The absorption of office space has remained surprisingly robust in 2011-2012, despite a downturn in GDP growth, although the prospects for 2012-13 paint a rather bleak picture.
Currently, the combined Grade-A office space across India's seven major cities—including Mumbai, the National Capital Region, Bangalore, Pune, Chennai, Hyderabad, and Kolkata—totals an impressive 389 million square feet. In the financial year 2010-11, these cities saw the construction of 38 million square feet of new office space, a slightly reduced figure of 37 million square feet was recorded in 2011-12.
Interestingly, the office space absorption numbers for 2011-12 were only marginally lower, by 2%, when compared to the prior financial year, even as GDP growth dipped from 8.4% to 6.9%. Contrary to widespread belief, 2011-12 was not a lackluster year for the office market in terms of space absorption. This healthy absorption rate led to a significant decline in vacancy levels, dropping to 21% by the end of Q4 2011-12 from a notably higher rate of 27% at the end of Q4 2009-10.
It's worth noting that the absorption landscape saw a shift; the contributions from the Banking and IT sectors have decreased, while the manufacturing sector displayed an upward trend, accounting for 19% of total absorption in 2011-12, a rise from 13% in the previous year. Projections estimate that the GDP growth rate for the services sector will be around 8.8% during 2012-13, outpacing the industry segment's anticipated growth of 6%.
Nevertheless, the forecasted absorption of office space for 2012-13 is expected to fall considerably compared to the previous two years. This decline poses a significant challenge for developers striving to sustain their current rental rates.
On a hopeful note, the recent action taken by the Reserve Bank of India (RBI) to cut both the repo and reverse repo rates by 50 basis points could potentially provide a necessary boost to the economy and positively impact the demand dynamics for office space in the forthcoming quarters.