India has evidently witnessed a boom in the real estate sector in the past few years. With strong economic policies, constant improvement in business environment, and the government’s deliberate efforts to improve infrastructure in the cities in India, commercial real estate market has geared up exponentially. Grade A office rental space is witnessing an increase demand, as companies in tech parks look to upgrade their offices in terms of aesthetics as well as amenities. It is estimated that, during 2019 and 2020 this market will witness net absorption of over 76 million sq ft in India. Also, the supply in the market would be around 126 million sq ft over the next 3 years based on launch of new projects in several Indian markets, as per industry reports.
With India’s position improving considerably in ‘Ease of Doing Business’, the Indian economy is estimated to grow by 7.3% in 2019-20 and 7.5% in 2020-21, giving a positive impact on the real estate sector, especially on the demand in commercial office segment. In 2019, the top seven markets for Grade A office spaces and office rentals are Delhi-NCR, Mumbai, Bengaluru, Chennai, Hyderabad, Pune and Kolkata. Bengaluru retained the highest position with its office absorption increasing 37% in 2018. The growth was driven by strong economic fundamentals, demand for quality Grade A office space, relatively affordable rents, and the co-working office trend coming up in key markets. This made Bengaluru to witness third highest growth in office rental in the year 2019.
With regulatory reforms such as RERA and GST showing results, the real estate sector is expected to grow exponentially. Many developers are planning to put their rent-yielding office assets through the Real Estate Investment Trusts (REITs) which has received a green signal from the Indian government. Also, with the Indian government allowing 100% Foreign Direct Investment (FDI), the current market trends would be beneficial for the foreign investors. Further to this, some of the factors that are driving growth of demand for Grade A office spaces are –
Growing co-working and start-up ecosystem
There has been a significant rise in office space used by co-working companies and this has also impacted rental rates. The demand is not only driven by start-ups and independent professionals, but also by large corporates that prefer outsourcing capacity by involving the third party co-working model to reduce capital expenditure and increase collaborative culture. Talking about start-ups, co-working space benefits them a lot as they can rent an office (be it a small or large space) accurately without spending a fortune.
Rise of millennials
Globally, India is leading in terms of millennial population (i.e., 34% of the country’s total population), accounting for nearly half of the working age population. Millennials have changed the face of corporate structure as this generation constantly looks forward to innovations and technological change. Millennial entrepreneurs have always looked up to high-end and luxurious spaces for their workplace, increasing demand for Grade A office spaces.
Changing office requirements of IT, ITES and other sectors
Earlier, IT companies preferred constructing their own offices spaces. Nowadays, with the changing trends and more availability of rental property, MNCs are renting office space particularly in Bengaluru. IT companies look at a luxurious office with high-end design, and accessible locations which push them towards investing in a Grade A office space.
Also, with growing amount of leasing and investors’ activity, the Grade A office segment is now witnessing leasing by non-IT companies from other segments. Sectors like - BFSI, telecom, healthcare, biotech, consultancy business and e-commerce are actively taking up spaces across cities which is evident from the changing pattern in occupier’s office requirements.
Growing FMCG sector
The FMCG sector is expected to grow at a CAGR of 27.86% to reach $103.7 billion by 2020. With the growth in FMCG sector, a larger office space is required to accommodate its employees working in various departments. Grade A office space provides a spacious office space with best-in-class infrastructure for the FMCGs.
The commercial real estate market is thriving in India and it can change the traditional way to corporate working. Being a significant part of commercial real estate, Grade A office space market is growing faster than anticipated. However, in technology-driven markets like Bengaluru, Pune and Chennai, there can be a demand-supply gap as there are very few builders who have entered this market.