Burgeoning Commercial Real-estate

<strong>Post the global financial crisis, India witnessed a shift of capital to core assets in commercial real-estate and IT parks and the last two years saw the pan-India office vacancy at its lowest in five years. <em>Realty Plus</em> analyses the commercial real-estate scenario.</strong> Accor

BY Realty Plus
Published - Nov 6, 2017 6:34 AM

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Post the global financial crisis, India witnessed a shift of capital to core assets in commercial real-estate and IT parks and the last two years saw the pan-India office vacancy at its lowest in five years. Realty Plus analyses the commercial real-estate scenario. According to an IBEF study, Mumbai, NCR & Bengaluru account for 60 per cent of total office space demand in India.In the last three years or so, the net absorption in the top eight cities (Ahmedabad, Bengaluru, Chennai, Delhi NCR, Hyderabad, Kolkata, Mumbai and Pune) has consistently crossed the 30 million square feet mark. Also, business activity is now shifting from CBDs (Central Business Districts) to SBDs (Special Business Districts), and Tier 1 to Tier 2 cities. Vacancy levels in some cities such as Bengaluru, Chennai, Hyderabad and Pune is around 5-10%. The average annual net absorption in 2016 was 34 million sqft across top eight cities in India. Sachin Sandhir Sachin Sandhir, Global Managing Director-Emerging Business, RICS commented, “There is a lot of institutional capital chasing Grade A space. In 2017, inflows into the commercial office space will see a four-fold rise touching a new peak of Rs 240 billion or US$ 3.5 billion from Rs 63.8 billion in 2016. On the supply side, there is a shortage of grade A office space which is less than half of the current office stock across top eight cities at 280 million square feet across Gurgaon, Thane, Navi Mumbai, Salt Lake (Kolkata), Secondary Business District-Bengaluru, Whitefield (Bengaluru) and Hinjewadi (Pune).” The Occupiers There is an increase in leasing activities with both domestic and international occupiers increasing their office portfolios. Information Technology-Business Process Management (IT-BPM) companies continue to dominate commercial office leasing activity, their share has dropped to 50 per cent in commercial office leasing activity in top Indian cities from 65-70 per cent. Around 30 per cent of the leasing activity in the IT-BPM space is directly by US-based companies. A high rental growth was seen mostly in South cities like Bengaluru, Chennai and Hyderabad where y-o-y change ranged between 8-17% at some locations. Bengaluru CBD has always been the first preference of BFSI and IT occupiers primarily due to its connectivity and prime location. In spite of having limited availability of office spaces and supply, it has witnessed 17% y-o-y rental appreciation.The Bengaluru EPIP/Whitefield also has ample availability of large floor spaces and Grade A developments attracting occupiers whereas, Electronic City offers comparatively cheaper rents than other markets of the city offering large and superior quality office spaces. Hosur Road too is an emerging IT/ITeS micromarket in Bengaluru with cheaper rates mainly due to its location in the peripheral area of the city and ample land availability. Chennai CBD is predominantly an IT market with BFSI, consulting companies having their setup in Guindy, MRC Nagar and Saligramam. In Q2 2017, Chennai Office CBD accounted for 16% of total absorption. OMR Post Toll micromarket includes locations like Navalur, Sholinganallur and Pallavaram-Thoraipakkam Road which is popularly known as IT corridor of Chennai and has observed 8% y-o-y rental growth. DLF Cyber City is in Gurugram and is the top preference of domestic and international occupiers due to its quality office spaces, DLF Cyber City has witnessed 12% y-o-y rental growth. Hadapsar market in Pune with projects such as Magarpatta city offering large floor spaces is dominated with IT/ITeS office occupiers. The SBD market in Hyderabad includes HiTECH City, Madhapur and Gachibowli that have 89% of total leasing volume due to superior amenities and reasonable rentals compared to other cities. A Cushman & Wakefield-RICS research report (Commercial office real estate: Positive Disruptions-Beacons of Change) released in May, 2017 predicts that the average commercial real-estate supply in the top Indian cities will be 40-45 million sqft per year until 2020 while average net absorption will be around 32-35 million sqft. REIT Environment Currently, developers incur huge capital expenditure in commercial real-estate development which remains locked until the asset generates returns. But, through REIT, developers can exit from the completed asset. REITs in commercial assets are attractive for investors as their rental yield is as much as 8 percent.Presently, India has a rent-yielding office inventory to the tune of 537 million square feet. REIT listing will pave the way for institutionalization of the commercial office market. Adoption of international valuation and measurement standards will bring in much needed parity in the functioning of the market. As Sandhir stated, “India’s REIT potential is quite large given the fact that about 229 million sq. ft. of office space in the country is REIT compliant. While REIT’s have not yet taken off in India, REIT listings are expected either this year or the next. International private equity funds and real estate developers such as Blackstone, Brookfield, GIC, Cananda Pension Plan Investment Board and RMZ Corp are all considering REIT listings.” New Trends With the commercial real-estate market maturing in India, new development and usage trends are gaining popularity. Talking of new advancements, Vipul Shah, Managing Director, Parinee Group stated, “A lot of developers today are shifting base to crowdfunding to fund