09 November 2016 14:05:01 IST

What’s driving office leasing activity to a two-and-a-half year high?

REITs, better compliance under the Real Estate Act and global trends will impact the real estate sector

TCS leasing the 5,50,000 square feet of ITPB-victor block in Bangalore and Cognizant Technology Solutions leasing 5,20,000 square feet of KO4 Avance Business Hub in Hyderabad were among the largest deals done during the September quarter. With about 11 million square feet leased in the third quarter (14 per cent growth yoy) this calendar year, leasing of office space hit a two-and-a-half year high, according to CBRE, a property consultant.

The demand was led by Bangalore which constituted 24 per cent of overall demand for lease followed by Hyderabad (17 per cent), Mumbai (16 per cent), Chennai (16 per cent) and Pune (13 per cent).

The robust leasing offtake is good news for the jobs market. According to Kamal Sagar, CEO of Total Environment, on an average, one job is created for 80-100 square feet of office space taken. He estimates that at least a lakh of people have moved to Bangalore over the last 12 months.

But not all markets were buzzing with activity. Delhi National Capital Region (NCR), witnessed a 50 per cent drop in leasing offtake — all thanks to lack of supply in established micro-markets.

Leading the way

As witnessed in the previous quarters, prime micro-markets within these cities witnessed most of the activity. Whitefield and Electronic City in Bangalore, OMR Zone 1 and 2 in Chennai, IT corridor in Hyderabad, Navi Mumbai, Powai, Vikhroli and Kanjurmarg in Mumbai were among the leading micro-markets.  Despite an influx of new office space in peripheral markets, prime office locations will continue to suffer from a deficit of large quality space, according to the latest CBRE report. This, in turn, could sustain growth in rental values in supply-constrained locations. 

IT and ITes companies (mostly off-shore setups) led the pack — accounting for 55 per cent of overall transactions done at major cities. BFSI (banking, financial services and insurance) and engineering and manufacturing were the other leading demand drivers, constituting 10-11 per cent each of overall corporate leasing activity.

Going forward, IT/ITes as well as banking and financial services are expected to be the dominant demand drivers for office space leasing, while other sectors of manufacturing/engineering, research and consulting, e-commerce and pharmaceuticals will fuel additional demand.

Small is in

Big space leasing is increasingly being replaced by small-scale leasing of corporate office space. During the September 2016 quarter, the share of small to medium sized transactions (area less than 50,000 sq ft) rose to 88 per cent of overall transactions, against 65 per cent a quarter ago. In contrast, leasing of one lakh plus square feet formed only 5 per cent of overall transactions.

Fresh supply

Mumbai and Chennai accounted for the bulk of new supply of corporate office space available for lease, with a national market share of 41 per cent and 23 per cent respectively. Much of the supply happened in the non-IT areas (43 per cent), while IT and SEZ (Special Economic Zones) constituted another 30 per cent and 27 per cent respectively.

Vacancy levels were marginally down in Delhi NCR, Bangalore, Chennai, Hyderabad and Pune, but higher in Mumbai and Kolkata (with an increase in supply during the quarter).

Rent rising

The rental values remained flat on a q-o-q basis in the central business districts of Mumbai and Kolkata as well as Delhi NCR and Hyderabad, while it was up by 1-7 per cent in Bangalore, Pune and Chennai. Falling availability of office space in SEZs led to increase in rentals in the range of 1-10 per cent in select pockets in Chennai, Pune, Hyderabad and Bangalore. Mount-Poonnamallee High Road in Chennai, Hinjewadi and Kharadi in Pune, and the IT corridor in Hyderabad were among the few places that saw an uptick in rental values.

Those leasing office space in Mumbai will have to face upward revisions in rent in the coming years, says Anuj Puri, Chairman & Country Head, Jones Lang LaSalle India. After bottoming out in June 2015, rentals are expected to rise, he adds.

According to Ram Chandnani, Managing Director, Transactions Services, CBRE South Asia, the increasing buzz around REITs, developers’ improved compliance under the Real Estate (Regulation and Development) Act (RERA), which also covers the commercial segment, and trends in the global outsourcing industry will impact the commercial real estate sector in the coming quarters.