Service Sector Growth Fuels Commercial Real Estate Boom
India's expanding service sector is significantly driving the demand for commercial real estate. Real estate research firms indicate that the service sector in India has experienced a substantial growth rate of 8.5%, leading to increased demand for commercial spaces. In 2011, the service sector occupied 70% of office space, a figure projected to rise further this year.
Key Industries Driving Demand
Information technology (IT) and IT-enabled services (ITES), along with banking and other financial services, including the insurance segment, are the primary occupiers of commercial real estate. Office space absorption has been notably higher in major Indian cities, including Bangalore, Hyderabad, Pune, Chennai, Mumbai, NCR-Delhi, and Kolkata.
Market Trends and Expert Insights
The first half of 2012 saw moderate demand for commercial real estate due to cautious expansion plans by office occupiers. However, Mr. Subash Bhola, Senior Manager of Research at JLL India (Jones Lang LaSalle India), asserts that a major slowdown in demand for office spaces is unlikely, citing the robust 8.5% growth of the service sector.
"There is no chance for any major slowdown in demand for office real estate spaces," stated Mr. Bhola. "The record growth of service sector at a pace of 8.5 % confirms this situation."
Although industrial production contraction, high interest rates, and elevated inflation levels have hampered GDP growth in the 2012 financial year, overall GDP has benefited from the service sector's 8.5% growth, according to Mr. Bhola. IT and ITES have grown at a considerable rate of 35%, while BFSI industries have grown by 16%. The demand for office space increased by 13% in 2011, a substantial increase from the 3.8% seen two years prior. These figures demonstrably illustrate the tight correlation between commercial real estate growth and the growth of the service sector.
Mr. Sanjay Dutt, South Asia Executive Managing Director at Cushman and Wakefield India, notes that the current situation is favorable for corporations due to the ample supply of available space. He emphasizes that this surplus supply helps stabilize prices and maintains affordability.
"[The situation] is very apt for the corporate world as there is sufficient space ready to be supplied," Mr. Dutt remarked. "[M]ore vacant space ready to be supplied keeps the price stable and within the limit of affordability."
Mr. Dutt identifies BFSI (Banks, Financial Services, and Insurance) as the primary driver of increased demand, while simultaneously acknowledging the significant demand for office space from the IT and ITES sectors.
City-Specific Absorption Rates
Cushman and Wakefield's research positions Mumbai as the leader in office space absorption, with 2.23 million sq. ft. absorbed in the third quarter of 2012—a 50% increase from the preceding quarter. Chennai and Bangalore closely followed with 1.32 million sq. ft. and 1.25 million sq. ft., respectively. Pune also demonstrated growth, while cities such as Hyderabad, Kolkata, and Ahmedabad experienced declines in office space absorption. Pune's total absorption reached 840,000 sq. ft., indicating a 38% increase from the prior year. The total absorption for 2012 shows a 6% rise compared to the last year. In summary, combined office space absorption across major Indian cities amounts to 7.78 million sq. ft.