Oversupply expected in India's office market

MUMBAI (India): An oversupply situation in the office property market is likely to occur in India with the expected entry of 162.6 million sq ft of new office space in the next three years, according to Jones Lang LaSalle Meghraj's (JLLM) Trends in Commercial Office Space report published recently.

The new supply will increase the Pan-India Grade A office stock to 387.4 million sq ft, outgrowing demand in the medium term across the secondary and suburban micro-markets. About 85% to 90% of the near term supply of 68.3 million sq ft is in the advanced stages of construction and expected to become operational in 2010. Mumbai is expected to lead in terms of operational office stock in the country by end-2010, replacing current leader, Bangalore.

JLLM projected the net absorption of office space to grow at a compound annual growth rate (CAGR) of 29% during 2009-2012, an increase from 19.6 million sq ft registered in 2009 to 42.2 million sq ft in 2010.

Mumbai and NCR-Delhi are likely to absorb about 20% to 22% of the projected demand during 2010 to 2012, while Bangalore and Chennai have an expected absorption of 14% to 15% of the projected demand during the same period.

Though the information technology (IT) /Information Technology Enabled Services (ITES) & Business Process Outsourcing (BPO) sectors have a projected growth of 10% during 2010, the translation of expansion strategies into demand for space is only expected by end-2010, said JLLM.

However, better growth projections of IT/ITES sector during 2010 to 2012 is likely to bring about more demand for office space in these micro-markets.

In 2009, India saw a considerably lower net absorption of 19.6 million sq ft, compared to 33.1 million sq ft net absorption in 2008.  A quarterly absorption rate of 17% was recorded in 4Q 2009. The absorption rate has been steadily increasing from 1Q 2009.

In the face of lower rents in IT and non-IT spaces, the opportunistic demand is led by domestic occupiers, while sectors such as telecom, pharmaceuticals, healthcare and manufacturing took up large spaces in various cities.

JLLM noted a trend in 2009 that was contrary to those observed in 2007 and 2008 - a larger share of transactions occurred in operational vacant stock rather than under- construction projects. This is due to the fact that options in operational office space were not available to tenants in the same measure as in 2007 and 2008.