Builders of office space in Bengaluru are bracing for a slowdown with IT firms unwilling to commit to more space ahead of the US elections and e-commerce players likely to surrender space already booked. Sanjay Dutt, managing director at Cushman and Wakefield, believes instances of space being given up are possible adding, decision-making at companies is definitely slower than it was last year.
Property brokers confirmed that corporates, especially in the ecommerce space are backing out of transactions. E-commerce constituted nearly 10% of Bangalore’s absorption in 2015 but didn’t rent any space in the three months to March.
American e-commerce major, eBay, is understood to to have shelved its plans to wheel into an upmarket address in Mumbai. Another firm too had committed to lease office space but after six months shied away from closing out the transaction, Navin Makhija, CEO at Wadhwa Developers, which owns projects in Mumbai’s corporate business district, Bandra Kurla Complex (BKC) told FE. Loss-making e-retail portal, Jabong as well as the troubled Yahoo are understood to have vacated their Bangalore based outfits in the past three months. According to one analyst, banks are holding back on renting space for front end operations.
“New supply will not get absorbed if corporates hold back the next level of growth,” Makhija added. Two years back, Flipkart had signed what was the biggest rental agreement for R300 crore but the firm has surrendered a million sq ft.
Jitu Virwani, chairman and MD of Bengaluru -based, Embassy Group, believes the sluggishness in Bengaluru is temporary. “We are anticipating demand of nearly 12 million sq ft whereas new supply will be a fourth of that,” he said. With money not flowing as freely into the e-commerce space as it did a year ago and IT firms not likely to hire at the pace they were earlier, the outlook for office space doesn’t appear quite as promising as it did even six months back.
Dutt said that companies have over committed in Bengaluru and rents have escalated sharply in the city, therefore much of the demand could move to Hyderabad.
Compared to last year, absorption rates fell across all major cities in the past one year. In Mumbai rates fell by 58%; in Pune, they fell by 20%. In Delhi-NCR, rates fell by 11%. Bangalore, which historically accounts for maximum absorption somehow recorded flat growth, according to data released by Cushman and Wakefield. Experts are not confident that office absorption will touch last year’s high of over 30 million. sq. ft on an annual basis.
IT companies have been the main drivers of the demand for office space but with Tata Consultancy Services (TCS), the country’s largest IT services provider and biggest recruiter indicating hiring would slow down, the property market could be in for a slowdown. N Chandrasekaran, CEO and managing director at TCS, observed recently lateral hiring will be “calibrated” during the year with a greater focus on retention.
The absorption data comes at a time when private equity (PE) funds are looking to snap up more office space, with the segment having done well in 2015 and in the hope REITs (real estate investment trusts) will soon take off next year.
In the past three years, yields on commercial properties have dropped from 12% on an average to even as low as 8% in the case of built up Grade A developments, experts told FE. Most PE deals are expected to take place in the under-construction segment, possibly providing a filip and speeding up pace of construction.