Office Space Sales Could Improve Next Year
India Today [ 29-11-2013 ]

The commercial real estate market has been down in the dumps for a very long time. Slower economic growth has led to an overall decline in expansion by companies which have resulted in falling demand for office space in the past two years. But the next year could well see an upswing, thanks to some recent developments.

Real estate consultancy Cushman & Wakefield (C&W) expects the absorption rates to improve in the top eight cities for the next four years - from 22.55 million sq ft in 2013 to 28.11 million sq ft by 2016. It expects a fresh supply of 143 million sq ft (of office space) to come into the market by the end of 2017, in value possibly equal to the Mumbai or Delhi NCR market.

"Currently, there's oversupply, which the market will take some time to absorb. We will see steady revival from the second half of next year if a stable government comes into power," says Ravi Ahuja, Executive Director at C&W.

The sharp depreciation of the rupee may have alarmed many, but it has also had the unintended effect of benefiting IT and ITeS companies. These are also the biggest users of office space - nearly 75 per cent in the country.

"Currency devaluation has made our IT companies more competitive and there are expectations that India will get more outsourcing work," says Anshuman Magazine, Chairman and Managing Director (South Asia), CBRE. More outsourcing translates into more employment and greater demand for office space.

Also, unlike financial services, pharma and FMCG sectors, which drove the demand for office space in recent years, the IT and ITeS sectors depend much less on the domestic economy.

Experts say the demand for commercial real estate is more closely linked to economic growth than that of the residential segment. India's decade-low GDP growth of 5 per cent in 2012/13 has directly affected the demand for commercial realty this year. Corporate houses are looking at more efficient use of existing space and increasingly considering relocation to bring down real estate costs.

In the quarter ending September 2013, less than 3 million sq ft of office space entered the market, a drop of over 75 per cent compared to the previous quarter and 50 per cent compared to the corresponding quarter last year.

Regulatory changes and attractive prices are also favouring the revival. For instance, the rate (around Rs 23,400 per sq ft) PE giant Blackstone Group paid to buy Express Towers in South Mumbai last week is much lower than the prevailing property rate in the area. A stone's throw away is NCPA Apartments, which despite being a residential complex, has a minimum price of Rs 1 lakh per sq ft.

"Office rentals across the country have fallen 15-20 per cent in the past 30 months. Some investors are having a field day because of the low prices. When the economy turns around, they will reap benefits for the next few years," says Ahuja.

In August, the government relaxed norms pertaining to special economic zones (SEZs) which are also likely to give a big boost to the commercial property market. Under the new regulations, the minimum land requirement to set up SEZs across different categories - sector-specific and multi-product - has been brought down significantly, as developers face issues in both acquisition and financing while trying to procure large pieces of land.

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