What is driving commercial real estate again?
After overcoming the hard blow of the last two years, the business real estate (CRE) segment is back in the accounts. All CRE segments, including office, retail, industrial, logistics and hospitality, are doing well now and are attracting increased investor interest. Considering a host of factors and based on data gathered by various research organizations, the prospects for the segment also look bright by any measure.
With prolonged office closures and the pandemic making working from home (WFH) the new way to work, new office space requirements have been severely impacted. According to a report by JLL India, new office space supply in seven major Indian cities fell by 30% to 36.34 million square feet in 2020 from 51.62 million square feet last year. last year. However, the recovery started last year itself and the uptake of Grade A office space is set to explode in 2022, with Delhi-NCR accounting for the majority of demand in this segment. In fact, gross office uptake in the six major cities has already tripled to 14.7 million square feet in the second quarter of 2022 compared to the same period last year, according to Colliers.
An additional factor that has driven the demand for more office space is the requirement to maintain a 5-6 foot distance between workstations in offices, in line with social distancing standards. In addition, general normalcy and the removal of most pandemic-related curbs have brought footfall back to pre-Covid levels at markets, malls and restaurants, leading to a significant increase in demand for these segments. Again, with new standards in place, developers are opting for retail spaces with contactless and voice-activated features to ensure the maximum security possible.
The recent growth of the coworking sector and an increased demand for data centers is another reason why the commercial sector is receiving a strong boost. A phenomenal increase in post-pandemic digital transactions has necessitated the establishment of data centers across the country with a steady increase in e-commerce activities, online education, data consumption and the gateway of payment. With this, the demand for data centers is expected to increase by 25-35% over the next two years according to reports, and this is obviously a big plus for the commercial segment.
Attributing the growth of the commercial segment largely to government initiatives, Akshay Taneja, MD, TDI Infratech Ltd, said, “The Make in India campaign coupled with reforms such as RERA and GST have been a boon to the industry. Despite their initial reluctance, developers and buyers are turning to the commercial real estate industry because of the industry’s transparency and competence. Overall economic growth also stimulates the demand for commercial goods.
According to the latest Outlook 2022 report from Knight Frank India, the commercial real estate sectors will experience stable and sustainable growth in 2022. Moreover, a joint report by Colliers and Qdesq indicates that office space absorption will cross 60 million square feet in the subway. and non-metropolitan cities by 2023. The lukewarm demand of the past two years has turned into an agile and flexible working model and this is driving the demand for commercial real estate. Large companies specializing in IT process management, e-commerce and consulting would be the main occupants.
As retail space offers much higher rental yields, investors are obviously more attracted to this segment. Attractive capital gain potential, recurring rental income and tangible nature of the sector have generated renewed interest on their part. Additionally, with the commercial real estate investment process becoming more stable, transparent and efficient with the advent of REITs, funding in the segment has become more diverse.
The investment of millennial NRI investors is of particular importance in this regard. According to a survey by MYRE Capital, 53% of NRI investors choose commercial real estate as their preferred investment vehicle over ETFs (21%) and mutual funds (19%), the average ticket size for a NRI being higher, at Rs 38 lakh, compared to a resident CRE investor.
LC Mittal, Director of Motia Developers, believes that the lockdown has offered innovative new concepts to the commercial real estate industry and increased demand for rental properties with great amenities. He said: “Commercial real estate is expected to grow over the next few months at a faster pace. The rental value and the capital value of commercial properties will increase in the market. The corporate world has begun to show active participation in expanding its businesses; and that’s a healthy omen for the commercial real estate industry.
“The commercial sector,” said Kunal Bhalla, co-founder and CEO of CRC Group, “has seen a massive turnaround following the multiple pro-business initiatives announced by the government.” “In addition, commercial assets, such as offices, stores, warehouses and other commercial properties, are considered the safest investments as they generate recurring rental income. This view was only reinforced after the pandemic and it will continue to drive investment in times to come,” he added.