In 2021, the southern cities such as Bengaluru and Hyderabad are placed comfortably to lead the path to recovery; emerging asset classes, such as student housing, co-living and senior housing are expected to pick up and flexible workspaces may make a strong comeback.
In 2010, post the global financial crisis, the commercial real estate sector of India reversed and put itself on a slow yet steady growth path. From 2016-2019, the annual office space leasing activity increased from 41.6 million square feet to 58.6 million square feet, translating into a compounded annual growth rate of 12% over the three years.
India has emerged as the preferred destination for setting up global in-house and research and development centres for topmost global firms, leading to global investors and private equity firms showing keen interest. In the year 2019, commercial real estate sector attracted foreign and domestic investments to the tune of 3.3 billion dollars.
Lower operating cost, availability of abundant talent, and business-favourable state policies have contributed to this massive growth – making commercial real estate the blue-eyed boy of India’s growth story.
At the end of Q1 2020, with the onset of COVID-19, a pandemic resulting in job losses, pay cuts, and health scare, the Indian real estate sector was ailing. A nation-wide lockdown initiated the largest remote working experiment which made businesses press pause on their real estate decisions, added to this was a labour shortage following a mass exodus of migrant workers from metro cities back to their hometowns. This put commercial real estate markets’ resilience to test.
Despite the short-term disruption, India’s commercial real estate sector continues to attract interest from occupiers and investors looking at medium and long-term horizon.
During H1 2020, office leasing across the country witnessed a 36% decline on year to year basis. However, with gradual ease of restrictions, all major micro-markets of Indian cities have shown green shoots of recovery. Gross absorption of around 7 million square feet of office space was recorded in Q3 2020, up by 58% on a quarter on quarter basis. Around 4.1 million square feet of new supply entered the market this quarter pushing the vacancy level up by 5.6 percentage points to 15%.
The southern cities of the country are leading the charge on the road to recovery. Both Bengaluru and Hyderabad together accounted for approximately half (47%) of the total leasing activity year to date. On the supply side, 67% of the new supply was accounted for by Bengaluru, Hyderabad and Chennai – backed by strong pre-commitments.
Bengaluru has been an innovation-oriented city, with an estimated population of 12.3 million, 40% of it under the age of 25, the city boasts the presence of world’s premium technology companies and is home to the start-up ecosystem of India. Owing to this, Bengaluru accounts for close to one-third of India’s leasing activity year-on-year.
Taking in account the impact of COVID-19, gross absorption is expected to taper as occupiers delay decision making. However, the city’s attractiveness for occupiers remains intact, and the gross absorption is estimated to be at 11.5 million square feet for the year – a 25% contraction from last year’s record 15.2 million square feet.
Interestingly, the city has witnessed interest from large private equity firms – Blackstone and Brookfield, for investments into rent yielding commercial properties - totalling to approximately around 3.5 billion dollars, which echoes the positive future-outlook towards the city. Presence of Grade A assets, upcoming metro infrastructure boosting the city’s connectivity and availability of best-in-class talent in the city further strengthens Bengaluru to retain its first position for years to come.
Second only to Bengaluru, Hyderabad has seen strong growth in the commercial real estate sector for past two-three years. The gross annual office space absorption witnessed a steep increase from 5.4 million square feet in 2016 to 9.6 million square feet in 2019, i.e. within a span of three years.
The city has been in spotlight for its growth potential and investments from all major technology led companies around the globe. In the last few years, technology giants like Apple, Google, Facebook and Amazon have entered this market resulting in tremendous economic development and is touted as the Top Emerging Tech Location for Occupiers in Asia-Pacific.
Hyderabad has witnessed a strong recovery in the third quarter accounting of around 3.7 million square feet of gross absorption year-to-date. Approximately 6 million square feet of new supply also entered the market – majority of which was pre-committed. We project a steady demand to continue with average annual demand expected to touch 8.0 million square feet through 2020-2024 compared to an average of 6.3 million square feet during 2015-2019.
As 2020 ends, the commercial real estate sector is showing signs of recovery. However, it is too early to call it a win. While the current crisis has accelerated the subdued trends of work-from-home and rapid technological advancement, the news of vaccines being around the corner and as economies and businesses emerge from crisis mode, occupiers are bracing for a new area of work.
With more than eight months of accelerated work from home experience, employers and employees are seeking the right balance of in-office and remote working option.
As for outlook for 2021, occupiers are expected to stress on the well-being of their employees by redefining the use of office spaces. The southern cities of India are placed comfortably to lead the way to recovery given the talent pool availability, existing and upcoming infrastructure, supportive government policies and the vast opportunities that India’s real estate market has to offer.
New asset classes, such as student housing, co-living and senior housing are expected to pick up and flexible workspaces may make a strong comeback as more and more organisations look to add ‘flexibility’ to their portfolios.