India office market to enjoy better occupancy rate despite challenges ahead

INDIA: The occupancy rate of the office market in India is projected to “considerably increase” in 2015 and 2016 compared with 2012 and 2013, despite challenges ahead, according to Jones Lang LaSalle India’s (JLL India) recent India Office Real Estate Market Review 2014.

“We expect only 22 million sq ft of office space to be ready at the right locations against the demand forecast of 30 million to 32 million sq ft in 2015. Therefore, rental and capital values will continue to grow,” said chief operation officer Ramesh Nair.

“Investment volumes are expected to go up in 2015, driven by low-risk, cross-border capital. Overall, the investment market will do better in 2015, with a substantial weight of capital targeting office real estate (especially Grade A and trophy assets).”

Ramesh attributes the lower vacancy levels in the office market to efforts and market research undertaken by the new Indian government targeting reforms in the right industry such as real estate, mining, manufacturing, and infrastructure, which indirectly triggers growth for a multitude of ancillary and supporting industries.

“With the renewed confidence, the Indian economy is operating at a speed where current year 2014 and 2015 growth is expected at not below 5.5% year-on-year (y-o-y) ... Inflation has ceased to pose challenges to growth, which is positive. All this led to the Indian office market having the second best year ever other than 2011 in terms of absorption and the lowest vacancy levels since late 2009,” Ramesh said.

Pan-India office space vacancy dropped from 18.5% as at end-2013 to 16.9% as at end-2014. Mumbai, Chennai and Pune were responsible for this steep fall in vacancy during the year. “While limited supply was helpful in reducing vacancy in Mumbai and Chennai, Pune benefited from moderate supply and healthy growth in absorption. Despite a significant rise in supply in Bangalore, a healthier absorption resulted in reduced vacancy. The current vacancy levels in Mumbai are the lowest seen over the last 36 months.” The report says demand for office space increased by close to 30 million sq ft in 2014, a three million jump in net absorption compared with the previous year. The absorption rate for Bangalore rose 72% y-o-y in net absorption in 2014, followed by National Capital Region (NCR)-Delhi (48%), Hyderabad (41%) and Pune (13%) while Kolkata (-55%), Chennai (-43%) and Mumbai (-21%) saw a fall in net absorption.

The improved economic outlook in the United States, strengthening domestic capital markets and the government’s bold efforts to boost the manufacturing sectors are among the reasons these sectors outperformed the others in terms of leasing, said Ramesh.

According to the report, the total stock of Grade A office space across major Indian cities grew 8% y-o-y with an additional supply measuring below 30 million sq ft. 

“Bangalore saw the biggest addition ... in absolute area terms, followed by NCR-Delhi. Mumbai, Pune and Hyderabad saw moderate increases ... Chennai and Kolkata added very little supply ... during the year,” said Ramesh. Pune, Bangalore, and Kolkata saw the highest rental increases of 8.6%, 5.2% and 4.2%, respectively. Rentals in other markets remained stable.

This article first appeared in The Edge Financial Daily, on January 16, 2015.