Real Estate

Office rentals to peak on demand surge across top cities

Bindu D Menon Mumbai | Updated on January 12, 2018

A file picture of multi-storeyed buildings coming up at Cyberabad in Hyderabad

Limited supply sees developers entering into pre-commitment deals with prospective tenants

Is limited supply in the office market space leading to high rentals? Market seems to indicate that commercial rental market is likely to peak anywhere between 5 and 12 per cent due to limited supply.

Developers who have invested in commercial projects also said that they are seeing significant enquiries from prospective tenants with some of them sealing pre-commitment deals to offset a price.

“There is a short supply of commercial projects and we expect rents to move up by at least 10 per cent. Both investors and HNIs are investing in commercial properties,” Vipul Shah, MD, Parinee Group, told BusinessLine.

The company said it has sold 1.5 lakh sq feet of the total 11 lakh sq ft in its upcoming Entertainment Project in Andheri. Commercial rents range from ₹50 to ₹150/sq ft depending on the location pan-India.

Ashish Shah, COO, Radius Developers, which counts Amazon and Cisco as its clients, said commercial rentals are expected to grow to the tune of 5-10 per cent.

Real estate consultant CBRE in its report said that India’s office market had witnessed an all-time high annual absorption of over 43 million sq. ft. in 2016, registering a growth of nine per cent on a y-o-y basis.

CBRE said that tenants too, were willing to pre-commit to have an upper-hand in rental negotiations even as overall take-up is expected to remain strong in 2017.

Anshuman Magazine, Chairman –India and South East Asia, CBRE, said, “Occupier enquiries for medium to large-sized office spaces are expected to be closed in forthcoming quarters, adding to the transaction momentum. Due to the limited availability of ready-to-move-in Grade A supply, occupiers with medium and large size requirements will focus on pre-commitments in under construction/built-to-suit developments across key micro-markets in the leading cities in the country.”

Interestingly, the average vacancy has been coming down since 2013. “At the end of Q3 2016, India’s total Grade A office stock stood at 472 million sq feet with an average vacancy rate of 15.3 per cent,” Subash Bhola, Associate Director - Research & Real Estate Intelligence Service, JLL India, said.

Vacant stock

JLL said that NCR alone contributes about 41 per cent to total pan-India vacant stock of 72 million sq ft, followed by Mumbai contributing about 28 per cent while Bengaluru, the second biggest office market in size after Mumbai, contributes just 4.2 per cent to pan-India vacant stock.

JLL said the scarcity of office space has prompted new projects by developers, particularly in cities such as Bengaluru, Pune, Hyderabad and Chennai.

Knight Frank India Real Estate H2 2016 report said that Mumbai’s office market sees a decline in both new completion and transactions in H2 of 2016 compared to H2 of 2015. New completion at one million sq ft was lower by 73 per cent; transactions dipped by 34 per cent to 3.3 million sq ft

Knight Frank too said the shrinking new completions and lower vacancy level push up office rents; BKC and Central Mumbai rentals were higher by six per cent in H2 of 2016 over H2 of 2015.

Samantak Das, Chief Economist & National Director - Research, Knight Frank India said, “H1 (January-June 2016) raised hopes for the MMR residential market and we predicted H2 of 2016 on a growth trajectory. But H2 2016 suffered a setback with launches and sales down by 53 per cent and 26 per cent year-on-year respectively. The major reason of this fall can attributed to the demonetisation move.”

A Collier insight on commercial real estate also said that the preferred micro markets in cities such as Bengaluru, Chennai, Hyderabad and Pune witnessed quarter on quarter rental increase in the range of three to eight per cent, while the year-on-year trend shows that a couple of micro markets such as ORR in Bengaluru, SBD in Hyderabad and Off CBD locations in Chennai even witnessed double digit increase in rents.

Traditional markets

Traditional commercial markets such as Mumbai and NCR remained stable in terms of rents and vacancy due to stabilised demand and supply scenario.

“The growing office demand is outstripping the supply in technology sector driven markets such as Pune, Bengaluru, Chennai and Hyderabad. This is therefore leading to a continual downward pressure on vacancies and an upward pressure on monthly gross office rents in these markets,” said Surabhi Arora, Senior Associate Director, Research at Colliers International India.

Published on January 19, 2017

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