Unlike the fragmented residential market,
some leading developers are building Grade A office space in key cities
Steady lease
rentals, high absorption levels, inadequate supply and global investor interest
have breathed life into India’s commercial real estate sector, even as the
country’s residential property market continues to be in a slump.
Unlike the
fragmented market for residential properties, a few leading developers, backed
by large investors, are building Grade A (top quality) office space in key
cities.
Around 38.4
million sq. ft of Grade A space is expected to be built in 2016, of which
around 33 million sq. ft is likely to be taken up on lease. Around 36.2 million
sq. ft was absorbed last year, while the highest office space absorption was 37
million sq. ft in 2011. In 2017, around 40.9 million sq. ft is expected to be
constructed, according to property advisory JLL India.
“While
demand for good quality office space remains high, absorption will be lower
this year because there isn’t adequate supply in the market. Also, demand is
high but relevant supply, which depends on location and other advantages, is restricted.
We expect the sector to continue to do well,” said Ramesh Nair, chief operating
officer of JLL India.
According to
property advisory CBRE, Bengaluru has good demand and supply of office space
and its office buildings have the lowest vacancy levels. In Pune, due to lack
of good supply, there are many takers for Grade B buildings as well. The
National Capital Region, the worst-impacted market in residential sales,
grabbed 37% of the total 5 million sq. ft of corporate office space take-up or
leasing during January-March.
After the economic
slowdown in 2008, developers gave up capital-intensive office projects and
shifted focus to the residential market, which seemed a safe bet at the time. A
number of large apartment projects came up in the next few years, resulting in
a glut in the market and another slowdown in 2012-13.
Among top
developers building office projects are Embassy Group, RMZ Corp., Panchshil
Realty and DLF Ltd, many of them backed by global investors. More than 80% of
commercial office space absorption or supply is from information technology
(IT) and IT-enabled services (ITES) clients, while the rest would be for
banking and financial services and of course, e-commerce firms.
Backed by
Blackstone Group Lp, Panchshil Realty is adding 5 million sq. ft of new space
in Pune across three projects. Nearly Rs.2,500 crore will be invested in the project, including
both equity and debt. “We lease around 1.5 million sq. ft. office space every
year, so we just have to keep building because the demand is high,” said
Panchshil Realty chairman Atul
Chordia.
DLF may not have
any residential launch planned this year, but the country’s largest developer
by market value plans to add two-three million sq. ft of office space every
year to its rental portfolio as it seeks to replicate its success in building a
nearly 30 million sq. ft commercial office portfolio over the last decade.
This year, DLF has
started work on a two million sq. ft office project in Gurgaon and will add one
million sq. ft to its IT park in Chennai. Lease rates at DLF Cybercity in
Gurgaon have risen to Rs.100-105 per sq. foot from Rs.60-65
per sq. foot three years ago.
“While residential
prices are seeing a downward pressure due to the oversupply situation, rentals
are steadily moving up. Good supply is limited and there is tremendous interest
from institutional investors to buy space and from corporates, many of whom are
in consolidation mode and looking to lease or buy space for their own use,”
said Rajeev Bairathi, executive director (capital transaction group and north
India), at property advisory Knight Frank India.
Mumbai-based K.
Raheja Corp. is planning to invest aroundRs.2,000
crore in acquiring land and building six million sq. ft of commercial space in
Navi Mumbai.
“Growth and
consolidation, particularly in the IT and ITES sectors, are driving the demand
for big commercial office spaces. Demand for commercial real estate is growing
at 20-22% on a year-on-year basis,” said Vinod Rohira, managing director and
chief executive, commercial real estate and Reit, K. Raheja Corp.
2016 is likely to
witness two of the biggest private equity investments in the commercial office
sector. DLF is in the process of selling a 40% stake in its rental assets arm
to raise about $2 billion and Brookfield Asset Management Inc. is close to
investing $1 billion to buy out the office and retail assets of Hiranandani
Developers Pvt. Ltd in suburban Mumbai.
With top quality
assets becoming fewer, investors such as Blackstone have moved from buying out
completed, lease-generating assets to brownfield, under-construction
developments to more greenfield, early-stage projects today.
“From a rental
stream perspective, the investor community always got into fully developed
projects in the initial years, but now after building a relationship with the
developer partner, they are now willing to go ahead and invest in a new
project,” said Ram Chandnani, managing director, advisory and transaction
services, CBRE.
Just like
developers shifted focus to the residential market after the 2008 financial
crisis, commercial office is regaining favour, with some realigning their
portfolios to build more commercial space.
Bengaluru-based
Salarpuria Sattva Group, which started as an office developer and then built
its residential portfolio, is planning to focus a little more on the office
space again. It will start three new projects in Bengaluru, a total of 3.5
million sq. ft. Earlier this year, Salarpuria raised Rs.470
crore from Blackstone to fund a 6.6 million sq ft under-construction and partly
leased project in Hyderabad, in what also marked the fund’s first investment in
the city.
“While entry
barriers are low in residential and there are too many developers, office
development is not easy and as a result, we have a few serious developers
building good projects,” said Bijay Agarwal, managing director of Salarpuria
Sattva Group.
Credit : http://www.livemint.com/
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