Reinvent the Office Segment: Drive a trend-based growth

Coupled with the industry’s consistent efforts to reshape the operational mechanism and services, the real estate sector has reinstated India as the world’s fastest growing major economy. How this impacts the office market segment in H2 2018, is what we need to watch out for.

14 Jul 2018

Reinvent the Office Segment: Drive a trend-based growth
The past two years have been significant in solidifying a space for the realty sector in the Indian economic landscape. The roll out of major reforms that stagnated the economy at first, have finally added the much-needed ingredients to flavour the realty sector -  transparency and flexibility.

Initiatives like RERA, GST, Affordable Housing, that were envisioned to bear fruit in 2018, are showing the results that they were meant to. Coupled with the industry’s consistent efforts to reshape the operational mechanism and services, the real estate sector has reinstated India as the world’s fastest growing major economy.

So, one may ask, was the office market one of the segments to have inspired this growth? And the answer would be an undoubted yes!

Rewinding back to 2017, the office market continued to breach the 40-million mark in terms of space take-up despite a dip in supply across key markets. Leasing activity was dominated by Delhi-NCR, Bangalore and Hyderabad. Despite the cautionary trends permeating the office sector, the expectation was for 2018 to be a positive year, with a healthy play between supply and demand. Flexibility in work spaces was expected to emerge stronger, and landlords to better align spaces with the needs of occupiers. As availability of ready-to-move-in spaces remained constrained (particularly in core locations) amid sustained rental growth, pre-commitment activity was estimated to remain strong, especially in cities such as Bangalore.

Despite a crunch in the availability of ready-to-move-in spaces, office leasing remained resilient in 2017, dipping marginally by 3.5% y-o-y. We expected occupiers to make more efforts to remain flexible as the business environment changed, focusing more on pre-committing quality space and prioritizing infrastructure availability while implementing their location strategies.

Six months into 2018: while we see most of our estimations falling into place, we also see a change in the trends that influence occupier preferences. So, in order to catch the pace at which the sector is growing, we, as an industry need to modify our services in line with what our audience is looking for. Efficiency doesn’t lie in the successes of the old, but how we approach successes in a new way – walking hand-in-hand with these trends.

Over the past few years, the industry has seen the rise of digital technologies in the way industries operate. However, the relevance of technology never stays stagnant. In case of the office segment, disruptions in the tech sector are likely to marginally reduce leasing activity this year. However, the decline would be offset by augmented demand from other industry sectors such as banking, financial services, engineering & manufacturing, and research & consulting. There is increased traction in leasing by sectors such as pharmaceuticals, healthcare, telecommunications and aviation, also expected through the course of the year. Co-working/business centre operators would continue to expand, and their contribution to the overall leasing activity would be significantly higher than seen in the past couple of years.

On the other hand, cities like Delhi-NCR and Bangalore would continue to drive absorption in 2018, while Hyderabad would compete with cities such as Mumbai to become a key office destination. Demand across most cities would be predominantly supply-driven. Consequently, in the case of Chennai and Pune, demand would weaken as quality supply is expected to come onstream only after 2018.

Pre-commitment would remain popular among occupiers as it allows higher rental arbitrage, efficient portfolio evaluation and greater availability of quality offerings. We also anticipate a rise in the pre-lease period for buildings scheduled for completion within the next four years, considering occupiers’ willingness towards operating from quality assets. In contrast, occupiers in completed properties would increasingly prefer a shorter lease period to gain flexibility.

Today, developers are increasingly focusing on placemaking, with occupiers reconsidering existing occupational densities. The gradual alignment of these complementary interests could lower vacancies across cities. Low-quality (strata-sold) supply is expected to face both completion and leasing hurdles. On the other hand, occupier interest in quality assets will remain robust, which will lead to a supply-led demand through the course of the year.

In line with other APAC countries, occupiers in India would continue to deploy modern workplace strategies – efficient space utilization, flexible working and optimum hiring. These strategies are bound to impact office real estate demand.

So, what should be our call to action now? We have assessed the opportunities, and have another half of a power-packed year to drive successes to meet the expectations form the year. How we leverage them is up to us.