Bengaluru: Property developers are buying office space at a brisk pace and building new information technology parks and special economic zones, which is in sharp contrast to the freeze on launching residential projects.

The office space sector has seen steady growth amid a prolonged slowdown in India’s residential space due to tepid demand, rise in prices and unsold inventory.

Realty firms with office development portfolios are not only focusing on growing their business but in some cases also shifting focus from residential to rent-yielding office projects.

Blackstone Group Lp-backed Embassy Group has about 7.8 million sq. ft of new office space that will be launched across cities in the coming months. The Bengaluru-based firm is evaluating acquisition of commercial assets even as it has temporarily shelved the plan of listing its assets through a real estate investment trust (REIT).

In November, the Embassy Group entered into an agreement with Cornerstone Group to develop a 100-acre business park near Whitefield in Bengaluru. Embassy Cornerstone Business Park, with a development potential of 12 million sq. ft of office space, will be the Embassy Group’s fourth business park in the city, besides Embassy GolfLinks Business Park, Embassy Manyata Business Park and Embassy TechVillage.

“There are three projects in design stage that we plan to launch in Hyderabad next year. There are also projects planned in Pune and Chennai," said Mike Holland, chief executive, Embassy Office Parks. “We want to buy office assets, but where the product and price are appropriate, and which are not less than a million sq. ft."

For acquisitions, Holland said his company may take over projects where 80% has been built and then may have got stuck for some reason.

In contrast to the residential segment, where projects are lying unsold and demand remains weak, supply of quality office space is less than the rising demand from companies or occupiers. The demand is also pushing developers to move outside their core markets.

A lack of quality, ready space in key micro markets in big cities at a desirable price has led to many corporations holding out on their leasing plans, despite the overall sentiment for business remaining positive, according to a November report by property advisory Cushman and Wakefield India.

In July-September, pre-commitments for future supply saw a sharp rise of 75% year-on-year and was recorded at 4.7 million sq. ft, pushed by pre-commitments in Mumbai, the report said.

Hyderabad made an emphatic comeback with the highest net absorption at levels of 2.4 million sq ft, according to the report.

Backed by Qatar Investment Authority, RMZ Corp. is in the last leg to invest in two office parks for about 1200 crore—buy a 50% share in Equinox Business Park close to Mumbai’s business district Bandra-Kurla Complex (BKC) and fully buying out an IT park in Gurgaon from realty firm BPTP Ltd. RMZ will put in its own share of capital along with Qatar Investment’s equity share.

This apart, RMZ, a Bengaluru developer, is planning to substantially scale up its office portfolio and focus on it more than residential development.

The company has identified three land parcels in Pune and two in Hyderabad and will start two new projects in Chennai.

“The plan is to do an REIT listing sometime in 2017, either in India or outside by when we plan to a portfolio of 2 crore sq. ft of office space across the country," managing director Raj Menda said.

A situation of high demand but low supply has pushed up valuations of office assets.

Developers, unless backed by funds, are finding it tough to match the high prices of such assets, particularly when large funds such as Blackstone are in the fray.

“Since both funds and developers are actively chasing office assets, valuations are high. A lot of them are also taken, and whatever good if left is expensive," said Ravi Ahuja, executive director, Cushman and Wakefield India. “Prices in BKC, for example, were at 27,000 per sq. ft and have risen to 30,000 a sq. ft. It is expected to touch 30,000 a sq. ft in the next two years."

“We plan to launch new space in Navi Mumbai and Chennai. We are interested to buy but often, a much higher value gets paid by funds," said Vinod Rohira, managing director, commercial real estate & REIT, Raheja Corp.

The newest entrant in the commercial real estate space is Tata Realty and Infrastructure Ltd (TRIL), a subsidiary of Tata Sons Ltd, and its new investor partner, Standard Chartered Private Equity, who have committed to invest 2,600 crore to build commercial office projects over the next four years and eventually list the assets through a real estate investment trust (REIT).

Blackstone’s other partner, Panchshil Realty Ltd, is planning to build about 4 million sq. ft of IT SEZ space and another 4 million sq. ft of non-SEZ office space in Pune.

About half of this 8 million sq. ft is in partnership with Blackstone and the rest will be developed by Panchshil on its own, said chairman and chief executive Atul Chordia. Among these projects is a 2 million sq. ft development near Hinjewadi, which Panchshil had stopped in 2010 due to oversupply in the area. The project is now being restarted.

Firms such as TRIL and K. Raheja Corp. are also bidding for land parcels to build office assets.

The largest office transaction in the coming year will be DLF Ltd’s partial sale of its rental portfolio, talks for which have already begun.

“Until now, we have seen funds completely buying out 100% stake in office projects, but now we are likely to see part monetization where the developer wants to retain a share of the asset where there is further value creation by associating with a large investor," said Shashank Jain, partner, transaction services, PricewaterhouseCoopers India, a consultancy firm.