INDIA: APAC'S FASTEST- GROWING OFFICE MARKET

BY Realty Plus

As per the latest office market report from Vestian, absorption increased to 13.40 Mn sq ft in Q1 2024 from 11.85 Mn sq ft in Q1 2023, showcasing a 13% increase Y-O-Y. Southern cities, Bengaluru, Chennai, and Hyderabad accounted for 61% of the Pan-India absorption in Q1 2024, the share increasing from 54% a year earlier.

Absorption more than doubled within a year in Chennai and Mumbai, whereas it increased by more than 50 percent in Hyderabad. All the other cities witnessed a decline over the same period a year earlier. While IT-ITeS sector dominated absorption with majority share, fol-lowed by the BFSI sector, Flexible spaces garnered interest from large conglomerates.

As per Knight Frank India Mumbai witnessed office space transactions totalling 2.8 million square feet (mn sq ft) during the quarter, marking a 29% year-on-year (YoY) increase. Additionally, office completions in Mumbai surged by 986% to reach 0.4 million sq ft in Q1 2024. During Q1 2024, the major occupancy/leasing activity was driven by India Facing Businesses with 88% attribution. Flex office areas accounted over 9% share and 3% was occupied by third party IT services.

RENTALS GOING NORTHWARDS

Sustained absorption activities and limited new completions in the past year guided rentals northward. As a result, rentals appreciated across the top seven cities in the range of 2.4% to 6.8% over the previous year. Pune witnessed the highest annual increase in rentals due to robust demand for office spaces with a majority of transac- tions, around 37%, concentrated in the manufacturing and engineering sector, as per Vestian.

In fact, occupiers across ma- jor markets in India are willing to pay higher rentals for quality office supply. Superior quality new office spaces command up to 20% higher rental premium over average quot- ed rentals in select premium micro markets, states report from Colliers. India's top office markets have experienced a notable 4-8% YoY surge in rentals, driven by robust demand and simultaneous infusion of high-end, quality supply. Select high performing markets across the top 6 cities have specifically seen up to 20% YoY rental rise. Some of the examples include MG Road - Delhi NCR (18.2% YoY), SBD1 (Includes

Koramangala, CV Raman Nagar, IRR, Indiranagar, Old Airport road, Old Madras Road, Rajajinagar and others) - Bengaluru (15.5% YoY), and Pallavaram Thoraipakkam Road (PTR) - Chennai (10.9% YoY).

THE OCCUPIERS PROFILE

In the resurgence of returning to office spaces, the IT/ITeS sector has emerged as the dominant force in leasing demand, accounting for approximately 28% of office space requirements. In terms of the IT/ ITeS sector, although Bengaluru remained a major contributor with 35% of the sector's demand, Noida surpassed Hyderabad, accounting for 20% of the demand in the first quarter of CY 2024.

Meanwhile, the BFSI sector saw an increase in its share of leasing demand, rising from 16% in the first quarter of CY 2023 and 13% in the fourth quarter of the same year to 20% in the first quarter of CY 2024. Mumbai and Chennai alone con- tributed to 50% of the BFSI sector's demand, finds out CREDAI – CRE Matrix Report. In addition, the co-working

spaces are making a mark for themselves as an emerging asset class. Flex spaces, especial- ly with the rise of core-plus-flex models, are gaining prominence. Flex spaces are likely to continue the momentum in 2024, and is expected to constitute 15%-20% of total office leasing across the top 6 cities, states Colliers.

Overall, with over 150 msf of office supply at various stages of construction in the next three years, India continues to offer a plethora of high-quality office spaces at competitive prices, catering to the diverse needs of occupiers.

INDIA THE GCC HUB

In 2024, GCCs are driving India office space demand, with 37% share in overall leasing activity. With global corporates increasing- ly seeking to optimize resources, maximize savings, and drive growth, India offers a compelling proposi- tion. During Q1 2024, a significant square feet (msf) of leasing activ- ity by GCCs, represented 37% of total office leasing across the top six cities.

