As work from home nears an end, commercial real estate is back with a bang. Should you invest?

Nakul Mathur, MD, Avanta India (3)

Authored by Nakul Mathur, MD, Avanta India

Indian commercial real estate is once gaining steam as offices are reopening. Most of the larger organizations are now either reopening or implementing back-to-office programs. This means a windfall for the office category that before the pandemic-triggered crisis, was one of the fastest-growing real estate segments.

The upbeat sentiments in commercial leasing in India were also underlined in the recent research by CBRE. As per the CBRE report, in Q2 2022, the total office leasing in major Indian metros reached 18.2 million Sq. Ft., jumping steeply by 61%, when compared to the previous quarter. The bounce back in the market has been led by Bangalore, followed by Delhi NCR and Hyderabad.

Over 80% of the leasing in India is run by mid-sized deals in the range of 10,000- 50,000 Sq. Ft. However, there has been a pickup in big-sized deals (over 100,000 Sq Ft) as well. Many major enterprises including but not limited to ABB, Google, Amazon, etc. have leased out large spaces in recent months.

There is a visible flight towards good-quality grade-A deals in prime locations. Interestingly, backed by a surge in demand, rental rates have also increased in certain pockets in Delhi NCR, Bangalore, Chennai, Pune, etc. In certain micro markets, the quarterly rates have increased up to 1.5%.

IT and technology companies are leading market drivers. Nevertheless, the demand is also emanating from other key segments such as engineering and manufacturing, shared spaces, BFSI, research and consulting, etc.

Hot Investment Pick

The office segment in India is once again a hot pick for the Indian investor fraternity. Though the housing market in India is believed to be more risk-free, the rental yields in the segment are low and mostly range between 2-3%. Co-living is emerging as an attractive category, but it is still a nascent market.

This further makes the office segment the go-to-market asset class for investors. By investing in Grade-A assets in prime locations, one can easily enjoy an elevated yield in the range of 6-7%. Moreover, the crypto boom is also waning while financial markets continue to be in the doldrums. This further makes investing in office spaces a lucrative deal.

In addition to investing in top-quality assets, the strata-sales market is also picking up fast. Office assets in general are very expensive, which limits investor activities. However, thanks to strata sales & leasing, investors with a bandwidth of INR 20-50 lacs can also own assets in prime properties.

Already the concept of strata investment is a popular concept in Asian economies such as Singapore, and Hong Kong. In the near future, India will join the league.

As the demand for shared offices or Flexi offices is growing fast, it is another category, where investors will bet big monies. Market experts believe that in the next 3-5 years, around 35% of the leasing will be led by shared spaces. Alongside SMBs and start-ups, large enterprises are also opting for shared/ Flexi spaces as a part of their strategy to contain costs and enjoy flexible leasing conditions. As the demand for shared spaces is bound to move upwards, investing in the segment can easily give a return to the tune of 8-10%.

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