MINT - 27th March 2018

Demand for unfinished office projects on the rise

BY- Bidya Sapam

Mumbai: Tenants are rushing to sign up office space even before it hits the market, builders and brokers said, as commercial rentals rise in India’s top cities struggling with a shortage of premium space.

Data compiled by property advisory firm CBRE shows of the total 8 million sq.ft expected to come up this year in Bengaluru, nearly 50% has already been pre-leased. In National Capital Region (NCR), Pune and Hyderabad, up to 20% of new supply has already found takers.

CBRE says over 42 million sq.ft of office space were absorbed in 2017, of which 29 million sq. ft were fresh supply. “This constrained availability of ready-to-move-in space, and increasing rentals have resulted in a number of corporates pre-committing to space in under-construction properties,” said Ram Chandnani, managing director (advisory and transaction services India) CBRE South Asia Ltd.

Embassy Group, RMZ Corp., K Raheja Corp. and Panchshil Realty are among large builders which have seen rising interest from banking and financial services firms, technology and pharmaceutical companies.

Pre-commiting space helps in “negotiating favourable rental terms, block contiguous space for future expansion and appropriately stagger expansion as per the development schedule,” Chandnani of CBRE added.

Bengaluru-based Embassy Group said almost 80% of 2.8 million sq. ft coming up this year end has already been leased out. Average occupancy at its existing office assets across Bengaluru, Pune, Hyderabad and Chennai stands at around 95%, said Michael Holland, CEO, Embassy Office Parks.

“There is increasing occupancy and shortage of good quality space. Secondly, there are number of companies which are looking at consolidation into large standalone business parks. This takes a lot of time and planning. So, a few large international companies would be hedging the space well in advance,” he said.

According to Vinod Rohira, managing director (commercial real estate and REIT), K. Raheja Corp., 50-60% of fresh supply coming in next 12-18 months in Mumbai and Pune have already been leased out. A total of 6 million sq. ft of office space are expected to be delivered in these cities during the period.

“In certain micro-markets, where there is limited supply, we have seen a surge of pre-commitments. Customers want to lock in space before it goes away. People fear that the new supply would be not catching up with the demand,” Rohira said.

At present, K. Raheja Corp. operates around 30 million sq. ft of office space in Mumbai, Pune, Hyderabad and Chennai.

Bengaluru-based RMZ said its entire supply for the year has already been leased out. The company expects to complete developing 350,000 sq. ft of office space by year-end.

“There is tremendous demand for office space. Headcount projections are high. People are hedging their bets. While demand is strong, supply is slightly short,” said Thirumal Govindraj, managing director, RMZ Corp.

He said of the total five million supply coming up in Bengaluru in next 24-36 months, one million would be committed by this year.

Similarly, in Hyderabad, 3.8 million sq. ft is expected to be completed, and one and half million is already leased.

“Bengaluru absorbs around 12 million each year. How do you keep pace with that kind of demand? From the time you acquire land till you deliver a building, it takes around 36 months... and there are only 2-3 large real estate builders developing large good quality space,” he said.

Similarly, 50% of the total 2.5 million sq.ft new supply coming in at Panchshil Realty’s existing Eon Information Technology Park in Pune, has already been leased out, said Vivek Rachh, director, corporate solutions, Panchshil Realty.

“Pre-commitments have gone up in the last 8-10 quarters. It’s generally a function of how supply is playing out in the market. There have been times where we have finished constructing a million sq.ft, it would take around four-six quarters to get fully occupied,” he said.