Looking ahead, GCCs are pro- jected to lease between 45-50 msf of office space in the next two years, constituting around 40% of total demand. Heightened GCC activity is fueled by diverse occupiers spanning sectors such as BFSI, Technology, Engineering & manufacturing, and healthcare. Additionally green-certified Grade A office spaces and Sub & near dollar micro markets remain pivotal for GCC space uptake in India, contributing nearly 80% of the leasing activity.

FLEXSPACE A FORCE TO RECKON

According to the CBRE re- port, flexible space operators have emerged as a prominent force within the Indian office leasing ecosystem consistently securing a share exceeding 15% in the past five years. This trend reflects an upward trajectory in the space leased by such operators and is anticipated to continue its growth.

India is the fastest-growing flexible office market in the world. The sector is likely to gain further traction driven by increasing demand across diverse segments, including large enterprises, the burgeoning start-up ecosystem, and GCCs establishing their R&D operations in India. As hybrid work models become increasingly popular, the an- ticipated strong demand for flexible spaces would propel the sector's impressive growth trajectory for the foreseeable future.

OFFICES SEGMENT PE TRANSACTIONS

The commercial offices segment dominated PE transactions in FY24 with a 57% value share, as per An- arock survey. This was largely due to the GIC-Brookfield deal, which accounted for approx.40% of total transaction value in FY24.

According to Anarock, commercial real estate deals remained very thin on the ground, due to multiple factors such as the delayed notifi- cation of SEZ amendments, elevated interest rates, and global uncertainties. However, given strong demand fundamentals of commercial real es- tate, driven by leading IT companies’ determined push to return to office, increased traction of co-working spaces, a favourable capex cycle, the amendment of SEZ laws, and expectations of lower interests, commercial office real estate activity should strengthen over the coming quarters, Office sector was the preferred sector among equity investors, ac- counting for 43%, closely trailed by residential investments at 38%. Early-stage deals, despite showing a slowdown from last quarter, says the Cushman & Wakefield findings. Additionally, the quarter recorded corporate transaction volumes of INR 12.78 bn (USD 0.15 mn), a 65% jump on y-o-y basis. Mumbai con tinued to drive transaction value with 57% share in total, followed by Pune at 33% share.

REITS AND SM REITS

As per the latest findings from ICRA, Real Estate Investment Trusts (REITs) within the office market have shown a remarkable potential. The REIT-ready office supply market could boost the office REIT market size by 6.0-6.5 times, with Bengaluru leading the way at 31% of the supply.

Presently, three listed office REITs in India represent about 9% of the total office supply. Despite challeng- es like high vacancies in SEZ space, office REITs maintain a healthy 84% occupancy rate. ICRA projects a revival in SEZ attractiveness, supporting a stable outlook for India’s commercial office sector due to its appeal to global capability centers. With Securities and Exchange Board of India (SEBI) formulating detailed guidelines for Small and Medium REITs (SM-REITs), a large number of erstwhile unregistered Fractional Ownership Platforms (FOPs) for real estate assets are expected to get listed as SM REITs. This will effectively have the potential to regularize underlying real estate assets to the tune of over INR 40 billion in the near to midterm, states Colliers.

GREEN LEASING THE WAY FORWARD

Institutional landlords with their global learnings are leading the way in terms of green certifications for new projects as well as green upgrades through retrofits. Out of the total grade A office stock under the three listed REITs in India, nearly 96% is already green-certified. Additionally, the stock owned by institutional players also has a higher green-certification penetration with 86% of their stock being green-certified, highlighted the re- cent JLL report.

However, widespread adoption is still a long way off and this can be attributed to the lack of indus- try-wide guidance on minimum standards, lack of transparency, legal complexities, split incentives, and unrecognized value.

Legal teams often exhibit reluctance in agreeing to green lease terms, driven by risk avoidance or a desire to simplify and expedite the negotiation process. As a result,clauses related to sustainability are frequently redlined without thorough consideration.

Moreover, even when finalized, green clauses often become mere check-box exercises and promises of best efforts being undertaken to- wards improving the environmental performance indicators of the asset under consideration.

The next logical step toward sustainable real estate is synchro- nization between landlords and occupiers where responsible leasing in the form of ‘green leases’ is the spirit of collaboration.

Tags : BFSI Technology Engineering & manufacturing healthcare APAC FASTEST- GROWING OFFICE MARKET