the construction process of commercial and housing projects.The trend of building tech-savvy workspaces and mixed-use format of office & retail to is steadily gaining momentum. Co-working spaces and the free-trade warehousing zones are the new entrants gaining popularity in commercial real estate. Vipul Shah Co-working spaces: As the commercial real-estate market matures in India, new trends such as co-working spaces are gaining popularity in tier one and two cities as it is an affordable option for start-ups, small and medium enterprises and for large companies who require additional space on a temporary basis. While it still accounts for a small share of the overall leasing volume (around 2-3%), this concept is growing in cities that have a start-up ecosystem such as NCR, Mumbai, Bangalore, Hyderabad, Chennai, Ahmedabad and Pune. Crowd funded real-estate projects: This concept in commercial real estate aids trend-setters raise funds to launch their services through the digital podium. This procedure includes raising petty amount of money online from varied people throughout the globe. This practice in India being in its nascent stage, has an ability to pick up well. Office-retail Complex: A working individual ends up spending almost his entire day at work, retail services try and locate themselves in the vicinity or just within the business district. Various retail classifications like recreational malls, high-end fitness centres, telecom services, spa, financial institutions, restaurants and coffee shops are looking positively at this zone. This facility lends the retailers a double advantage of paying lesser rents and also increases their access to their targeted segment of office-goers. Tech-friendly Workspaces: These technological factors include accessibility to devices, proper system for data security, wireless connectivity and upgrades, apps related to business, conferencing and presentation competencies to name a few. The aesthetics factor which was previously the main consideration is today taking a backseat to make way for technology. Warehousing:This is an imminent and a promising trend in the commercial real estate segment. With the implementation of government measures like the goods and services tax (GST) the potential of warehousing has only increased. These special zones lend tailored warehousing facilities that help store the products, prior to them being shipped in a structured manner. They are also cleverly located and well networked, thus, offering time and value benefits. Facility Management The commercial real estate space providers are investing in technology for energy management, building controls, integrated workplace management systems among other things. Facilities management is another growing segment. As Shah puts it, “The last couples of decades have perceived an enormous surge in non-traditional businesses. The coming years will witness a major transformation with focus flexible and collaborative work-spaces.” Also, emergence of new technologies and innovations are influencing cost rationalization and productivity optimization. . Indeed, an organization’s property is its biggest expense and therefore, the commercial real-estate industry is increasing seeking professional services that help them achieve an optimum balance between people, physical assets and technology, with the intent to maximize value and minimize costs. Tariq Chauhan, Group CEO, EFS Facilities Services elucidated, “Maintaining the building asset with optimum efficiency and longer life cycle can directly enhance the bottom line of the company. Inarguably, facilities management must be an integral part of the design and construction, spanning contract management, financial management, change management, human resource management and health and safety, in addition to core building maintenance, utility supply and domestic services (such as cleaning and security).” Tariq Chauhan The surge in investment in commercial real-estate developments has triggered an urgent demand for effective and quality facilities management services. But, the global culture of service excellence is often seen missing when MNCs deal with local companies who have inadequately defined Indian standards for the industry. Chauhan explained, “The commercial property owners prefer global and experienced corporate FM services providers who will create a compelling reassurance for end-users, in terms of experience and service delivery. However, the constant demand to cut costs, increase profits and improve existing service standards pose a major challenge. Tangible benefits offered by quality facilities management services are especially relevant in the current environment of regional fiscal austerity, as an integral tool for containing and managing building management costs.” Case Studies Mindspace Madhapur (Hyderabad) by K Raheja Corp - Mindspace at Madhapur is a gated business park spread over 97 acres. Designed by RSP Consultants, it serves as the hub for IT, ITeS, Telecom, Pharma, Biotechnology and similar business sectors. This commercial space provides retail, hospitality, food courts, entertainment hubs and premium residential offerings, in addition to SEZ and non-SEZ office spaces. Mindspace Madhapur sports sewage treatment, energy conservation techniques, solar power generators andend to end waste management system. [caption id="attachment_26893" align="alignnone" width="300"] Mindspace Madhapur[/caption] Piramal Realty first commercial project – Agastya Corporate Park in Kurla, Mumbai sprawls over 16.25 acres and offers its occupants 50,000 square feet. of landscaped greenery amidst a dynamic, technology enabled environment. Integrated with greenery are the modern workspaces and facilities that include a crèche, gymnasium, games room, massage room and large terraces that enhance employee experience. Agastya Corporate Park