Gross office leasing at 8-year high, touches 50 million sq ft in 2018

Gross office leasing activity hit an eight-year high in 2018 touching 50 million square feet, with IT-ITeS contributing the largest pie of 43 percent followed by flexible workplaces (14 percent) and BFSI at 12 percent, says a new report.

Overall rental values increased by 3 percent across major cities over the previous year in the backdrop of buoyant leasing and 14 percent decline in new supply infusion, according to a report by Colliers International India. Hyderabad noted the highest increase in rental values at 8 percent followed by Bengaluru at 5 percent. New completions were noted at 26.4 million sq ft with Bengaluru being the largest contributor followed by Pune, the report adds.

“Flexibility, collaboration, workspace efficiency, employee retention, and cost effectiveness should continue to be the key focus areas of CRE leaders in 2019. Occupiers should adopt a flex and core occupancy model that allows firms to commit to fixed real estate space for their core operations whilst keeping flexibility to alter their real estate portfolio depending on their operational requirements,” says Ritesh Sachdev, senior executive director, Occupier Services, at Colliers International India.

Other trends that are expected to dominate 2019 are:

Average area leased by companies shrinking

Corporate real estate leaders are moving towards framing workplace strategies defined to optimise space usage and people's performance. As per Colliers International India research, the average area of an office lease in India has declined by 18 percent from 45,200 sq ft in 2016 to 37,100 sq ft in 2018, despite leasing being at an all-time high in the last eight years.

Although the number of transactions has increased, this development suggests shrinking workplaces as a result of increased efficiencies with improved per sq ft occupancy. Colliers Research expects net absorption to increase year-on-year, albeit at a slower pace against the backdrop of growing need for work space efficiency and cost effectiveness.

REITs to be a game changer

The success of REITs is directly proportional to the appetite of international investors for Indian REITs as well as demand from domestic institutional investors such as insurance companies and mutual funds. Colliers International expects REITs to be a game changer, bringing in professional management, data transparency and international standards to income-yielding commercial assets. Developers should focus on building premium quality investable grade stock to capitalise on the asset monetisation option offered by REITs.

Peripheral locations to witness increased activity

Overburdened infrastructure and low vacancy in quality developments in established business districts are pushing occupiers and developers to shift their focus to peripheral locations. Colliers anticipates that peripheral locations, such as North Bengaluru in Bengaluru, Golf Course Extension Road (GCER) in NCR and Navi Mumbai in Mumbai, will gain occupier interest.

The report notes that about 5.6 million sq feet of new supply is planned in North Bengaluru by 2021, which accounts for 15 percent of the total supply in the city and provides expansion and consolidation opportunity especially to technology occupiers.

GCER in Gurugram has seen increased occupier interest owing to lower rents in the range of Rs 55 to 65 per sq feet per month compared to average rents of Rs 100 to 130 per sq feet per month in other major micro markets of Gurugram.

Navi Mumbai is attracting interest from occupiers and developers due to lower rents, availability of larger floor plates and improving infrastructure. The micromarket offers 38 percent lower rents than the city average. Of the total supply planned in Mumbai through 2021, as much as 44 percent  is planned to be in Navi Mumbai, the report notes.

“Technology occupiers following a cost-sensitive strategy or those looking for contiguous spaces for consolidating their back-office operations should consider spaces in peripheral locations. The peripheral locations across top three cities of Bengaluru, NCR and Mumbai offer rental arbitrage up to 48 percent compared to the city average,” says Megha Maan, senior associate director, Research Services at Colliers International India.