India’s Office Space Deals Rose To All-Time High In 2019: Knight Frank Report

Deal volume in India’s office space market rose to their highest in 2019 on the back of a surge in leasing activity by information technology companies.

The country’s office leasing volume rose 27 percent year-on-year to an all-time high of 60.6 million square feet in 2019, according to a Knight Frank India report.

“The historic rise in the office transactions is a significant growth indicator for the office market as it represents the continued commitment of domestic and global corporations in the country’s growth potential despite the ongoing economic slowdown,” Shishir Baijal, chairman and managing director at Knight Frank India, said in a statement.

That comes when the residential market too showed resilience as home sales grew marginally at 1 percent year-on-year in 2019, according to the report based on data from eight cities—Mumbai, Delhi-NCR, Bengaluru, Pune, Chennai, Hyderabad, Kolkata and Ahmedabad. “The residential sector also overcame the negative market outlook by registering a growth in sales volumes as well as new launches,” Baijal said. Project launches in the residential space soared 23 percent last year.

Baijal expects India’s GDP growth to start recovering and touch 6-6.5 percent by 2020-21. This, he said, will aid the real estate sector in maintaining its growth momentum.

While the office space market is expected to sustain demand, increasing supply could weigh on rents and vacancy levels, Baijal said. “Liquidity constraints and homebuyer sentiments will continue to keep buyers tentative in the residential segment. Thus, even maintaining this newfound stability in demand would need commitment from all stakeholders in the residential market.”

Around 61.3 million sq. ft. of office space was delivered in 2019, registering a 56 percent year-on-year growth over the previous year. The bulk of the office space supply—close to 37.5 million sq. ft.—became available for sale during the second half of the year, clocking a 78 percent growth over the year-ago period, the report said.

Among the top eight cities, Bengaluru saw the highest volume of office space leased in 2019 at 15.3 million sq. ft., followed by Hyderabad at 12.8 million sq. ft., nearly twice its previous annual high.

The IT sector accounted for 41 percent of the total office space leased in the second half of 2019, against 31 percent in the year-ago period. The share of the banking, financial services and insurance sector fell to 16 percent in the second half of 2019 from 18 percent in the same period a year ago. This, according to the report, was due to credit crunch faced by non-banking financial companies.

Bengaluru also saw the highest quantum of new supply at 16.1 million sq. ft., followed by Delhi-NCR at 12.3 million sq. ft. and Hyderabad at 10.9 million sq. ft., the report said. All markets, except the Mumbai Metropolitan Region and Pune, saw a positive growth in office supply.

Office leasing in India has been growing from strength to strength despite a sluggish economy, with ample investment demand for high-quality assets, Baijal said. “It would be interesting to see if the massive supply that is lined up to come online in the near future across major markets, and macro-economic headwinds put rental growth under pressure,” he said.

The weighted average rental level for the eight cities fell 1 percent in the last six months of 2019, according to the report.

While the drop in weighted average rentals is not necessarily due to the increased supply, this should rather be attributed to the significantly greater weightage of the much lower-priced markets of Hyderabad and Chennai in the overall transaction pie, the report said. The office space taken up by co-working players has nearly quadrupled since 2017 to a little over 8 million sq. ft. in 2019, it said.

How Residential Market Fared

The number of new residential units grew 25 percent to 112,150 units in the second half of 2019, the report said. Around 61 percent of new launches were under the ticket size of Rs 50 lakh and 81 percent were under Rs 1 crore as developers focused on affordable housing, it said.

With 79,810 units, Mumbai saw the highest number of new launches in 2019, followed by Pune at 44,660 units, and Bengaluru at 33,772 units.

Bengaluru clocked the highest jump in sales at 10 percent. Of the eight cities under coverage, only Mumbai and Pune saw a fall in yearly sales growth during the second half of the last year.

Weighted average prices have contracted across cities with Mumbai, Pune and Chennai witnessing an yearly fall of 2 percent, 3 percent and 5 percent, respectively. Prices in Hyderabad, however, rose 10 percent year-on-year due to the extremely low unsold inventory level and comparatively lower supply to meet the pent-up demand, the report said.

Unsold inventory across the top eight markets improved in 2019, registering a 5 percent decline to 445,836 units, according to the report. Mumbai had the highest quantum of unsold inventory at 145,301 units, followed by NCR at 122,084 units and Bengaluru at 78,414 units.

“Affordable and low-cost housing, which have largely been the focus of the regulatory and financial measures taken by the government, will continue to be focus areas for builders as they align themselves with the needs of home-buyers,” Baijal said.