Office space: US policy shift may shake demand in India

As per the India Office Market View Report — Q4 2016, released by property consulting firm CBRE, office space leasing rose to a record 43 million sq ft on a robust demand from corporates looking to expand their operations.

“Global economic uncertainty triggered by Brexit and election of Donald Trump as the next US President are events that might have a long term impact on the commercial real estate sector in India. A likely change in the US outsourcing policy might also adversely impact the space traction generated by global corporates who outsource their operations to India,” the CBRE report said. It further added that any such move may affect leasing demand from US-based corporates – which have traditionally been a significant contributor over the past few years. Even Nasscom has also lowered expected growth of the IT sector in India to 8-10 per cent for the current year.

Samantak Das of Knight Frank said that on an average, IT and ITeS account for 55 to 60 per cent of the transactions in all major markets such as Bangalore, Hyderabad and Pune. “There is definitely a concern on what Trump’s policy is going to be. However, we need to see over the next one-month how he lays down the policy,” said Das.

While India’s overall appeal as an established outsourcing destination, and the cost arbitrage that it offers are likely to safeguard it in the short to medium term, the report said that any protectionist measures undertaken by the new US regime will have a long term fallout on the sector.

If global concerns raise some challenges on the continuity of this growth in the office space, the report said that sectors such as BFSI (banking, financial services and insurance), engineering and manufacturing and research and consulting may provide some support to the leasing activity. Even pharmaceuticals, telecom and e-commerce are likely to see some activity.

The bulk of the office space leasing during the year was driven by demand in Bengaluru and Delhi-NCR as they accounted for 47 per cent share in the overall space. While the two cities account for the biggest share, individually, they have witnessed a marginal drop in leasing activity during last year. The biggest growth drivers were Mumbai and Hyderabad as they witnessed an increase in space absorption on an annual basis, accounting for a share of 14 per cent each in leasing activity in 2016. Hyderabad witnessed a steep rise in occupier demand, with absorption more than doubling to cross 6 million sq ft during 2016. The report is based on primary office markets of seven cities — Delhi-NCR, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad and Pune.

“The commercial real estate market in India has been performing well for the past two years. This is evident in the record absorption levels witnessed in 2016. India continues to show positive movement, despite global uncertainties,” said Anshuman Magazine, chairman CBRE, India and Southeast Asia.

Even, supply during the year touched 35 million sq ft and the total office stock for the country reached a milestone of over 0.5 billion sq ft as of Q4 2016.

In 2016, the demand from domestic corporates grew more and the share of domestic corporates in transaction activity rose from 41 per cent in 2015 to 43 per cent last year. “Commercial activity and occupier demand is expected to remain steady in the coming months, backed by corporates looking to expand/consolidate operations. Regulatory clearances in key locations are also likely to boost leasing activity in the coming quarters,” said Ram Chandnani, managing director – Advisory & Transaction Services, CBRE South Asia.

But the residential market fails to rise

The growth in the office space comes even as the residential market failed to see any uptick during the year. According to a property consultant Knight Frank India, the housing market, too, came to a “complete standstill” during the December 2016 quarter, with sales sliding 44 per cent in the 8 top cities, lowest level since 2010. Housing sales in residential segment fell to 40,936 units in 8 major cities during October-December 2016 from 72,933 units in the year-ago period and 68,734 units in the previous quarter, according to the report. New home launches fell 61 per cent to 24,316 units during the quarter, compared with the year-ago period.

The Delhi-NCR market was hit hardest with sales volume dropping 53 per cent to 6,765 units in the quarter, while new launches falling a massive 73 per cent. Knight Frank tracks the primary housing markets of 8 cities — Delhi-NCR, Mumbai, Kolkata, Chennai, Bengaluru, Hyderabad, Pune and Ahmedabad.