'Worst is Over' for India's Office Market

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Demand for office space in India is picking up after the market suffered along with the wider real estate sector and experienced a slump in prices, analysts say.

"Post the global financial crisis, the prices in markets like Mumbai have dropped around 35 to 40 percent and have bottomed out in most micro-markets, offering investors a good opportunity to buy into commercial real estate," said Ramesh Nair, the chief operating officer, business, at Jones Lang LaSalle India. "The demand for office space in India is likely to stand at around 200 million square feet over the next five years."

Demand for office space across India was 26 million square feet last year, while it is expected to reach 28 million square feet this year, Mr Nair said. 

The rental yield for commercial property was usually about 9 to 11 percent compared to a yield of about 2 to 3.5 percent for residential property, he added.

Knight Frank agreed that while conditions in the residential market were expected to continue to deteriorate, the worst seemed to be over in office market in cities including Mumbai.

"Contrary to the general view that Mumbai office market has been on a downtrend, we believe that it is resilient to further downfall," said Samantak Das, the chief economist and director of research and advisory services for Knight Frank India.

"Mumbai's office market is expected to close the year with transaction volumes to the tune of 6.4 million square feet which is a tad more than the 2012 figures."

The growing IT sector in India is playing a major role in demand for office space.

"The Mumbai office space market has more than matched absorption numbers for the first nine months this year compared to the same period in 2012," said Shishir Baijal, the chairman and managing director of Knight Frank India. "We expect 2013 to conclude marginally higher owing to the expansion activity in the export oriented IT/ITeS sector which will remain buoyant due to the now significantly healthier balance sheets of American and European companies."

Knight Frank noted demand for office space in the Delhi National Capital Region (NCR) had also fared relatively well. 

"The NCR office market has remained rock solid amidst economic woes," said Mr Baijal. "The fact that office space take-up during the first nine months of 2013 has marginally exceeded that of the same period in 2012 clearly indicates strong fundamentals in the NCR office market. Considering the current run rate of transactions and the level of pre-commitments, total absorption for the current year is likely to be in the range of 6.3 to 6.8 million square feet, which is commendable given the weak global and domestic economic scenario."

A report just released by CBRE revealed that Connaught Place in New Delhi was the seventh most expensive office market in the world, down two places from the last report issued in June.

JLL said that businesses were "likely to show greater confidence in terms of investing in their expansion plans" in the second half of next year. "This would result in increased office space absorption. Overall, it is reasonable to expect better growth in rental and capital values in 2014 as against the current year."