Demand drivers of Commercial Real Estate in India
Real estate market trends are often regarded as the bellwether for the overall economic conditions. In India, real estate is the second largest employer after agriculture and is slated to grow at 30 per cent over the next decade.
Amongst the largest four subsectors, i.e. housing, retail, hospitality and commercial, the commercial real estate demand is witnessing a robust growth lately.
Demand for office space across India was 26 million square feet last year, while it is expected to reach 28 million square feet this year, said Mr Nair, chief operating officer, at Jones Lang LaSalle India.
According to a report by CBRE, a property advisory firm, the uptake of commercial office space has grown by 70% in Q2 of 2015 over the previous quarter. During the period, more than 8 million sq. ft of office space was absorbed, with a major portion of it occupied by IT and IT-enabled service companies, e-commerce firms, and the banking and financial sector.
The next pertinent question that arises is- what is driving this demand in commercial real estate?
Broadly, there are three factors that are stimulating demand of office spaces in India.
1) Economic factors:
From an economic perspective, commercial real estate is emerging out to be a highly favorable bet for investors and developers. Researches show that the average capital values in Indian commercial real estate sector are about 25% lower than most recent peaks seen in mid-2008. In residential sector, however, the average capital value has surpassed the previous peak. Presently, the commercial sector is emerging out to be the best opportunity for investment at a fair price.
Along with optimum market rates, a positive growth in global economy has ignited an optimistic sentiment in office space demand. There has been an overall increase in the job opportunities across the globe, making the commercial sector a sure-shot stake.
Anuj Puri, chairman and country head, JLL India, a property consultancy, said that with the US economy showing signs of improvement, more jobs are being created and more work is outsourced here. This has resulted in the growing uptake of office space in places such as Bangalore.
Yields in commercial real estate are not only optimistic in the future, but also better. The rental yields of a corporate property is about 8-10% which is much higher than 2-3% return of a residential property.
Investment opportunities too are easier and increasing than ever before. Policies – both governmental and private like real estate investment trusts (REITs), real estate exchange traded funds (ETFs), commingled real estate funds (CREFs) and infrastructure funds have assisted a greater spectrum of people to invest in the commercial real estate market. Due to the higher liquidity available in the market, the lower transaction costs and lower capital requirements, average investors find it comfortable to invest in real estate via one of such investment instruments.
2) Commercial factors:
On the commercial front, the changing market paradigms has assisted in driving office space demand.
There has been a reorientation in the workforce. An increasing number of employees and workers are looking into remote-working and freelancing opportunities, creating a demand for flexible working spaces like business centres and coworking spaces.
These modern workplaces provide an economically viable solution with low capital investment for solopreneurs or small businesses and an equally profitable opportunity for landowners and investors. Large traditional office spaces, which remained vacant earlier can be remodeled into a serviced office, ensuring a higher return on investment (ROI).
Along with business centres and coworking centres, there is also a greater demand for smaller office spaces. Large MNCs are setting up smaller teams in different cities, while small companies are looking for professional spaces which allow them flexibility to scale their operations. There has been a rising demand for office spaces of less than 10,000 sq. feet.
A recent research by CBRE revealed that small scaled office space transactions made for about 25% of the total office space transactions this year, compared with 19.75% last year.
3) Cultural factors:
Lastly, the all-embracing startup culture has also contributed greatly to the office space demand. The blooming base of entrepreneurs have a great potential to make India the next “Silicon valley”. Currently, India has the third largest number of startups in the world. The increase in the number of startups lead to an obvious increase in the demand for workplaces. Even the investors grant a separate growth capital for development and expansion of offices spaces.
The government of India too, is encouraging a culture which is leading to an increase in commercial real estate demand. The Startup India movement by PM Narendra Modi, has brought about legal support and tax abatement policies for startups, amongst other things.
Various initiatives by the government like ‘Make in India’, relaxation of FDI (foreign direct exchange) norm, etc have also assisted in improving the market sentiment and fostering capital inflow in the country.
In conclusion, the commercial real estate in India is not only exhibiting green shoots of recovery, but also a promising future for investors, brokers and landlords.