Once upon a time, not too long back, manufacturers realised they could not increase the prices of their products any more, despite a rise in prices of raw materials. If they did, customers backed off, leading to losses. So, the solution was to cut the corners, literally. Items began to be sold in non-standard packs, with a few grams being shed off every unit. Business once again became viable, customers were relieved they could get the item within budget. Everyone was happy again.
Move over to the realty sector, which is witnessing a similar trend. The real estate sector has witnessed major turbulence since the 2017 government announcements like the formation of the Real Estate Regulatory Authority (RERA), the introduction of goods and services tax (GST) and the formation of the Real Estate Investment Trust. The market for property transactions, particularly the commercial ones, took a hit. To cut the losses, real estate developers have began to look at the market for smaller units, both residential and commercial. By the end of the year, it was clear that 2018 would be a better year. According to the Knight Frank study “India Real Estate Report 2017”, the results in the fourth quarter of 2017 made 56 per cent stakeholders positive about office rentals and buying trends of consumers.
The government reforms, coupled with increased constructions, led to a rise in unsold inventory of spaces in various regions, with National Capital Region (NCR) at the top of the list. The NCR market failed to impress in the second half of 2017. There was only 3.2 million square feet of office transactions, a 14 per cent year-on-year plunge. Again, of the total office space transactions, most were in Gurgaon, followed by Noida.
Smaller size, bigger profits
Looking at the situation, developers began to cash in on the demand for office and smaller residential units. The area has an abundant supply of 1 BHKs, both in primary as well as the secondary market. Some of them were built years ago and are available for resale.
According to developers, areas with good potential for economic growth have better demand for units provided with amenities. For instance, serviced apartments in an industrial town like Bhiwadi finds many takers. Ssumit Berry, managing director of BDI Group, says “There is good demand for 1-BHK units among business operators and people coming to work in the big companies in Bhiwadi.” The group’s residential project Ambaram offers 1-BHK units along with 2-BHK ones in the area.
Shrinking offices to make them affordable to smaller firms has helped cut down on the unsold inventory and, in turn, losses. The Knight Frank Asia Pacific Prime Office Rental Index Q4 2017 has given a thumbs up to office market.
Amid the slowdown, rental values remained stable in most of the office markets in the NCR. As per the Knight Frank India report, a lack of good quality space put an upward pressure on rentals in locations such as Connaught Place in Delhi, DLF Cybercity and Golf Course Road in Gurgaon, Noida-Greater Noida Expressway and Sector 62 in Noida. “Rental growth continues to be strong across prime office markets in India on account of an ongoing supply crunch in the country. This, coupled with strong occupier demand, is expected to drive the rentals up in the next 12 months in the prime office markets of Mumbai and Bengaluru. However, we expect rental growth to remain stable in Connaught Place,” says Dr Samantak Das, chief economist of Knight Frank India, about the findings of the report.
According to the “Colliers International Report”, office space absorption during the January to March quarter in 2018 increased by 23 per cent year-on-year to 11.4 million square feet, driven by demand from technology and finance sectors. Bengaluru continued to grab the highest share, accounting for 34 per cent of the total leasing volume, followed by the NCR at 26 per cent, Pune at 16, Mumbai at 10, Chennai at nine, Hyderabad at four and Kolkata at one per cent, the report states.
The technology and finance sectors remained major contributors to office demand with 36 and 17 per cent share respectively of the total office take-up in Q1 2018, according to Ritesh Sachdev, senior executive director, occupier services, Colliers International India.
The demand from flexible workspace operators and the manufacturing sector started gaining momentum in 2018, accounting for 13 per cent and 12 per cent, respectively, of pan-Indian leasing volume, Sachdev says. The report adds that the commercial real estate market is likely to remain robust with increased investor activity, sustained demand and growing interest from various industry occupiers.
