News: Office Leasing Remains Strong In Q2, Tops 10 Million sq ft: CBRE-11.07.2017

Office leasing remains strong in Q2, tops 10 million sq ft: CBRE

Kailash Babar  |  ET Bureau  |  July 09, 2017, 23:08 IST

MUMBAI: Leasing activity for prime office space across eight key Indian cities picked up in the April-June period, with companies absorbing over 10 million sq ft, as much as 28% more than the previous quarter. The strong demand growth has pulled up total absorption for the first half of 2017 to 2% over the year earlier period.

Sectors driving corporate leasing activity during the quarter continued to be IT/ITeS, BFSI and Engineering & Manufacturing. Similar to earlier quarters, leasing activity was driven by small and medium-sized transactions of less than 50,000 sq ft, which accounted for almost 90% of all deals recorded in the second quarter, property consultant CBRE said.

Leasing activity was led primarily by Bengaluru, the National Capital Region and Hyderabad. In fact, Hyderabad witnessed significant activity in the past quarter, overtaking Mumbai in leasing activity. Another city that witnessed a rise in quarter-on-quarter space take-up was Kolkata.

“With the implementation of several policy reforms underway, including GST and Real Estate Regulation and Development Act (RERA), the fundamentals for the country remain strong. Infrastructure development across major cities, growing prominence of smaller cities for corporates and overall positive sentiment are providing a further boost to the office market, which has witnessed positive momentum over the past two years,” said Anshuman Magazine, chairman-India & South-East Asia, at CBRE.

The share of US-based companies in quarterly transaction activity increased to 50% in the second quarter from 44% in the first quarter of 2017, while that of domestic companies rose to 37% from 33%, CBRE said in its India Office MarketView.

On the supply side, development completions more than doubled on a quarter-on-quarter basis during the second quarter of 2017 to about 8.2 million sq ft. Bengaluru and Hyderabad accounted for more than 60% of the supply addition, followed by Pune and Mumbai.

Occupiers continued to future proof their portfolios and hedge against rental escalations by pre-leasing space across several cities. Pre-leasing activity picked up mainly in Bengaluru and Delhi-NCR (Gurgaon) in the second quarter, followed by Mumbai, Hyderabad and Chennai. These moves were driven by a mix of BFSI, engineering and manufacturing, research and consulting and IT/ITeS firms.

“India’s office market continues to perform well despite uncertainties among global corporates in the recent past. Occupiers continue to future proof their portfolios and hedge against future rental escalations by pre-leasing space across various cities,” said Ram Chandnani, Managing Director – Advisory & Transaction Services, CBRE South Asia. “The use of ‘co-working spaces’ is expected to rise, with the concept being adopted not only by start-ups and individuals, but also by organizations with fluid expansion/occupation plans.”

Sustained occupier interest resulted in rental values rising 2-8% sequentially across most micro-markets in the cities of Bengaluru, Hyderabad and Pune. Rental values remained broadly stable in Mumbai, Chennai, Kolkata and Kochi, with rental growth restricted to the core locations in Delhi-NCR.

Going forward, office leasing activity is expected to sustain in the short term, backed by companies looking to expand or consolidate their operations.

It expects an increase in the share of leasing by prominent sectors such as BFSI, engineering & manufacturing, and research & consulting. Occupier demand is expected also from sectors including pharmaceuticals, telecommunications and ecommerce.

The IT/ITeS sector, the largest contributor of office space demand, is currently going through a series of disruptions, including changes in the H-1B visa regime proposed by the Trump administration in the US, increased protectionism impacting the growth of outsourcing to India and the rising automation of processes, all of which are likely to lead to a subsequent slowdown in projected office demand.

India’s overall appeal as an established outsourcing destination and the cost arbitrage offered are unlikely to change. However, the impact of the change in US policy and subsequent operations of IT/ITeS firms are likely to pan out in the coming quarters.