Demand for Office Space

Good & Bad News

12:35 PM

Good & Bad News

While residential housing sales have gone into a nosedive, rising demand for office space has bought succour to the realty sector.

Those hoping for an uptick in the sale of residential housing are currently drowning their tears in whatever they can lay their hands on. The report card from experts suggests grim portents. The residential segment is unlikely to witness a revival in demand in the next six months as the home buyers’ market in the country is at an inflexion point for the first time in the last five years.

If the real estate sector has not slumped into total morass, it has the rising demand for IT and startup office space to thank for.

In the residential sector though, there is good reason for dismay. The current unsold inventory levels are pegged at over seven lakh units, a stock that could take over three years to exhaust.

A recent Knight Frank report predicts that the residential market will not see a recovery in the next six months. Explains Shishir Baijal, chairman and managing director, Knight Frank India, "Despite the economic scenario strengthening, we see no improvement in the residential market across the top eight cities. While sales dropped by nearly 20 per cent during January-June 2015 compared to the same period last year, new residential units coming into the market fell by 45 per cent. Going forward, we do not see any improvement until the end of 2015 in terms of sales." That’s a pretty long way to go.

Not surprising then that the real estate market has seen a sharp drop in price growth, a reduction from nine per cent to two per cent in the last three years. Prices are unlikely to escalate this year either, what with high inventory and subdued sales.

Developers admit there has been no improvement in demand and recovery could be slow. Points out Rajeev Talwar, executive director, DLF, “Real estate prices have been correcting for the last six to seven years. The main reason for the price correction is decline in sales due to overall stress in the economy. Liquidity remains a concern with banks weary of lending to the sector.”

Talwar adds that delay in construction is aided by the slow approval process and labour shortage, among others, which adds to construction costs.

The sentiment is about similar in the sector. Says Sunil Mantri, chairman, Mantri Realty, “Real estate prices have remained steady in the last couple of years and will continue to remain at this level at least for the next six months. Getting funds is an issue in the market as banks are not lending much to the sector while private equity and NBFC are too costly. All this has led to rising construction costs putting pressure on real estate prices.”

But Mantri remains optimistic. “Seasonally, monsoon witnesses low demand and it may take a couple of quarters for the demand to revive, but we expect in the medium to long-term that demand should improve.’’

Samantak Das, chief economist and national director research, Knight Frank India, however, does not shy away from hard facts. “Despite delayed reforms in the economy and concerns across the globe, the Indian economy is doing reasonably well with basic fundamentals showing a strong foothold. However, notwithstanding the economic scenario, the current sentiment score at 49 has reached pre-election levels and reflects negative sentiment. Stakeholders (developers, financial institutions and other supply side stakeholders) believe that the current market scenario is worse compared to six months ago.”

Delayed reforms, it would appear, is the prime driver of these negative sentiments. But closely allied to it is the underperformance of the residential market. While the current sentiment is negative, the future sentiment score stands at 62. Though the score indicates that the coming six months are likely to be better, the continuous four-quarter fall reflects waning stakeholder confidence, adds Das.

Naturally, builders are tweaking strategies to attract customers. “Unable to sell expensive homes in a sluggish market, builders across India are making smaller apartments without lowering the price per sq ft and compromising on the quality of product. In the last five years, we have seen average apartment sizes falling across all major cities of India,” explains Anuj Puri, chairman and country head, India, Jones Lang LaSalle (JLL).

The Mumbai Metropolitan Region (MMR), for example, witnessed the maximum fall in apartment sizes on an annualised basis, along with Bangalore, Chennai and Kolkata. Other cities also witnessed varying degrees of fall in median apartment sizes, a JLL and CII report points out.

The fall in average apartment sizes across top seven cities is a clear indication that developers intend to make houses affordable for buyers by reducing average apartment sizes instead of reducing capital values, Puri adds.

Explains Niranjan Hiranandani, co-founder and managing director, Hiranandani Group: “Real estate demand continues to remain subdued and would take sometime to revive. The on-going transition within the real estate sector offers us a foretaste of what the near future beholds. We foresee sweeping changes in the way real estate developers conduct their business. These include innovative practices and the agility of a new breed of developers.”

However, it’s not the end of the road - as yet. The good news is that office demand is picking up and some believe the momentum it provides will also help elevate residential demand as the GDP is expected to grow to 7-10 per cent from the present 5-6 per cent. The turnaround in the office space market witnessed in 2014 holds good on the back of improved business sentiments and recovery in the domestic economy.

“We have observed office space transactions to the tune of 18 million sq ft during January – June 2015 across the top six cities. The average vacancy level across these markets stands at 17 per cent - the lowest since the global financial crisis. Leading e-commerce players are now emerging as strong drivers and have inked office space deals upwards of a million sq ft each in recent months,” says Knight Frank India’s Baijal.

Lower rentals may be helping fuel this recent office space demand but the main driver of this demand are IT companies and start-ups. ``The trend of companies migrating to offices in suburbs, driven by a combination of cheaper rents and lesser commuting time for the workforce, has risen sharply over the last decade. Not just location-independent IT/ ITeS companies, but other sectors too are setting up office spaces in secondary business districts (SBDs) and peripheral business districts (PBDs),” points out the CII-JLL report.

The migration is also helped by occupier demand for large IT parks and office projects in SBD and PBD precincts. Of the two, PBD has seen the biggest jump in the share of office stock, rising from 28 per cent in 2004 to a healthy 47 per cent in IH2015. While the share of SBD in office stock has remained stable over the last several years at around 43 per cent of the total office stock, CBD has witnessed a severe attrition of occupiers and a decline in fresh supply of office space that has led to a significant drop in its share of office stock from about 33 per cent in 2004 to 10 per cent in 1H2015.

For the record, Delhi-NCR has witnessed the most spectacular emergence of alternate business districts in Gurgaon and Noida. Mumbai has been an exception to the trend of office migration to PBD, mainly due to lack of supporting infrastructure and connectivity. However, the city witnessed a steady shift in office stock from prime CBD areas to SBD precincts.

When it comes to occupier profile, the share of IT/ITeS sector in leasing volumes has declined from 48 per cent in 2005 to 32 per cent at the end of Q2, 2015. This lower absorption, though, is compensated to a large extent by new-age sectors such as e-Commerce.

Again, while space absorption declined in the manufacturing sector, it has increased in export-driven healthcare and biotech. Banking, financial services and insurance (BFSI) has been relatively stable through the last decade, the CII-JLL report concludes. Well, there is some good and some bad news.

- by Jharna Mazumdar

Source :- Financial Chroncile

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