts for 2025 are anything to go by, India will remain the gold mine for investors in commercial real estate. To know more about how Strata plays a role in all of this, visit us at www.strataprop.com.