Waning fear of Covid-19 to see India enter new cycle in office market

Anil Urs Bengaluru | Updated on February 22, 2021

The segment to see sustained IT sector growth, demand from e-commerce, healthcare, FMCG, and growing presence of institutional investors

In 2021, strong market fundamentals in the form of sustained IT sector growth, increasing demand from sectors such as e-commerce, healthcare, FMCG and the growing presence of institutional investors is expected to drive the office market.

According to ‘India Real Estate Outlook – A Growth Cycle’ report launched by JLL on Monday, year 2021 is expected to witness close to 38 million square feet of new completions, while net absorption is likely to hover around 30 million square feet. This will be at par with the annual net absorption levels seen during 2016-2018.

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“With the roll-out of vaccines and the further easing of Covid-19 fear, there is a lot to look forward to, and 2021 will be the year when India enters a new cycle of office market growth,” the report said.

Investors cautious

While most investors remained cautious as asset pricing and revenue stability became challenging, large portfolio deals during the last quarter led to total investments of over $5 billion during 2020. The total value of deals in 2019 stood at $5,431 million compared to $5,034 million in 2020, the report said. The office space with a total deal valuation at $3,102 million leads the pack among asset classes in real estate. The primary markets witnessed a strong response to listed REITs, providing a new avenue for retail and institutional investors.

"India’s emerging REITs market is expected to attract cross-border flows and further improve transparency and asset pricing leading to more mature markets. This loop of increasing maturity and capital flows will lead to investments scaling new peaks. Office market is on its road to recovery as it is likely to witness an increased number of new completions of close to 38 million square feet, while net absorption is likely to hover around 30 million square feet,” said Samantak Das, Chief Economist and Head of Research, JLL India.

Flex is the future

The current market penetration of flex spaces in total office space stands at around 3 per cent. In 2021, India is expected to witness deeper penetration of flex spaces as corporate occupiers continue to shift away from long-term capital-intensive commitments. Flexible space solutions will be leveraged to satisfy temporary space needs, support a more mobile workforce and enter new geographies. In fact, driven by increased demand from large enterprises, we expect the size of the flex space market to reach nearly 39 million square feet in 2021.

Range-bound vacancies and stable rents

Vacancies in Grade A office spaces in India have stayed below the 15 per cent mark since 2017. Even during a pandemic-riddled year, vacancies increased marginally and are expected to remain range-bound in 2021 as well. Given the range-bound vacancy levels, office rents in 2020 remained stable across the seven major office markets in India.

However, landlords did consider the situation and were more accommodative to the demands of occupiers. Landlords across markets were more flexible in providing increased rent-free periods, reduced rental escalation and fully furnished deals to prominent occupiers which reduced their net outgo. But the reduction of headline rents was not a popular phenomenon. With stable rental values and low vacancy levels, the office market in India will continue to be characterised by strong fundamentals in 2021.

Also read: Kotak’s AIF sees opportunity in real estate sector

Sustained recovery 2020

The office market witnessed sustained recovery momentum in the second half of 2020. Business activities resumed with the gradual opening of the economy in the third quarter of 2020 and the office market witnessed green shoots of recovery. Sentiments improved further in the last quarter of 2020 with the news of potential vaccine development, and the office market continued its recovery momentum. Net absorption increased by 52 per cent, while new completions grew by 39 per cent compared to the preceding quarter.

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Published on February 22, 2021
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