Absorption of office space, primarily led by the IT sector, is estimated to fall this year after what could be called a bull run in the last three years.
Absorption of office space, primarily led by the IT sector, is estimated to fall this year after what could be called a bull run in the last three years. Informal channel checks with brokers revealed the reported large layoffs in the IT and ITes segments could see absorption fall 15% to 20% from the all-time high of 43 million. sq. ft last year. IT companies typically account for about half the country’s total office space demand.
According to two people familiar with the development, Infosys has put on hold its plans to take up approximately 8 lakh sq. ft in Pune and Delhi. Infosys did not respond to an email query regarding their office requirements and subsequent change of plans at the time of going to press. “There is no doubt that demand will reduce this year. Companies are going to delay decisions and re-look their existing portfolios,” said Sanjay Dutt, CEO, Ascendas India, a major lender in the commercial segment.
According to sources, Amdocs, an IT multinational in Mumbai plans to re-design its office pruning the space to 85 sq. ft per person from 100 sq. ft per person. Experts said other companies could be expected to do the same. This information could not be independently verified with Amdocs. The residential piece is not going to be insulated either. Residential demand in the IT hubs, mainly Bangalore, Hyderabad and Pune is expected to be affected, with some impact in the micro markets of Navi Mumbai in Mumbai and Noida in the NCR, said Shubhranshu Pani, managing director of strategic consulting, JLL India.
Typically, home buyers who run the risk of losing their jobs target apartments priced between Rs 4,000 a sq. ft and Rs 10,000 sq. ft, making this a vulnerable segment now, Pani added. Absorption levels in the commercial sector, Grade A office space have escalated rapidly in the last three to four years with a number of deep-pocketed international institutional funds inking deals with pedigree developers. Nearly all companies that have a portfolio of office blocks managed to raise capital.
“There will be a lull after consistent performance for the last few years. However, businesses are cyclical and the headwinds in the IT sector will not dent the fundamental strength of the segment,” said Irfan Razack, CMD, Prestige Group. Anish Singhvi, partner at PwC, India said the state of the market might impact the valuations of REITs. Although valuations are dependent on current rentals, which are locked in, lower absorption could dent sentiment, Singhvi added.
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Some micro markets of Mumbai, like Bandra Kurla Complex (BKC) have seen a downward revision when leases have come up for renegotiation. According to sector specialists, whether the trend will be seen in Bengaluru depends on the extent of job cuts in the IT sector. Moreover, experts said that while there is no news of job cuts in the BFSI segment, banks may not be willing to pay top dollar for space. At least three banks revised their rental downwards in BKC in the last few months and one Swiss-based bank is cutting down its per employee space, much like Amdocs.
On the flip side, the outlook towards e-commerce has recently improved as one merger and one major fund raising were announced. This comes after almost two years of under performance, which resulted in companies vacating offices. At its peak, back in 2015, when the highest ever rental was committed by an e-commerce player, the entire segment contributed less than 10% to the total absorption. Which is why they point out that even if the sector grows on the back of capital infusion, it may not be enough to balance the dent caused by IT.