Commercial real estate

Capital value expectations as well as monthly rentals both have marked growth in September quarter for commercial real estate segment in India, but still its lower than the expected as per the RICS (Royal Institute of Chartered Surveyors), UK based qualifications and standards authority for property, construction and land. Apart from that the Indian commercial property monitor also indicated that maximum number of tenants and investors felt that market valuation for commercial real estate segment is much expensive in comparison of previous quarter. In contrast, the percentage of tenants and investors who felt that price of commercial dipped in third quarter of 2015 was about 30 percent in comparison of earlier quarter.

According to Devina Ghildial, MD, South Asia, RICS, “The commercial property segment in India was always upswing because demand was outstripping supply, but growth in rentals value was modest with its early expectations”. The more she added that in India, there is dearth for grade A office space under commercial segment in major cities because many new MNCs are looking towards more business in India and for that they are looking for more space to set up new office space. In our country existing large business organizations are ramping up their business and operation with solid pace, but the supply of grade A office space is not able to match up to this demand, leading to healthy appreciation. As per the records of property price cycle of commercial segment, a large group of segment (about 38.3 per cent) feeling that its in establishment phase. Apart from that percentage who believed that it is in early uptrend phases, is about 27.2 per cent. And almost equal percentage, which is about 24.7 per cent, felt that commercial property segment was in mid-downturn stage, but only 6.2 per cent felt that it is in mid-upturn phase, whereas; 1.2 per cent felt it had peak stage.

According to recent reports, there was a spurt in the demand in Indian real estate sector and when it comes to commercial property because auto, IT and e-commerce start-ups, telecom, banking financial services and insurance (BFSI), consumer durables, fast moving consumer goods (FMCG) sectors are looking for more space to enhance their business and operation in premium cities such as; Bangalore, Mumbai, Delhi and National Capital Region (NCR) and these cities have witnessed several large-sized transactions during the quarter.

According to Ashutosh Limaye, Head of Research & Real estate intelligence service, JLL India stated that “In India commercial properties are more affordable in comparison of other countries and apart from that rentals in our country have bottomed out and making its way up. The more he added that rise in rental was gentle, but the direction was definitely up and rentals in real estate’s commercial segment is fair and competitive, but it’s still below the previous peak of 2008. Metro cities like; Bangalore was one of the few market which has reached its peak in the year 2008 while real estate sector in other cities remained more than 10 per cent below it, whereas; Chennai was 2 per cent below its peak and Pune was at 10 per cent while rest were over 10 per cent lower than their peak. In 2008, the price was high as Rs400 per square feet (sq ft) in the cities Mumbai and Delhi. In present, Nariman Point is 30 per cent lower than commercial property rental values of 2008 while other suburbs areas such as; Kurla and Andheri is 20 per cent lower.

According to J C Sharma, MD of Sobha Developers, India offered arbitrage in two things; one office rentals and second salaries or wages. The more he added that MNCs came to India because of these two arbitrages, which is competitive in comparison of global market. The more he added that if you will include the market of the Bandra Kurla Complex (BKC), Mumbai and Delhi, so its 90 to 95 per cent of the totals transactions in the India’s commercial property segment and it is very affordable in comparison of emerging global market such as; Southeast Asian countries such as; Jakarta, Bangkok and Malaysia.

Global Rentals Chart

Owing to a vigorous demand from start-ups and e-commerce business, office rentals in major cities of India are experiencing a significant surge. The rising appetite for Indian commercial properties is attributed to about 67% of investments flowing into Indian real estate market from overseas which has been noted to be the highest among all other countries.

Indian cities of Mumbai, Delhi and Bangaluru have topped the global commercial property market with regards to annual rental yields as demand for commercial spaces has picked up in recent times. While Bengaluru topped the list with 10.5% annual yield, other cities like New York, Singapore, London, Tokyo and Hong Kong ranged between 2.9% and 7%, indicates a global survey of property consultant Knight Frank. Mumbai and Bengaluru have also featured among the list of top 5 global cities for future rental growth and the anticipated growth is nearly 22% and 16% for both cities respectively.

Currently, these cities are facing severe paucity of good quality office space in the face of strong demand which is creating an upward pressure on office rentals that is expected to scale up in the range of 6-7% in the next six months year-on year,” says Samantak Das, Chief Economist & National Director of Research, Knight Frank India.

Although the aggregate vacancy level of commercial spaces is at 17%, occupiers and investors are facing a challenge in procuring quality office spaces across prime business districts in the country where vacancy is in single digits.

The Indian commercial real estate sector is making a comeback after experiencing massive slump for over three years.  With a healthy pipeline and recent large ticket transactions, early signs of revival are being observed.

Big corporate occupiers are returning to the market hinting at an improved business sentiment. Bengaluru and Mumbai have been leading with these large transactions.   In May this year, while Tata Consultancy Services leased over two million sq ft of built-to suit space at Hiranandani Estate in Thane in Mumbai, Flipkart hired a 2-million sq ft custom-built office campus in Bengaluru.