Striking a balance
Developers believe upscaling of ageing buildings in central business districts can help keep clients from moving away
While it is commonly acknowledged that selling of office space is an integral element of growth in the real estate sector, a distinction needs to be made between prime or iconic office spaces and premium office space for large-format usage. While prime or iconic office spaces are expected to have an element of luxury or opulence, premium office space for large format usage need not ride the crest of luxury or opulence. For large occupiers in particular, it is not easy to strike the right balance between affordable and perfectly suitable premises.
As developers, we need to bear in mind that no commercial real estate occupier of any substance is today willing to compromise on `must haves’ - even though they may seek to strike a balance between `good to have’ and `affordability’. Therefore, imaginatively conceived and designed projects are bound to hold the edge as occupiers of these spaces are looking for an optimal blend of location, features, profile and pricing.
What is required urgently, however, is up scaling of ageing buildings in traditional central business districts for their very survival, which is at stake there. If this does not happen any time soon, large format occupiers would, at first opportunity, migrate to newer micro markets which have better infrastructure, amenities and buildings.
The landscape of commercial real estate in the country is changing at a rapid pace; the pace of change has been phenomenal over the last decade, following an entire cycle of the economy going up with the global markets and then coming down with the global economic bubble burst - followed equally logically by a phase of rebuilding and strengthening. This entire cycle has led to developers maturing and offering commercial space for sale and lease, where designs are increasingly sensitive towards the needs of the present day occupiers.
Until onset of the millennium year, offices were largely limited to the central business districts in major metros like Delhi, Mumbai, Chennai and Bangalore functioning as central nodes and hub for most commercial activities. With improvements in the intra-city infrastructure and connectivity, sub-urban or peripheral locations around these central hubs have facilitated growth and acceptance.
Adding to the huge growth of these suburban regions is the heightened migration of workforce to these regions. The IT/ITeS sector has been the dominant performer, contributing a major share of leasing volumes while retail, consulting, e-commerce, manufacturing and industrial sectors have also shown good traction, particularly in the last few months. Over the past decade, Gurgaon has remained the single-most favoured destination of office occupiers and has seen a good mix of IT and corporate occupiers. Changing demographics, urbanisation and rapid developments in technology have and will continue to influence commercial real estate markets across the sub-continent in a very big way.
Today, with businesses far exceeding the time-tested eight-hour work schedule and office goers spending nearly one-third of their lives in the office, important partnerships, alliances and deals are struck over coffee or in boardrooms. As a result, business spaces have themselves undergone a complete metamorphosis, as have their functions.
These spaces now combine recreation, socialising and networking, apart from work-related occupations. Developers with a futuristic approach to buildings, have not just kept pace with this transformation but have already begun to create better structures in the last few years for today’s businessmen to see and learn.
This trend is now reaching the next level. Heightened migration in the last couple of decades due to increased commercial activity, along with a saturated urban core, has resulted in development of satellite and suburban nodes. Improvements in intra-city infrastructure and connectivity have facilitated the growth and acceptance of these peripheral locations. It is expected that by 2015, 61 per cent of office space in India would be located in the suburbs.
These sub-markets, which are within easy commuting distance in terms of time as compared to established CBDs, have high potential of emerging as cost effective substitutes. Unless a space in tier II city comes at a hefty discount of at least 30 – 40 per cent as compared to it’s tier I substitute, occupiers of large format office space may not prefer going there, unless this decision is guided by tapping of human resource pool.
According to a report published by a leading international property consultant, 68 per cent of businesses are expected to expand and grow over the next five years. This would lead to continuing demand. Demand for commercial real estate is directly linked to growth in economy, particularly economic activity in the services sector.
Until four years ago, the IT/ITES sector was growing at a rate in excess of 25 per cent. Presently, the growth rate is hovering around 18-20 per cent. Assuming a GDP growth @ 5-6 per cent per annum, it is unlikely that the growth rate for IT sector should drop below 10-12 per cent in the short to medium term.
