The year 2018 saw demand for Grade A office stock grow. While co-working emerged as the new poster boy of commercial real estate, logistics and warehousing saw significant growth. Despite minimal new supply in 2018, the retail real estate sector held its own on the back of conducive FDI norms.
Leasing activity: As per Cushman & Wakefield estimates gross leasing activity is expected close to 50 mn sq ft. This has been supported by robust space take-up by IT-BPM sector with global captive centres clocking impressive numbers as well, and the co-working revolution consolidating its gains with a strong showing during the year.
Total investments Of the total investments in the office space during the year, approximately 77 percent of the investors were of foreign origin, cementing foreign investors’ trust in the Indian commercial space. In terms of cities, 42 percent of the total inflows into the office sector were seen in Mumbai, followed by Hyderabad that had a 35 percent share. Bengaluru distantly followed Hyderabad with a share of 6 percent of the inflows in Jan-Sept 2018, as per Cushman & Wakefield estimates.
The year 2018 is likely to close with office inflows of $3.5 billion subject to closure of some key transactions with investors like Blackstone, GIC and CPPIB in Mumbai, and Hyderabad.
Quality supply continues to draw in occupiers who are willing to pre-commit to such projects if the current vacancy is constrained. The top seven cities are expected to see over 32 mn sq ft of fresh office supply, basis 26.1 mn sq ft absorption till the third quarter of 2018.
Bengaluru retained its top position in 2018, with more than 8 mn sq ft of new supply in 2018. Office absorption in Bengaluru is expected to cross 11 mn sq ft by the end of the fourth quarter of 2018, denoting a massive annual increase of 37 percent. The city’s large talent pool, its vibrant start-up culture, ample Grade A office stock, relatively affordable rents and steady demand from the IT/ITeS sectors, BFSI and co-working spaces prompted this growth.
Office absorption As per ANAROCK data, total office absorption across the top 7 cities is geared to cross 39 mn sq ft in 2018, given that 28.2 mn sq ft were absorbed until the third quarter. This denotes an annual increase of 19 percent in absorption.
Co-working/flex spaces are here to stay and operators are smartly aligning themselves to target large enterprises and transform in to managed space operators while retaining the form for start-ups and smaller firms.
The stock of flexible space market in India increased from nearly 10 million sq ft in 2017 to about 15 million sq ft by the third quarter of 2018, making it among the biggest markets in the APAC region, says a new report.
Co-working operators are expected to lease about 7-9 million sq ft by 2020 from over 5 million sq ft estimated this year, according to property consultant CBRE. Bengaluru and Delhi-NCR were the largest markets for flexible spaces in India, with a combined share of almost 55 percent in overall leasing by flexible space operators.
In terms of market traction, commercial real estate retained its status as the most buoyant sector in 2018 across major cities. Demand for Grade A office space saw new highs and vacancy levels declined in prime locales. India’s first REIT listings, now expected to happen in early 2019, will result in massive liquidity infusions into commercial office spaces. This, in turn, will prompt commercial property developers to focus more on this segment to fulfil demand from occupiers across the IT/ITeS, BFSI, manufacturing and co-working sectors, says Anuj Puri, Chairman, ANAROCK Property Consultants.
A grade office space was a ‘big boys’ game in 2018. Market was relatively stable and only players with deep pockets entered the segment, says Anckur Srivasttava of GenReal Advisers.Where should HNIs put in their money?
Investors do not look for small office spaces anymore, they have shifted to co-working spaces. In such a scenario, owners with investments in small office spaces will have to redefine their objectives as they will find it hard to get quality tenants. REITs, when it is introduced, could be a good avenue for them to invest in. Also, assured returns are no longer permissible, advises Srivasttava.
There’s also been a trend wherein ultra HNIs are buying into large floor plates and handing them over to co-working players to manage such spaces on a revenue share model. Their gains work out to be around 13-14 percent IRR, he says.
In case of warehousing too, it was observed that investors typically outsourced it to a third party to manage the facilities. Debt was relatively cheaper because warehousing has been given infrastructure status. Loans under priority sector lending are at 9.5 percent. So, if you an HNI investor and are keen to invest in the warehousing space, look at investing in warehousing facilities that are not less than 30-40 acres. The IRR that this option is likely to fetch is around 18 percent, he says.
Student housing is yet another option as it is a resilient and a risk averse segment. I case you wish to invest in this asset class, look for at least an option of 100 rooms. IRR expected to be around 12-13 percent, says Srivasttava.
Retail Real Estate 2018 review
Cities that saw maximum retail growth in 2018 included MMR, NCR, Bengaluru and Kolkata. PE investment inflow in the segment grew 54 percent in the first half of 2018. As many as 32 new malls spanning nearly 13.5 million sq ft area are slated to be operational in 2019
Among the major policy overhauls, the Government further liberalized FDI policies early in the year. These policy interventions repositioned the Indian retail sector on the global map of investments, attracting a large number of global retailers into India and further fuelling growth of organized retail in the country, says Anuj Kejriwal, MD & CEO – ANAROCK Retail.
The government’s decision to allow 51 percent FDI in multi-brand retail and 100 percent FDI in single-brand retail under the automatic route was a definite crowd-pleaser that attracted giants like Walmart to make forays into the country.
The retail sector is now projected to grow from USD 672 billion in 2017 to USD 1.3 trillion in 2020. This is definitely an attainable figure if we consider one of the clearest measures of growth – namely the increasing focus on the retail sector by private equity (PE) players who invested close to $300 million in Indian retail in the first half of 2018, as per ANAROCK estimates.