How Office Real Estate is Defying Economic Slowdown
With the Indian economy clocking at around 4% GDP growth and the recent downgrading of India’s ranking by IMF, investor confidence appears to be at an all time low in the present moment. Consequently, it implies that the real estate may also show such signs. However observers were startled to find that this economic sector is defying all odds, especially commercial real estate. What they found was that a large number of companies, including SMEs, are pre-leasing commercial property to future-proof their financial portfolios and to hedge against future rental escalations.
Different surveys point to this growth in various reports. For example, Cushman & Wakefield found that across all India, gross office leasing volumes touched a 69.4 million sq ft in 2019, compared to 49.5 million sq ft in 2018. According to CBRE South Asia, pre-leasing activity grew to more than 25% from 2018 to touch a historic high of 61.6 million sq ft. They also found out that vacancy levels stayed low despite robust supply and rentals continue to rise owing to strong growth momentum.
Many of these surveys also have noted how IT sector primarily leads in pre-leasing activity. Their push for office space in 2019 exceeds cumulative absorption of commercial property in 2018 and 2017 combined. For example:
“On many notes, the office leasing performance in India surpassed industry expectations and paves the way for an optimistic year ahead.”
“Interestingly, the absorption figure for 2019 exceeds cumulative absorption of 2018 and 2017. Occupiers from the IT space expanded their real estate portfolio aggressively and contributed to the maximum share of leasing activity across sectors.”
— Anshul Jain, country head & managing director, Cushman & Wakefield India.
As per FDI data, it seems that global investors have placed their bets on commercial real estate, despite overall slow sales momentum in the real estate sector. Their investments have primarily been made in office real estate segment, where more than 40% of the total funds have been deployed. The total investment portfolio is around 6 Billion Dollars in 2019 alone.
Another major factor in office real estate boom are the new start-up companies who’ve adopted co-working concept; wherein different companies share office space and save costs in rentals. This has disrupted traditional forms of office leasing and has spurned new investments. Despite the WeWork debacle, office space inventory has continued to grow and net absorption rates have catched up with it. According to experts, the co-working market is expected to become one of the largest in the world, second only to China. Many co-working start-ups are seeking investments from major players and there’s no dearth of interest in this new form of business which has taken commercial real estate by storm since 2012.
The overall picture which emerges is of optimism and it appears investors are looking beyond sensational news headlines on the state of the Indian economy and the fierce debates around it. While the public attention continues to be divided along partisan lines, investors are finding new sources of revenues and the office real estate is their best bet. This has led the Indian office real estate to defy the current slowdown in the economy.