The Indian office space market has witnessed completion of 10 million square feet of office space during July-September 2015, while the overall office space supply addition was the highest in 9 quarters, according to latest findings of global real estate consultant CBRE.
However, there is little to cheer, as most of this supply was already pre-committed to occupiers few years back. This essentially means that if an occupier makes a decision to lease space now, the propositions available in Grade-A segment are still few.
Development completions surged by 21% on a quarter-on-quarter basis, and around 44% on a year-on-year basis. Bangalore led the new supply addition, CBRE said. Large commercial and SEZ developments were completed across Bangalore, Pune, Chennai, Gurgaon and Hyderabad during the quarter.
Rajat Gupta, managing director (transaction services), CBRE South Asia told Fe, “The availability of new office space continues to be minimal as the developers are still faced with challenges of liquidity to undertake commercial real estate. The supply that is coming in now mostly constitutes of pre-commitments made by occupiers in the past”. Unlike residential, where customers start paying for the apartments right from the planning stage of the project, in case of commercial or office space, the developer starts earning lease rents only after the building is complete, which makes the business of commercial realty highly leveraged.
Consultants tracking the sector say that commercial real estate in India is seeing just the opposite scenario of residential, as the demand for quality office space is outsripping supply. Shishir Baijal, chairman and managing director, Knight Frank India says that post the global financial crisis, developers stopped “high leveraged developments” (commercial and office buildings) and the market is now feeling the brunt of that.
“The demand for office space is peaking at the moment, but there is a great dearth of quality office supply. The scarcity of supply in the prime office locations continues. The supply, which is coming in is of inferior quality and in locations which lack infrastructure,” Baijal adds.
More than 9 million sq ft of office space was absorbed in the July-September 2015 period, across key cities of India; clocking a growth of about 20% on an annual basis and around 6% on a quarterly basis.
This rise in absorption activity, primarily driven by corporate occupiers from sectors such as IT/ITES, banking / financial services, and e-commerce companies, reflected a sustained improvement in office space leasing sentiments across most cities, CBRE said.
However, with a lack of Grade-A office supply, the capitalisation rates or cap rates have compressed significantly, which is making commercial real estate scenario seem better from what it was post the global financial crisis in 2008. This change is helping those developers who already have income generating high grade office projects.