Co-working as co-winner
Increasingly, start-ups and new SMEs, especially in the services domain, are recognising the benefits of flexible office space. According to a JLL India blog post, in terms of business opportunities, 20 per cent of the market demand lies with small and emerging business sector. Start-ups and freelancers cater to 10 per cent market demand, while the rest 70 per cent belongs to large enterprises. With the co-working space coming into the scene, 90 per cent of the India’s shared workspace has started using it within 12 months.
“Co-working involves various individuals or start-ups sharing a common workplace environment. Companies can save as much as 15 to 20 per cent on rent by working in a co-working space, which provides an ultra-modern workplace along with plug-and-play amenities at par with those at Grade A offices,” says Ramesh Nair, CEO and country head of JLL India.
According to a Confederation of Indian Industry report, the co-working segment in India is expected to receive USD 400 million in investments by the end of 2018. Currently, there are around 200 premium business centres across the country, and the number is set to double by 2020. Also a major group of founders of start-ups and small businesses belong to the millennial class, and they find co-working spaces a lot affordable. “As there is a rise in start-ups and SMEs, they are opting for the co-working spaces, because it’s a cheaper and plug-in type model. These spaces are available against less security, with amenities which are necessary for an office. Going for one’s own office can be overly expensive,” says Vishrut Gawri, a partner at the architectural firm Realty Options.
Small businesses continue to demand spaces in office corridors like Bengaluru, Gurgaon, Mumbai, Delhi, Noida and Chennai, and this is helping in rental appreciation this year. According to Nair, Bengaluru is likely to see the highest absorption of office space in 2018-19, followed by the NCR, Mumbai and Hyderabad. The future supply is expected to be higher in 2018-19 in the NCR and healthy in Hyderabad and Mumbai, while it will be lower than expected in Chennai and Kolkata. “At the pan-India level, total office stock across the seven major cities is forecast to reach around 600 million square feet by the end of 2019. In alternate office (or co-working) spaces, around 1.2 million square feet got absorbed across major Indian cities in 2017,” says Nair.
The non-metro appeal
Occupiers are also consideringTier II and Tier III cities, such as Chandigarh, Coimbatore, Ahmedabad and Bhopal for back office requirements, given that they are cheaper than the Tier I cities.
Similarly, commercial spaces have attracted many start-ups in Chennai. According to the CBRE-South Asia’s latest “India Office Market View” report, Chennai has witnessed substantial rise in the absorption of office spaces in the city. Chennai-based real estate developers and builder Akshaya Pvt Ltd, which also offers projects in Coimbatore, Trichy and Salem, is seeing good amount of traction from the millennial crowd. A big chunk of this is made up by entrepreneurs and freelancers or independent consultants who need office space but cannot afford to independently own or rent one.
“With improved infrastructure, enhanced connectivity and better job creation in different sectors, the demand will see an upward swing in the coming quarters in the city. We can also expect a rise in rentals but it will not hamper the demand for office spaces across prominent locations of Chennai,” says T Chitty Babu, chairman and CEO of the firm.
Another area that is garnering more interest is studio apartments. Babu says that studio apartments have witnessed a rise in Chennai in the past few years. There is a lot of interest from the millennial crowd to own or rent studio apartments in the city, he remarks. “Studio apartments have been marketed as a utility home with all luxuries available for homebuyers, with the focus on long-term investment purpose as well,” he avers.
The rise in demand in this segment can also be attributed to maintenance friendly and cost-effective budget homes for young homebuyers, who prefer manageable spaces that are minimalistic and contemporary from a design point of view. “We feel that it can turn out to be a fast-moving segment in the future if the location and price suit the demands of buyers,” he adds.
In Chennai, areas like OMR and Porur have displayed good growth potential in the past few years. Proximity to industrial zones as well as the IT hub will boost the demand for budget as well as mid-segment homes in these micro-markets this year.
The big builders are in big problems these days, with many of them spending time on judicial sites than at construction sites. The unviability of big projects has compelled the mid-level real-estate players to innovate and seize the momentum. They seem to be right on the track with ample help from a new boom on millennials-led entrepreneurship.