NEWS

Emerging demand drivers of commercial real estate in India

May 25, 2022

When it comes to commercial real estate in India, there is a lot of attention being paid to emerging demand drivers, as this is where the big money, including foreign funds, is expected to pour in. Analysts are, hence, evaluating the next demand drivers of commercial property. This could be business-wise or region-wise.

Key trends in Indian commercial real estate

A recent report by Savills India that focuses on tech towns of the future, highlights that the next demand drivers would come from tier-3 cities. Savills India’s Research presented these upcoming locations as clusters, namely ‘challenger cities’ and ‘emerging cities’. Some of the key trends in demand commercial real estate, as per the report are:

* Information technology-business process management (IT-BPM) sector to expand to tier-3 towns.

* The IT-BPM sector has been absorbing large office spaces through the last decade-and-a-half. Its current share is estimated at more than 50% of the total office space leased in the last five years.

* As its growth continues, a cumulative space uptake of 80-120 million sq ft in grade-A office buildings, including co-working spaces, can be expected over the next five years.

* The IT-BPM sector is expected to clock a cumulative leasing of 100 million sq ft by 2026.

* Leader cities are already established IT-BPM hotspots and have high availability of skilled talent and robust infrastructure.

* Challenger cities enjoy a symbiotic association with leader cities and are already witnessing significant IT-BPM activity.

* Emerging cities are expected to be the next big potential hotspots in the medium to long term.

* Tier-2 and tier-3 cities are likely to feature prominently in a world finely balanced, in terms of employee safety and wellness, return to offices in calibrated measures, increased adoption of remote work through enterprise-level digital transformation and cost-benefit analysis in real estate portfolio allocations.

Commercial real estate segments that could drive demand

Now, the question is which are the segments that would emerge as the demand drivers? While industry opinion is divided, it still seems tilted towards logistics and warehousing.

Ramesh Nair, CEO, India, and managing director, market development, Asia, Colliers, says that with occupiers returning to the office, gross office absorption during the first quarter of 2022 rose to 13 million sq ft, a three-fold increase year-on-year. “Demand for industrial and warehousing spaces also witnessed 11% increase during the quarter, at 6.2 million sq ft led by third-party logistics. The demand for office and industrial space will continue to remain strong throughout the year. Investment confidence also remains intact, as investors continue to bet on traditional assets as the economy recovers,” says Nayar.

Ashish Narain Agarwal, founder and CEO, PropertyPistol.com, points out that commercial real estate has been picking up since corporates and organisations are welcoming employees back into the workplaces after the COVID-19 pandemic. “Commercial real estate is also being driven by an uptick in sectors like IT, e-commerce, logistics, data centers, etc. With investment in commercial real estate being a preferred option by a lot of investors, this segment is definitely going strong and the momentum will further continue,” says Agarwal.

Amit Goenka, MD and CEO at Nisus Finance, is in favour of life sciences, data centres and e-commerce, as the main drivers in a post-pandemic world. “Leasing demand is strong in the major metros and almost 30 million sq ft is expected to get absorbed this year,” says Goenka.

Commercial real estate hotspots of the future

The upcoming industrial corridors and the way Indians work in the post-pandemic era, are likely to have a major impact on commercial realty. The first major shift would be in terms of the geographical spread and tier 1 cities would no longer be the major contributors, in absorption of office or retail spaces.

Even within tier-1 cities, there is a shift from over-crowded CBDs (central business districts) to the EBDs (emerging business districts). The shift of offices from Nariman Point in Mumbai to the Bandra-Kurla Complex (BKC) is a case in point. Some tier-2 and tier-3 cities, connected with upcoming industrial corridors, would be the magnet of investments.

Commercial realty projects that may witness demand

In terms of projects, the emerging economy clearly indicates that plain vanilla office spaces and retail spaces, would no longer attract the lions’ share of investment. The hybrid model of office-cum-retail would be the new experiment ahead.

Nevertheless, the big ticket investments are likely to be in the emerging segments of commercial real estate. For example, online retail has already gained ground in India and there is a deficit of warehousing. Logistics and warehousing would, hence, continue to attract sizable investment ahead.

Data centres is another segment that is expected to perform well. In the last few years, data center projects have been witness to an uptick and a lot of global players have entered. Tokyo-headquartered NTT has committed to an investment of $2 billion to set up six data centres in India.

In a nutshell, the demand drivers of commercial property in India have spread out beyond the traditional centers. However, these emerging segments would demand much deeper investments.

Source: housing.com