In India, Bangalore, Greater Mumbai and Delhi NCR are primarily regarded as vibrant markets for commercial real estate. Most micro markets in these cities, for the present, do not appear to be suffering from this gap, particularly in case of Grade A office spaces. However this scenario may change if an unhealthy gap seeps in between demand and supply, which can lead to pressures on absorption and pricing.
The absorption of office space in the country totaled 26.7 million sq ft in 2013 with suburban locations accounting for 60 per cent of the total absorption. During the last three years, commercial real estate has seen a gradual growth at the rate of approximately 20 per cent, primarily also due to lack of availability of quality grade A commercial spaces.
It is estimated that India has close to 350 million sq ft of Grade A office space which is valued at $65-70 billion. The commercial office sector witnessed about 20.4 million sq ft (msf) of Grade A supply across the top eight cities during January-September 2014, an increase of 9.0 per cent over the corresponding period a year ago. The increase was mainly owing to a substantial increase (almost six times) in Grade A commercial real estate supply in Hyderabad as many deferred projects were completed during the period.
This was followed by a 1.7-time increase of Grade A supply in the lucrative Delhi-NCR region. The total Grade A office stock across top eight cities was pegged at 368.0 msf as on Q3 2014; prominent cities such as Bengaluru, Delhi-NCR and Mumbai accounted for almost 65 per cent of this stock. At 94.5 msf, Bengaluru recorded the highest grade A stock amongst the top eight cities, followed by Delhi-NCR at 79.3 msf and Mumbai at 66.0 msf.
While REIT is expected to provide sustainability to developers of commercial real estate, from an occupier’s perspective, it may have little or no impact. About 100 million sq ft of commercial office space is expected to entrust with REITs over the next 2-3 years at an estimated valuation of $15-20 billion. The influx of FDI during the last couple of years has predominantly been in revenue-yielding resolved assets. This trend, if it continues, would provide a further fillip to commercial real estate in India in the years to come. In the medium term (by 2015 end), vacancy levels are expected to inch up due to significant addition of Grade A office space in select cities.
Hence, select micro-markets may face downward pressure on rentals.
As developers, we need to bear in mind that no commercial real estate occupier of any substance is today willing to compromise on `must haves’ - even though they may seek to strike a balance between `good to have’ and `affordability’. Therefore, imaginatively conceived and designed projects are bound to hold the edge as occupiers of these spaces are looking for an optimal blend of location, features, profile and pricing.
What is required urgently, however, is up scaling of ageing buildings in traditional central business districts for their very survival, which is at stake there. If this does not happen any time soon, large format occupiers would, at first opportunity, migrate to newer micro markets which have better infrastructure, amenities and buildings.
The landscape of commercial real estate in the country is changing at a rapid pace; the pace of change has been phenomenal over the last decade, following an entire cycle of the economy going up with the global markets and then coming down with the global economic bubble burst - followed equally logically by a phase of rebuilding and strengthening. This entire cycle has led to developers maturing and offering commercial space for sale and lease, where designs are increasingly sensitive towards the needs of the present day occupiers.
Until onset of the millennium year, offices were largely limited to the central business districts in major metros like Delhi, Mumbai, Chennai and Bangalore functioning as central nodes and hub for most commercial activities. With improvements in the intra-city infrastructure and connectivity, sub-urban or peripheral locations around these central hubs have facilitated growth and acceptance.
Adding to the huge growth of these suburban regions is the heightened migration of workforce to these regions. The IT/ITeS sector has been the dominant performer, contributing a major share of leasing volumes while retail, consulting, e-commerce, manufacturing and industrial sectors have also shown good traction, particularly in the last few months. Over the past decade, Gurgaon has remained the single-most favoured destination of office occupiers and has seen a good mix of IT and corporate occupiers. Changing demographics, urbanisation and rapid developments in technology have and will continue to influence commercial real estate markets across the sub-continent in a very big way.
