Realty Watch: The Indian Office Space

Realty has always been seen as a feasible investment alternative. However, it has always remained a regional or geographical play, and not everyone is able to track each pocket of realty.

Among the many realty research firms that provide useful insights on this segment, Jones Lang LaSalle (JLL) recently came out with a report providing an insight on lease rentals in various important markets. The report clearly indicated that office leasing has improved in Chennai and Pune, while it remains moderate-to-stable in other cities like Mumbai, Bengaluru and NCR. Rents and capital values remained stable across all cites in October 2013.

In the report, JLL stated that assimilation and diversity are two virtues India is known for and a glance at office leasing activity in the country in the past 21 months proves this right. Cities once known to be the long-time bases of specific occupier sectors are now experiencing a different and more divergent client patronage. The 21 month-period from January 2012 to September 2013 have been different in some ways from what has generally been observed in the 7 years uptil December 2011.

The report focused on the fact that 217 million sq. ft. of office space was leased between 2004-2011, and another 46 million sq. ft. was taken up in the last 21 months. Of this new addition, the share of IT-ITeS companies in the total space leased across India upto December 2011 was 43%, but this has now fallen to 36%.

There were some changes on the geographical front, as Mumbai, Pune, Kolkata, and the Delhi National Capital region (NCR) strengthened their share of the IT-ITeS leased space from 38% to 52%. Bengaluru’s share fell from 34% to 18%.

Another noticeable factor is that since January 2012, manufacturing companies have accounted for 28% of the total leased space across India, 7% more than their take-up as of December 2011. Bengaluru saw a reversal in its top spots, leasing 41% of its space to the manufacturing sector and the IT-ITeS sector moving to second spot with 35%. Prior to January 2012, the share was 44% for IT-ITeS and 26% for the manufacturing sector.

Mumbai has attracted more IT-ITeS companies than it previously had, while Pune’s dependence on IT-ITeS has dropped from 59% to 45%. Hyderabad has become first choice for healthcare, biotech, telecom and construction companies, which together have taken up 28% of the total space leased in the city (up from 12% at December 2011). This improved Hyderabad’s share of the total space leased across India for these sectors to 16% (up from 8%). More consultancy companies moved to NCR and the banking, finance and insurance sector (BFSI) remained in Mumbai, while also tagging Pune as a preferred destination.

We feel that scenario is quite favourable for the Bengaluru and Pune-based realty players having more commercial space. However, this does not mean that the worst is over for the realty companies. They are mainly being affected by the debt burden and the inability to generate cash flows to pay for even the interest costs. Apart from that, commercial has not been a major play for many listed entities. So, though there has been some improvement on the lease rental front, we do not expect to see any immediate positive impact on the companies in this sector.