Office leasing to increase by 25 per cent in 2021

In the past, the return on housing assets was usually adequate, if not exceptional, depending on the location, configuration, facilities, and builder's brand. Though rental yields for residential assets in India have traditionally been low, most real estate investors considered capital appreciation for being a sufficiently dynamic prospect. However, after the pandemic, investors with the financial means and the necessary knowledge of the commercial real estate space find office assets even more appealing and with good reason. In 2021, office space absorption in India's six major cities is projected to reach 41.3 million square feet, up 22% from the previous year, according to Savills India’s report ‘India Market Watch Office 2020’.

According to the report, the Delhi NCR market is projected to see a 20-25 percent rise in leasing in 20211, with the majority of activity expected in the second half of the year. Demand is expected to be led by technology, BFSI, consultancy, and manufacturing occupiers. The Delhi NCR has a large pipeline of new supply of about 8.5 million square feet, with Gurugram accounting for over 65 per cent and Noida for the remainder.

Investors are searching for good office real estate properties, which are in high demand due to rapid job growth and the likelihood of more REIT listings. Office properties in well-located Grade A houses, InfoTech parks, and even logistics centers are producing the kind of consistent and stable returns that investors pursued and found in the residential asset class previously.

Noida offers the best commercial real estate investment opportunities in Delhi-NCR. The Noida-Greater Expressway belt is particularly involved. In comparison to other regions, the physical and social infrastructure in this region is far superior. It has road and metro rail connections to Delhi, Gurgaon, Faridabad, and Ghaziabad. Significant progress on Jewar Airport and the recent announcement of Film City are the region's key development drivers. The new infrastructure will have an immediate effect on the surrounding areas. Investors in the residential and manufacturing sectors would be happy with the results. Property prices in this area are currently low, signaling unparalleled investment opportunities.

In 2017, the commercial office space saw a large rise in private equity inflows, which has persisted since then. We will see more infusions of liquidity into the commercial property asset class due to the recent listings in Indian REITs, which will amplify the developers' capacity and desire to come up with more such properties. Meanwhile, the ongoing sluggishness in the residential property market, and the related re-investment cycle risks, would push further investment into commercial real estate.

Previously, commercial offices were concentrated only in India's top seven cities. Corporates started expanding in tier II and tier III cities due to increasing property prices and the availability of good office space in smaller cities. IT parks and special economic zones (SEZs) have also sprouted up in smaller towns. Industrial parks, manufacturing parks, and other properties are typically situated in locations where people and products can be transported efficiently. As a result, growth has been high in smaller cities and towns along the industrial corridors.

Another boost to CRE is being provided by the start-ups, which is creating increased investments and job opportunities in India. Though their initial contribution to commercial space absorption was minor, these e-commerce companies now account for more than 3% of India's annual total commercial space absorption. Given the Government's Digital India initiatives, India has already turned itself into one of the world's most exciting and popular destinations for start-ups opening up more office space leasing opportunities in the coming months.

Commercial real estate is a much more attractive investment option for both affluent individuals and institutional funds. The investment case for well-chosen commercial spaces is compelling, and as developers respond to the demand for them, they are inadvertently creating potential demand for housing around their projects. We're witnessing an intriguing symbiosis at work, which bodes well for the Indian real estate market's future.

Authored by:
Sheetal Agrawalla, Managing Director, The Galaxy Group