Today, with businesses far exceeding the time-tested eight-hour work schedule and office goers spending nearly one-third of their lives in the office, important partnerships, alliances and deals are struck over coffee or in boardrooms. As a result, business spaces have themselves undergone a complete metamorphosis, as have their functions.
These spaces now combine recreation, socialising and networking, apart from work-related occupations. Developers with a futuristic approach to buildings, have not just kept pace with this transformation but have already begun to create better structures in the last few years for today’s businessmen to see and learn.
This trend is now reaching the next level. Heightened migration in the last couple of decades due to increased commercial activity, along with a saturated urban core, has resulted in development of satellite and suburban nodes. Improvements in intra-city infrastructure and connectivity have facilitated the growth and acceptance of these peripheral locations. It is expected that by 2015, 61 per cent of office space in India would be located in the suburbs.
These sub-markets, which are within easy commuting distance in terms of time as compared to established CBDs, have high potential of emerging as cost effective substitutes. Unless a space in tier II city comes at a hefty discount of at least 30 – 40 per cent as compared to it’s tier I substitute, occupiers of large format office space may not prefer going there, unless this decision is guided by tapping of human resource pool.
According to a report published by a leading international property consultant, 68 per cent of businesses are expected to expand and grow over the next five years. This would lead to continuing demand. Demand for commercial real estate is directly linked to growth in economy, particularly economic activity in the services sector.
Until four years ago, the IT/ITES sector was growing at a rate in excess of 25 per cent. Presently, the growth rate is hovering around 18-20 per cent. Assuming a GDP growth @ 5-6 per cent per annum, it is unlikely that the growth rate for IT sector should drop below 10-12 per cent in the short to medium term.
In India, Bangalore, Greater Mumbai and Delhi NCR are primarily regarded as vibrant markets for commercial real estate. Most micro markets in these cities, for the present, do not appear to be suffering from this gap, particularly in case of Grade A office spaces. However this scenario may change if an unhealthy gap seeps in between demand and supply, which can lead to pressures on absorption and pricing.
The absorption of office space in the country totaled 26.7 million sq ft in 2013 with suburban locations accounting for 60 per cent of the total absorption. During the last three years, commercial real estate has seen a gradual growth at the rate of approximately 20 per cent, primarily also due to lack of availability of quality grade A commercial spaces.
It is estimated that India has close to 350 million sq ft of Grade A office space which is valued at $65-70 billion. The commercial office sector witnessed about 20.4 million sq ft (msf) of Grade A supply across the top eight cities during January-September 2014, an increase of 9.0 per cent over the corresponding period a year ago. The increase was mainly owing to a substantial increase (almost six times) in Grade A commercial real estate supply in Hyderabad as many deferred projects were completed during the period.
This was followed by a 1.7-time increase of Grade A supply in the lucrative Delhi-NCR region. The total Grade A office stock across top eight cities was pegged at 368.0 msf as on Q3 2014; prominent cities such as Bengaluru, Delhi-NCR and Mumbai accounted for almost 65 per cent of this stock. At 94.5 msf, Bengaluru recorded the highest grade A stock amongst the top eight cities, followed by Delhi-NCR at 79.3 msf and Mumbai at 66.0 msf.
While REIT is expected to provide sustainability to developers of commercial real estate, from an occupier’s perspective, it may have little or no impact. About 100 million sq ft of commercial office space is expected to entrust with REITs over the next 2-3 years at an estimated valuation of $15-20 billion. The influx of FDI during the last couple of years has predominantly been in revenue-yielding resolved assets. This trend, if it continues, would provide a further fillip to commercial real estate in India in the years to come. In the medium term (by 2015 end), vacancy levels are expected to inch up due to significant addition of Grade A office space in select cities.
Hence, select micro-markets may face downward pressure on rentals.
The writer is chairman and managing director, ASF Group)
Source :- Financial Chronicle
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