Neeraj Bansal
With the third wave of the pandemic hopefully behind us and the recent Budget announcements of the massive infrastructure spending, the prospects of commercial real estate in India look decidedly positive.
The real estate sector in India is expected to account for about 13 per cent[1] of the Gross Domestic Product (GDP) by 2025, with commercial real estate forming a major share, attracting large-scale investments from institutional investors and private equity funds. The long-term growth of commercial real estate is entwined with the growth of a country’s economy and since India is one of the fastest growing major economies in the world, let’s look at how the sector is expected to grow.
Various demands in office space
Touted as one of the world’s fastest-growing markets for office spaces, India enjoys this strong surge due to the rising demand of office rentals, emerging flexible office spaces, and the growth of startups and technology companies.
While the pandemic-influenced work from home (WFH) had initially dampened office space demand, the rapid pace of the vaccination conducted last year saw an easing of restrictions and a quick economic recovery, which built investor confidence. 2021 thus saw a strong revival in occupiers’ confidence, with pan-India office space absorption exceeding the levels witnessed during 2016–18.
With India expected to achieve an average of 8 per cent growth this year,[2] the office space segment is accordingly expected to expand in 2022. The co-working office space—which has emerged as the trending preference for most occupiers—is expected to grow at 20–30 per cent[3] in seat absorption as companies adopt the hybrid mode of working.
Further, employees’ reverse migration to Tier II cities has led to large establishments decentralising their structure and expanding their offices, thereby boosting the flexible workspace, which is set to grow in metro and non-metro cities.
As occupiers focus on health and wellness of their employees, demand for well-managed Grade-A properties with superior infrastructure is expected to exceed 700 million sq ft,[4] with Delhi-NCR having the largest share of the pie.
The fractional ownership model, wherein investors invest in a fraction of the property and receive decent returns, is an emerging trend in commercial real estate. Since it divides the cost of the property into multiple fractions, this model can attract a large pool of investors, including institutional as well as individuals, and thus is expected to gain further traction in 2022.
Green building is another high growth segment. Employees want the workplace to have good air quality, optimum lighting, and less noise, nudging occupants to prefer buildings with such amenities. India’s green building market is estimated to reach 10 billion sq ft, with a valuation of $35–50 billion[5] in 2022. While the country ranks second after the US in sustainable building projects, green buildings still account for only 5 per cent of total buildings in India. Hence, there is a huge potential for further penetration of sustainable building design.
The trending shop-cum-office (SCO) plots—ideal for offices, banks, retail spaces, backend kitchen and warehousing—is a new asset class that caters to both retail and office segments, allowing developers the freedom in terms of building and customising land requirements.
The growing warehousing needs due to increasing e-commerce
While India’s warehousing space per capita remains low, the growth in manufacturing and rising e-commerce is driving the need for more warehousing space. To meet this surge in demand, e-commerce players and third-party logistics (3PL) firms are heavily investing in warehouses in India as evident in the recent investments made by the global giants of e-commerce and warehousing businesses.
Further, e-commerce’s growing popularity of instant delivery options is also spiking demand for small warehouses within the cities. As per several publicly available estimates, warehousing transactions are expected to grow at the rate of 35–40 per cent annually.
Demand for data centres due to unprecedented data consumption
The data centre segment was one of the least affected sectors during the pandemic, registering growth driven by a massive increase in data consumption, a growing user base of social media and streaming platforms, and data localisation, among others. The soon-to-be-launched 5G services will add to growth.
To meet the rising data usage, data centre capacities need to be scaled up and investment in this space is expected to grow at a CAGR of 5 per cent to reach $5 billion[6] per annum by 2025. Accordingly, real estate demand for data centres will reach 15–18 million sq ft by 2025.[7]
Further, the Budget granted infrastructure status to the data centre industry, which will not only attract foreign investments and private capital but also aid digital businesses, including fintech, health tech and edtech, all of which generate a large quantum of data.
Conclusion
India is one of the fastest growing e-commerce and 3PL markets. The IT industry, which is one of the largest contributors to office space absorption, is expected to grow at 15.5 per cent in 2022.[8] While these trends can have a positive impact on commercial real estate, there are downside risks including an escalation in geopolitics and monetary policy normalisation in advanced countries, which need closer monitoring.
Another area of concern is disallowance of input tax credit during the construction phase, which is pressuring developers in terms of higher construction costs. With multiple factors favouring its growth, commercial real estate is expected to weather these challenges and record a smart recovery.
[1] Commercial real estate market in India—growth, trends, covid-19 impact, and forecast (2022–2027), Mordor Intelligence, accessed on 22 February 2022.
[2] Press Releases, Reserve Bank of India, 10 February 2022, accessed on 22 February 2022.
[3] Workplaces of the Future, Confederation of Indian Industry, 3 December 2021, accessed on 22 February 2022.
[4] Commercial real estate market in India—growth, trends, covid-19 impact, and forecast (2022–2027), Mordor Intelligence, accessed on 22 February 2022.
[5] About GEM Rating, ASSOCHAM, accessed on 24 February 2022.
[6] India—the next datacenter hub, NASSCOM, February 2021, accessed on 23 February 2022.
[7] Indian real estate industry, Indian Brand Equity Foundation, 17 December 2021, accessed on 23 February 2022.
[8] India set for the rising techade as industry revenues soars past $200 billion, NASSCOM, 16 February 2022, accessed on 23 February 2022.
The author is Partner Risk Advisory and COO - India Global, KPMG in India