Bright days ahead for commercial real estate

Mumbai: Although the residential realty market was wobbly in 2016, the commercial assets were on firmer ground.

Real estate consultant JLL India’s pegs the demand for office space at a healthy 34.2 million square feet (mn.sq.ft.). This is slightly lower than the year-ago period’s 36.6 mn.sq.ft, which mirrored a strong rebound from the long-drawn lull in demand for office space. Lower off take in 2016 is attributed to the lack of quality office spaces.

Meanwhile, the outlook for 2017 is likely to be robust too with demand from manufacturing, logistics and consumer goods besides the information technology and outsourcing sectors. A paradigm shift in commercial space leasing is likely to boost demand, as firms that historically bought space prefer leasing to accommodate changing needs.

Higher use of technology has made jobs more process drive and less manpower driven. This means a $1 billion revenue growth would need only 20,000 people as against 35,000 at present that in turn would limit need for space.

Yet, economic revival will keep demand for office space high and 2017 too is likely to witness limited supply growth (see table). Realty firms may gain as lease rentals will be robust. Analysts are expecting a 5-10% jump in lease rentals in the forthcoming year too with Pune, Delhi and Hyderabad leading recovery.

Realty developers like DLF Ltd, Prestige Estates and Developers Ltd and Oberoi Realty have demonstrated that the cash flows accrued mainly from commercial real estate in the last four quarters.

Meanwhile, for large pan-India players, residential business may take a few more quarters to generate strong cash flows. And the impact of demonetisation that has kept buyers in abeyance may lead to a temporary blip in sales. Little wonder therefore that the BSE Realty index fell sharply in comparison to the benchmark BSE Sensex on fears that demonetisation will hit this sector more severely compared to the rest.