5 Highlights of Indian Office Markets Performance in 2017

For the Indian Real Estate Industry, 2017 stood out as a year of change and evolution. The industry has reached an inflection point, with some momentous policy changes being implemented during the year. These much awaited reforms aimed at increasing transparency and accountability through a regulator, curbing black money and shaping the future contours of the sector, have led to global players keenly eyeing the Indian market.

In 2017, office space net absorption stood at a little over 29 million sq ft; about 13% lower compared to the previous year. This was in sync with the annual supply also recording a drop of 16.1% y-o-y and only 29.1 mn sq ft of incremental supply added during the year. By all accounts, the office markets remained robust with the net absorption decline more on account of lack of quality supply during the year.

Some corporate reworking on account of GST implementation did cause a minor increase in average transaction times during the third quarter of the year. Rents continued to rise, recording a 2.4% y-o-y increase with average Pan-India rents now at INR 77.8 per sq ft per month. Vacancy in the Pan-India Grade A office stock remained low at 14.3%, with Bangalore standing out as the office market with the lowest vacancy in the country in 2017.

As we gear up to seize the fresh opportunities and brace for the challenges awaiting us in the new year, let us look back at the 5 things that made 2017 a standout year for the commercial real estate sector.
 

IT Sector continues to remain dominant

The IT sector accounted for the maximum space take-up during the year, contributing 36% of the total absorption for 2017. This was marginally lower than last year on account of uncertainty in the IT industry largely owing to the policy changes introduced in the US by the Trump administration as well as technological advancements increasing the role of automation. Bangalore, Delhi NCR and Hyderabad made the maximum contribution to the IT sector’s space share during the year.

Co-working emerged rapidly as a new contributor to space absorption, contributing 5% to the overall take-up during the year. The BFSI sector has continued to maintain a more or less steady absorption trend since 2015 with only a marginal drop. 
 

Americas region leads in office space absorption in India

Americas once again leads Indian firms in contribution to office space take-up during 2017. This has been a consistent trend with the only variance seen in 2015, when the general elections aftermath had caused quite a buoyant domestic sentiment.

Despite the impact of BREXIT, UK bounced back and took the number one spot in terms of space take-up contribution by the European Union countries in India during the year. Netherlands and France also showed improved performance while Germany- the strongest economy in the European Union, exhibited a relatively stable performance in terms of the space absorption share.

Transaction numbers on a continuous upwards swing

A pan India analysis of average size of office space and number of transactions over the past 6 years reveals interesting new benchmarks.

Another interesting trend is the rise in the number of transactions post 2014. Between 2011- 2013, the total number of office space transactions averaged around 800 annually. However, post 2013, this number now stands at an average of 1200 transactions every year. Growth of the services sector across industry domains and the economy’s growth spurring the emergence of new domestic companies as well as entry of global ones are the key contributors to this trend. Also with firms managing to achieve scale, there has been a distinct progression of office space take-up from grade B spaces to Grade A spaces due to increased affordability and business growth.
 

New benchmarks in average transaction size

While we see the total number of transactions increasing, the average size of offices seems to have found a typical standard. Pre- 2011, the average size of an office was about 40,000 sq. ft, which has stepped down to around a constant 32,000 sq. ft since 2012. This trend has been shaped by multiple dynamic factors, including the increasing acceptance of third party co-working operators as well as workplace designs incorporating open plan layouts, hot-desking and collaborative seating. It is an integral trend to the future of work and is here to stay.
 

The Changing Occupier base

Conventionally, each of the top 7 cities has been defined by a certain occupier industry sector. To highlight, Bangalore has been known as the IT cradle of India, Chennai for its strong industrial base identified by the automobile sector or Mumbai as the financial capital of the country, for its strong banking and financial services linkages. However, this trend began witnessing a gradual change post 2013, with cities  experiencing a different and more divergent client base.

Mumbai which was previously mainly dominated by the BFSI sector saw strengthening presence of the IT sector post 2013 with this sector contributing an average of 30% to the city’s space absorption while the BFSI sector’s share stood at a lower annual average of around 24%. This year Mumbai also recorded a significant contribution of the co-working sector, which made up 10% of the total leasing volumes in 2017. Though identified primarily with the IT industry, Bangalore has never seen the sector’s share move above 50% of annual space take-up, highlighting a healthy mix of Non- IT occupiers having an established presence in that office market.

The trends point towards signs of maturing office markets, with the performance/likeability of a city not affected or defined by presence a particular industry sector dominating it in the past. 
 

2018 Trends and Forecasts

We expect around 41.7 Mn sq ft of new supply in 2018 with an estimated absorption of 33.5 Mn sq. ft. Pan-India vacancy is projected to be around 14.7% with average rents expected to increase by 1.5% y-o-y, closely tracking the 2017 trend.

This year we also saw co-working emerge as a very strong sector with co-working operators leasing upto 1.5 Mn sq. ft of office space in 2017, making up 5% of overall absorption. The demand was driven not only by start-ups and independent professionals, but also by large corporates that preferred outsourcing capacity by involving the 3rd party co-working model to reduce capital expenditure and increase collaborative culture. With the occupancy level of a handful of branded co-working operators already touching 100%, the segment is expected to grow by up to 40-50% and receive about US$400 million in investments by 2018.

With the data explosion currently in our midst, we are witnessing new trends as physical data storage is being replaced by cloud platforms and third party data centre operators are emerging strongly as they will play a significant role in managing big data across industries. Typically, data centre facilities are large buildings, with average sizes ranging anywhere between 0.2 Mn sq. ft to 1 Mn sq. ft per facility. With increasing digitization and the Government’s make in India initiative, this asset class will also play in major role in driving the real estate demand in India and we believe will attract a lot of traction in the coming year.