Putting the current state of disruption in context
With the coronavirus pandemic dishing out a volley of challenges, the commercial office sector in India has undergone a variety of cyclical and structural changes since the outbreak took hold in early part of 2020. Evolving trends, however, provide one with ample reasons to believe that the sector is headed towards a full-fledged recovery, primarily because of strong demand fundamentals and the uniqueness of the commercial real estate market in India. Greens shoots are, in fact, already visible on the ground.
As per Cushman & Wakefield’s data and occupier conversations, there are clear indications that since most of the large occupiers/corporates are still looking at a gradual return to the workplace, the demand for office space will continue to remain robust in India. The gross leasing volume in the July-September 2020 period, for instance, has risen by 138% q-o-q to 14.7 million square foot (msf) when compared to the previous quarter. Riding on the growth of the tech sector in the country, Hyderabad and Bengaluru remained the most active commercial markets during this period, accounting for 23.7% and 22.9% share in pan-India leasing activity, respectively. Closing following the two markets was Chennai, with a contribution at 19.4%.
Numbers on pre-commitment activity also give us solid ground to believe that even though, market activity on a y-o-y comparison remains slightly lacklustre, the outlook for the office space in India looks robust. This is evident from the fact that pre-commitment activity in Q3 stood at 5.26 msf in Q3 compared to 2.74 msf in the previous quarter.
Recovery and Long-term Resilience of Indian Office markets
Our Global Recovery report predicts that APAC (excluding Greater China) will account for 700 msf of net absorption over the next decade. India with its share being intact is projected to see over 400 msf of net absorption over the next decade, reiterating the strength of its office markets.
Evolving trends around increased flexible working and WFH practices also do not meaningfully alter the outlook for the Asia Pacific office market. We expect net office demand in the region from 2022-2030 to be only 4.5% lower as a result of these effects. Their impact is dwarfed by the region’s overall high-growth backdrop. India again remains a key factor, making up 56.5% of tracked office inventory in the region and where the WFH adoption is expected to be lower than in the advanced economies in the region.
Additionally, the Asia-Pacific region is also predicted to be the center of office job creation to the tune of 1.47 million per year in the 9-year period between 2021 and 2030. With drivers of a robust talent pool and rising urbanisation, India is expected to ride this wave of growth, with the employment declines likely to be minor and short-lived. As office employment penetration increases with the work being undertaken moving up the global value chain, demand for offices will remain positively accretive.
Investor sentiment remains upbeat for Indian office markets
While global institutional investment in the Indian office markets have remained strong over the past decade, the successful debut of REITs on the Indian bourses has fuelled further appetite for asset acquisition in the commercial office segment. While the pandemic will alter investment philosophies, the investors continue to repose faith in Indian real estate, given the high value and growth metrics that the market offers. Increasing institutional ownership and continued interest in the commercial segment is a strong testament to that.
In what is a reiteration of investor confidence in the long-term resilience of the office markets and India in particular, Brookfield Asset Management recently bought 12.5 msf of Bengaluru-based RMZ Corp's commercial asset portfolio for USD 2 billion, among one of the biggest such deals recently. Another Bengaluru-based developer, Prestige is also in talks with Blackstone to sell its commercial assets, including offices, retail and hotels for around USD 1.3 billion.
Following the successful Embassy REIT listing, K Raheja Corp’s REIT offering was over-subscribed by 13 times. Brookfield is also preparing a REIT listing by the end of the year. Others are waiting in the wings as well.
At a time when the disruption in the office markets is being discussed globally and most established economies see a loner road to recovery, these developments in the Indian office markets clearly enunciate that India will be at the forefront of recovery in this segment and will emerge stronger as a clear favourite among office destinations in the region.
Even as the near-term outlook still remains slightly fragile and the road to recovery seems a little longer, it will serve us well to bear in mind that the global office markets emerged stronger in the wake of the GFC, albeit at varying degrees and there is no reason, when the pandemic is behind us, that the same will not be repeated again. Trends may change but the fundamentals remain intact.