Soaring capital values, rentals and imminent REITs launch induce visible focus realignment
For many years, most Indian developers’ portfolios were dominated by residential projects, and many dedicated only a minuscule percentage to the office asset class. Reasons for this preference included:
• The larger investments needed in office projects for as long as the developer wanted to lease them out compared to residential projects, where regular sales generated the required cash flow.
• Reduced office demand due to a slower economy until a few years ago
• The relatively-easy availability of funding for residential projects thanks to investors
Given the above circumstances, developers naturally preferred residential projects over commercial. However, in the last few years as the economy picked up pace and companies went bullish on their commercial real estate demand as well as expansion plans, capital values of commercial spaces appreciated faster than residential.
As the Real Estate Regulation & Development Act (RERA) kicks in, many developers are now shifting their strategy towards building more office projects. Also, with real estate investment trusts (REITs) set to launch in India this year, developers realize that this asset class can also continue to give them better dividends in the future, and that they can capitalize on capital value appreciation when they exit.
Resultantly, the focus is changing to either having more office projects in portfolios – or, as is the case with a select few developers, change focus from residential to commercial. For example, recent media reports pointed out how a Bengaluru-based developer that had focused largely on residential projects so far is moving heavily into commercial real estate development with plans to develop Grade A office space of about 5 mn sft in the next couple of years.
Given the low office supply vis-à-vis demand in the IT and technology hubs of Bengaluru, Hyderabad and Pune, developers are finding these markets very lucrative. In Delhi-NCR too, a couple of developers who are better known for their residential projects have now ventured into commercial realty. The financial capital of Mumbai is not left behind in this trend, and several developers have shifted their sights to building and leasing out office space in order to cater to the soaring demand.
Premium developers in Mumbai’s crowded residential space have been reportedly drawing up big expansion plans to increase their office footprints. Even the largest developer (by sales) in India is planning to develop a significantly high volume of office space – apart from a retail development in Mumbai and a big warehousing/ logistics facility (factoring in the post-GST demand surge) over the next five years.
The trend is also visible by looking at the forecast office space supply through 2019 and then through 2021. At a pan-India level, total stock of the country is forecast to reach about 600 mn sft by end-2019 from 480 mn sft (as of 1Q2017). It is expected to reach about 660 mn sft through 2021. This number could see a further hike as a lot of new office projects are announced during 2017-18 and get constructed through 2021.