Global slowdown could dent office space demand in H1 2023 after strong 2022

Demand from domestic companies will, however, lend stability to the market

India’s commercial real estate (office segment) market shrugged off the two-year long Covid-induced downturn and bounced back strongly in 2022. According to a recent report from JLL, the net absorption of office space in 2022 across the top seven cities (Mumbai, Delhi-NCR, Bengaluru, Hyderabad, Chennai, Kolkata and Pune) has been 38.25 million square feet (sq ft). In the past decade, net absorption was higher only in 2019.

High-net-worth individuals with large sums to deploy should consider adding office space to their investment portfolio.

Driven by GDP growth

India emerged as one of the world’s fastest-growing economies in 2022. Its growth story was the major driver of commercial real estate transactions as activity in this market closely tracks economic momentum. “From 2020 onward, pandemic-related restrictions had affected commercial real estate demand. This pent-up demand came back strongly in 2022, leading to renewed momentum on both the volume and the rental front,” says Vivek Rathi, director-research, Knight Frank India.

In 2022, Bengaluru led in terms of total space leased, followed by Hyderabad, Delhi-NCR, Chennai, Mumbai, Pune and Ahmedabad.

2023: Beware global slowdown

While real estate experts remain optimistic on the outlook for 2023, they believe the office market may have to overcome some headwinds.

“A large part of the demand for space is influenced by business outlook in America and Europe. The United States and a few key important European countries may experience a recession. Occupiers, especially from the IT sector, may delay decisions. Demand should begin to improve from the latter part of 2023 as inflation-related concerns get addressed in a sustained manner,” says Rathi. He adds that home-grown companies, however, are looking to expand, and they will drive demand. Overall, he expects rental rates and volumes to be stable in 2023.

According to Kanchana Krishnan, managing director, Chennai, Colliers, “BFSI, consulting, engineering, pharma, healthcare and e-commerce, which account for 35 per cent of India’s office space absorption, will see growth.”

Invest for stable returns

Experts say commercial real estate remains a sound investment option. “India is likely to witness significant GDP growth in 2022-23 compared to other emerging markets. Hence, the outlook for the commercial real estate sector remains promising. An investor can expect a 14-15 per cent return from an operational asset and 18-20 per cent from a greenfield project,” says Rahul Arora, regional managing director and head (office leasing & retail services), India, JLL.

Krishnan’s return expectations are more conservative. “Commercial real estate can return between 7 and 10 per cent, depending on the asset and the location. Returns from this segment have been consistent over the past decade and we expect it to perform similarly over the next few years,” she says.

Issues to consider

Before investing in commercial real estate, investors must take a number of factors into consideration. “Check whether the property will remain attractive for tenants for a sustained period as this will impact future occupancy. Also see whether the market it is situated in will remain attractive. This will in turn depend on infrastructure development and the government’s focus on that location,” says Rathi.

According to Arora, “The quality of the development, maturity of the market and the sub-market, the quality of asset management, and the occupier profile are some of factors that must be taken into consideration while investing in commercial real estate.”

The Reit alternative

Investors who are unsure about investing directly in commercial real estate may do so via a Real Estate Investment Trust (Reit). These trusts operate like mutual funds and invest in real estate on behalf of their unit-holders.

“REIT is an evolved structure that invests in top-class real estate across the country. Investors get the benefit of regulatory oversight, higher liquidity, and lower ticket size,” says Rathi.

Arora, however, points out that returns from Reits could be muted. “It is a good tool for portfolio diversification and is suited for investors seeking reasonable returns with minimal risk. Currently, however, various debt instruments can offer better yields than REITs,” he says.

Rental rates have surpassed pre-Covid levels in southern cities

Average rent rate based on transactions (Rs/sq ft/month)

	Mumbai	NCR	Bengaluru	Pune	Ahmedabad	Chennai	Hyderabad	Kolkata
Q3 2019	118	86	80	73	44	60	61	38
Q3 2020	117	81	83	73	42	60	62	36
Q3 2021	106	82	72	65	40	58	61	35
Q3 2022	110	82	81	71	40	61	65	35

Source: Knight Frank India