Indian office markets are currently seeing the healthiest growth rates in the APAC region, according to the Knight Frank Asia-Pacific Prime Office rental index. Bengaluru, the strongest performing market this quarter, recorded an 8% rise in quarter-on-quarter prime office rent growth in Q3 2019, while Mumbai and NCR recorded a 1 and 3% rise respectively.

In an interview, Sathish Rajendren, SLCR, MCR, Co-Chair for CoreNet Global’s India Chapter and COO at Knight Frank India, speaks about the outlook for the Indian commercial real estate market for 2020, and whether this growth can be expected to continue.

 1H 2019 office supply rose 31% year on year to 2.2 million square metres, a decade high, while leasing volumes similarly reached a high of 2.6 million square metres. Do you believe the growth is sustainable?

While the residential real estate sector is witnessing a slowdown, the office market has been the favoured asset class for developers and investors alike. The office space market, which has been limited more due to shortage of supply rather than lack of demand, saw over 24 million square feet delivered in the first half of 2019, which is historically the highest level of supply during a half-yearly period. Reiterating the underlying strength of the office market in India, the sector also saw a record level of leasing deals, at 27 million sq ft, in the January to June period this year, with five out of the eight top markets under coverage seeing double-digit rental growth. It would be safe to say that the office space market in India is going in an upwards direction, with more and more people investing in the sector. The industry is upbeat with the change and hopes to make the most of this trend. Though the office market is small, accounting for just over 10% of the overall real estate market, it is one of the fastest growing segments, forcing investors to chase investment-ready assets in the top cities.

Across the top 8 cities in India, co-working providers took up around 0.37 million square feet of space in 1H 2019, a 42% year on year growth, or 15% of the total transacted space during the period. Given the recent WeWork IPO issues, has the pace slowed down since? Will this be a concern for the office sector’s growth?

One of the most interesting trends in the Indian commercial real estate space is the emergence of co-working spaces. What has been a global phenomenon so far has taken root in India with the entry of many players like WeWork, Simplyworks, Indiqube, Tablespace, and Awfis. India is witnessing a proliferation of startups and small and medium enterprises (SMEs), which has given a boost to the co-working trend.

The Alternative Asset Classes in India form ~6% of the overall office stock v/s ~22% in developed nations. The spurt in growth witnessed over the last 3 years can be attributed to easy money available from PE firms, and I feel this momentum will be sustained going ahead. While the month of October was a tough one for WeWork, the growth was inorganic, and WeWork was the testimony. While the business model is sustainable, I don’t see the IPO issue impacting the office space demand in India, though the pace of growth may slow down and will grow only in the medium term. This might work as a learning for all startups, and there could be additionally a few companies that may rethink their growth strategies.

The Indian government has adopted a more accommodating stance on growing the Indian capital markets and we’ve seen recent mega-deals (Blackstone buying Indiabulls office portfolio and Embassy Office REIT IPO) sprouting. How do you view the capital markets, focusing on commercial sectors, in the coming year and how do you think that will benefit occupier business in India?

The residential real estate sector has been reeling under a prolonged slowdown, and to top it all off, there have been major policy overhauls in the last five years like demonetisation, RERA, GST, amendments in the Benami Transactions Act etc. However, commercial real estate is far less affected and financial closure is significant. Largely driven by IT/ITeS and BFSI sectors, the commercial real estate segment has been quite transparent and predictable – the primary criteria for foreign investors’ confidence. Government-driven policies, including ease of doing business in India, are attracting both Indian and global companies, squarely benefiting commercial real estate. The demand for high-quality office spaces in India has never been higher. Also, compared to the lease yields for office spaces at 8-12% per annum, rental yields for housing are negligible at 2.5-3.5% per annum in a best-case scenario. The funding crunch that has crippled the residential sector has not seriously impacted the office sector. In fact, India’s first REIT listing and those to follow have opened up massive potential for increased liquidity infusions into Indian office spaces. The major differences between commercial and residential real estate in terms of performance – and indeed as investment asset classes – are quite apparent. Certainly, private equity investors are quite certain of which segment they are more comfortable with in the current Indian market scenario.

In India, the corporate real estate segment has become more structured and institutionalized over the last few years. The stability that the growth in the economy has brought in has led to record leasing in the last few years, making commercial real estate a viable investment asset for large investment companies. Lately, Japanese investors have also expressed that the corporate real estate market in India has reached a certain stage of maturity for serious long-term investments, and that is good news for occupier business. Corporate real estate is generally considered the second largest expense after human resources in service industries, a lot of emphasis is put on the fact that it should create the right value for a long term, for the users of the real estate. The general tendency is to rationalise the cost on real estate. However, we have seen that real estate has a key role to play in creating productivity and people retention which directly impacts the top and bottom line of many companies.