Bengaluru, Asia Pacific’s second-largest Grade A office market by stock after Tokyo, remains numero uno in terms of office demand in the country as well as in APAC. The city’s relatively strong showing even in 2020, reaffirms its status even more. This consistent performance and its position as the leading tech and innovation hub in the APAC region haves given rise to a healthy inventory of quality, high-performing office assets. Institutional investor interest has naturally followed. The city boasts an expansive Grade A office market of 154.4 million square feet (msf) currently, having seen a very impressive 103 per cent decadal growth in its Grade A office inventory. This growth has been made possible with the strong occupier demand momentum propelling the city’s growth and ensuring that for a market this big, its average vacancy levels have remained in single digits for nearly the entire last decade. In fact, despite the pandemic, the city saw its office net absorption for 2020 (6.2 msf) drop by just 29 per cent compared to its three-year average (2017-2019), being ably supported by an early revival in demand for office space in H2 2020. Despite losing a major part of the year to lockdown measures, Bengaluru continued to remain the strongest market for office leasing, accounting for 27 per cent of pan-India lease activity with 13.7 msf, while recording only a 19 per cent drop for the same indicator on a y-o-y basis.

Investment trends in Indian real estate; Bengaluru gaining ground

The strong market fundamentals and superior quality office assets in India have seen this asset class garner a lion’s share of the last decade’s institutional fund inflows into Indian real estate. While the office sector in India attracted 44 per cent share of the total investments out of $41.1 billion during the last decade, over the past five years, it has accounted for a 47 per cent share of the total investments of $30.1 billion.

Bengaluru was an early starter, with Ascendas showing the way with their investment in ITPL even before the start of the new millennium. While Blackstone made a splash with their tie-up with Embassy Office Parks early, at the beginning of the last decade, others such as Mapletree Investments, GIC, Qatar Investment Authority, Godrej Fund Management and Mitsui Fudosan have all come calling over the last five to seven years. Large developers with singly-owned asset portfolios and high occupancy levels coupled with the strong demand from global occupiers have been big catalysts for Bengaluru’s enhanced prominence on the global office map. Progressive FDI regulations have also given a big push to the institutional money flowing into the city’s commercial sector. In 2019, Bengaluru-based Embassy Office Parks’ REIT (Real Estate Investment Trust) backed by Blackstone raised around ₹4,750 crore. As India’s first listed REIT, the issue was over-subscribed by 2.58 times. The city’s high share of REIT-able assets also speaks about its current demand among large institutional investors and is expected to open further opportunities for higher penetration of such institutions into the city’s office market in the years to come.

Bengaluru’s office sector, which has enjoyed significant investor interest over the last decade is now undergoing a second wave of transformation in the ownership pattern of its assets. Even with large-scale institutional investments being recorded in the city’s commercial assets over the years, developers continued to retain majority stakes in their portfolios. Bengaluru has always been an office market with single-ownership assets dominating the total stock. While in 2010, only 4 per cent of the 58.2 msf of single-owned office space (out of a total Grade A stock of 69.7 msf) recorded institutional participation with Ascendas having a stake in ITPL Bangalore, the proportion recorded a sharp rise in 2015 as investor interest was in its ascendancy. In the total office stock of 104.3 msf in 2015, investor participation (through full ownership or partial stake) was 19 per cent of the operational stock.

Despite a decline in leasing momentum during 2020 and rents having risen to an average of one dollar and twenty five cents from its sub-dollar start, the city’s office segment is still characterised by high occupancy levels, quality assets and presence of top profile tenants. It thus comes as no surprise that Bengaluru’s office sector continues to enjoy a preferential rating among institutional investors and has seen an upward interest among investors and funds to evaluate partnerships/stake sales in key developer projects. While investors are targeting income-yielding assets, they are also willing to assume some development risk, given the strong market fundamentals. Given two large stake-sales in recent times with the Brookfield-RMZ Corp deal getting concluded and the ongoing acquisition of commercial assets by Blackstone from Prestige Group, the share of institutional presence (having full stake or partial ownership) in the city’s single ownership inventory of 132.8 msf is slated to rise to 41 per cent (35 per cent of 154.4 msf of total Grade A office space), indicating a rapid transformation in the office ownership structure in the city.

While the strong institutional flow of funds into real estate will continue to provide running momentum to the increasing preference for REITs, its criticality towards enhancing market maturity, given the significant influence institutional investors will wield, cannot be stressed enough. As the market structure and asset ownership models evolve, market operations are likely to mirror global practices that institutional investors adopt. With a professional approach towards asset management, operations and tenant relationship management, even developer-owned portfolios will undergo a change to compete on even terms. This will also foster greater market transparency and benchmarking, allowing occupiers of all hues to be able to access quality real estate for their city operations. A consolidation in terms of ownership and rising institutional participation will also create an impact on the tenant/landlord relationship matrix and the leasing market ecosystem. With a more professional approach, there would be global benchmarks to follow in terms of tenant relationships, which will create more elaborate process flow to a leasing transaction lifecycle. A process-driven approach will also result in relatively lower flexibility in commercial term negotiations. A greater focus on asset management will bring in the possibility of a slight hike in maintenance charges as well, though the inherent benefits of health, wellness, safety and hygiene cannot be stressed enough in a post-Covid-19 world. All in all, there will be a fast-tracking of global best practices and standards across documentation, commercial lease structures, terms and asset management, even though flexibility may be somewhat sacrificed.

(The author is Managing Director — Bengaluru Market at Cushman & Wakefield)

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