In 2019, policy reforms across various sectors acted as a business sentiment booster leading to tremendous improvement in India’s ease of doing Business Ranking. According to the World Bank, India ranks 63rd among 190 countries on the index; the ranking is anticipated to improve further in the coming years, backed by progressive government policies. Economic growth achieved in the quarter ending September was largely attributed to sectors such as public administration, defense and other services (11.6%), and trade, hotels, transport, communication and services related to broadcasting (4.8%). When compared with other sectors, real estate services (along with financial and professional services) fared well.
Office real estate market remained buoyant in 2019, driven by demand from global multinationals, domestic firms and a healthy supply infusion in cities such as Hyderabad and Bangalore. By the end of 2019, gross leasing activity crossed 60 million to touch a historic high of 61.6 million sq. ft., growing by more than 25% y-o-y. Bangalore, followed by Hyderabad, NCR and Mumbai dominated office leasing on an annual basis, together accounting for almost 75% of the overall space take-up. Meanwhile, annual space take-up increased across all cities except Kochi. SEZ spaces accounted for almost one-third of the leasing activity, mainly led by Bangalore, Hyderabad, Pune and Chennai.
In 2019, the share of the tech sector in overall space take-up rose from about a third in 2018 to almost 40%; with overall space take-up by such firms rising by more than 45% on an annual basis. This growth was primarily driven by global multinationals, which accounted for more than 70% of the overall space take-up by tech firms this year. Several of the corporates continued to show interest in SEZ spaces despite the upcoming sunset clause deadline; as a result, SEZs accounted for about one-third of the leasing activity in 2019.
Meanwhile, occupiers are likely to continue to asses agility in their real estate portfolios with the ‘core + flexi’ strategy finding more takers. Occupiers continued to opt for flexible spaces, with the share of the segment rising from 12% in 2018 to about 14% in 2019. Several occupiers are likely to adopt newer workplace strategies to realign their portfolios by trying to find the right mix of agility within their core workplaces along with adding external flexible options (especially managed spaces). Tech and workplace transformation will continue to be high on occupiers’ priorities, thus putting employees at the
epicentre of all real estate strategies. Going forward, occupiers are expected to become more conscious about the well-being of their employees, the communities they operate in, sustainability and the broader environment.
Occupiers continued to futureproof their portfolios and hedge against future rental escalations by pre-leasing space across various cities. In 2019, more than 20 million sq. ft. of pre-leasing activity was recorded mainly in Bangalore, Hyderabad, Pune and Mumbai.
More than 52 million sq. ft. of new office supply added in 2019; led by Hyderabad, followed by Delhi NCR, Bangalore and Pune. In 2019, supply addition rose by about 50% y-o-y to touch 52.4 million sq. ft. The growth in supply additions in 2019 was a result of buildings receiving much a waited occupation certificates across cities, as well as pre-commitments made in the prior years which came to fruition through 2019. This led to space take-up scaling a historic high. The supply is likely to normalize in 2020, resulting in absorption growth in the coming year to plateau and be in line with the supply.
Tech and workplace transformation will continue to be high on occupiers’ priorities, thus putting employees at the epicentre of all real estate strategies
With the office market looking at another strong year in terms of space take-up, rental growth is expected to sustain across most relevant micro markets for the next few quarters. The real estate sector attracted both institutional investors and developers, with nearly USD 1.2 billion worth of capital being deployed in Q4 2019. Of this, nearly 35% was infused into core office assets across cities such as Hyderabad, Mumbai and Pune.
The overall quantum of investment for 2019 reached about USD 5.7 billion, out of which more than 40% was in the office sector. Mumbai dominated investments in office in 2019, followed by NCR and Hyderabad. Investment-grade office assets and land parcels continued to garner the highest share, especially from foreign players. While the former was mostly led by private equity and other institutional investors, the latter was driven by developers aiming at strengthening their presence in cities such as NCR, Chennai and Hyderabad. Developers focusing on expanding their footprint to other key markets across India have also seen momentum, with a few preparing to list Real Estate Investment Trusts (REIT) on the Indian Stock Exchange. India’s second such listing – known as Mind space Business Parks REIT – is likely to be issued soon, with K Raheja and Blackstone jointly planning to offer about USD 0.42 billion (about INR 3,000 crore) in its initial public offering (IPO).
Absorption is expected to be mainly driven by India’s position as a preferred outsourcing destination and growing need for space among corporates from sectors such as tech, BFSI, engineering & manufacturing, research, and consulting & analytics. Other sectors such as pharmaceuticals/ healthcare, telecommunications and e-commerce are also likely to report higher occupier demand. Space take-up by tech corporates would be largely dominated by foreign players, especially US- and APAC-based firms.
In the coming years, the real estate sector is expected to offer vast development and investment opportunities even as the Indian economy transitions and its workforce expand. Office stock is expected to grow to a billion sq. ft. by the end of 2030 and flexible space will become mainstream – accounting for 8-10% of the total office stock.