2016-17 will bring biggest fall in office space vacancy

Hyderabad

Showing faith in India's economic growth, corporate occupiers have been in expansion mode. Companies, especially in the e-commerce, telecom and healthcare sectors, have been snapping up office space across major cities. This expansion is also reflected by the decline in office vacancy levels across the country a trend that started in 2013. By 2015-end, cities such as Pune, Bangalore, Hyderabad and Chennai had a vacancy rate of just 5-12%.

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Vacancy in Bangalore has reduced from 16% in 2011 to 4% today. Chennai's vacancy has come down from 32% in 2010 to 12.5% today. Hyderabad has also seen its vacancy reduce from 17% in 2009 to less than 10% now. Similarly, in Pune, vacancy has reduced from 18% in previous years to 5% today. The sharpest fall in pan-India vacancy is expected between 2016 and 2017 when it will be slightly less than 13%.

India's office space absorption in 2015, at around 36 million sq ft, was the second highest after 2011. Leading this bull-run were cities like Bangalore, Hyderabad, Pune, Chennai. While the absorption in 2015 was similar to 2011, it was distributed across new and old buildings this time unlike 2011 when it was largely limited to newly completed buildings.

Also, while the demand in 2011 was due to lower rentals after the global financial crisis; in 2015, it was largely thanks to implementation of growth plans by corporates. Interestingly, in 2014, demand had surpassed supply for the first time since 2007. Moreover, the demand forecast looks strong in the medium-term.

As demand continues to pick up, occupiers will start taking up spaces in less ideal locations. Grade-B buildings in the good areas will also see good absorption.

Ramesh Nair – COO, Business and International Director, JLL India

Source - TOI 

Advantages of investing in commercial office space

Chennai - The commercial office space is an altogether different ball game. There are many advantages of investing in this space.

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This is by far one of the topics which investors need to get and focus on for someone who aims at creating value by investing into real estate assets. In India, more than 80 percent of the real estate activity that happens pertains to residential development.

Less than 20 percent of the realty activity that takes place consists of commercial development. Commercial development can typically mean Retail buildings, Malls, Office buildings, Warehouses Industrial buildings, Healthcare Hospitality, 'Mixed use' projects, where the property has a mix of retail or office and apartments.

There are evident reasons why retail investors do not flock into commercial investment but there are other advantages which emerge out of investing into commercial assets. We will in this section try and analyse only the advantages of investing into a commercial asset.

The key advantages are: 

Higher yields: While investing into residential assets can at best provide for a 3-4 percent per annum yield, investing into commercial assets can provide a return generally not lower than 6 percent, going by past trends. On the high side, the yields stretch to as high as 10-11 percent per annum.

Lesser maintenance spend: Whilst in residential buildings, the spend on maintenance and upkeep of the inside of the premises would mean a significant shell out to the landlord, on the commercial asset side, the tenants would volunteer and do an upkeep as it is important for them to keep the place to the best standards in their own interest. Typically it can be seen as a feature in retail spaces moreso than office buildings where renovation is less frequent than retail spaces. Retail spaces would need greater upkeep if they are to increase footfalls over time.

Valuation: Due to the higher yields and the nature of assets perse, commercial investments have a fairly higher valuation guidance as compared with residential buildings.

Longer leases: Commercial rents typically have investments into interiors coming in from the incumbent tenant which would safeguard the interest of the landlord to a greater extent in terms of predictability of lease. Even in cases where landlord invests or owns the interior after having purchased it from an earlier tenant, the lock in periods being defined would safeguard the interest of the landlord.

Leveraging: Leveraging on a commercial asset is by far one of the cheapest forms of leverage for a landlord and the end use of the leverage isn't restricted either giving more independence for deployment of the funds. Appreciation: Commercial assets tend to appreciate multifold than residential assets in a long run of holding period. This is typically by virtue of the building being able to attract many more investors given the stability of the lease and the quality of the tenant residing in the premises.

Depreciation advantages: Investing in and holding onto commercial real estate provides you a significant tax shelter through the depreciation of the building and improvements depending on the holding structure of the asset.

Provides a Superior Hedge Against Inflation: Commercial rentals provide better hedge against inflation as compared to residential rentals. This could be through the escalations that come in along with rentals while leases are signed and also the possibility of a deeper appreciation in rent while seeking a replacement tenant after a tenant has vacated the space.

Greater number of investors: While one may be able to attract multiple investors for residential assets, it needs to be noted that commercial rented assets have the possibility of attracting more number of investors easily, thereby increasing the chances of a healthy disposal process when the owner of the space intends disposing the commercial asset.

Source - TOI

In crowded Mumbai, open space gets huge premium

Realty developers maximize their plots development potential through various Floor Space Index incentive schemes in space-starved Mumbai. But only few understand that projects built on base FSI, which essentially lead to more open space and also strike a chord with consumers, are commanding 50-100 percent premium over the existing average price points in these localities.

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For Instance, current prices at BeauMonde Towers, built nearly a decade ago, in Prabhadevi, are around Rs 90,000 per sq ft, up more than 100 percent over the average rate in the locality. Prices at Parel's Ashoka Towers and Lower Parel's Ashford Casa Grande are 50-60 percent higher than current rates in these micro markets, showed data from research firm PropEquity. FSI refers to the permissible development potential on a plot of land. 

"The reason for such premium is quite simple. Mumbai has just 2.5 percent of area as public open spaces and amounts to only 1.95 sq meter per capital, much lower than global standards, and lower than even Delhi and Bangalore," said Ashutosh Limaye, Head - Research and Real Estate Intelligence Service, JLL India. The premium being paid clearly shows home buyer’s preference for a low density project offering exclusivity in the crowded Maximum City. And developers who are paying heed to this fact are receiving better response to their offerings.

"Higher FSI usage would compromise the project's exclusivity making it a very high-density development. Projects with 1.33 FSI would now be rare and heritage, therefore commanding much better preference by the customers. In a city like Mumbai, luxury in the true sense is open space,'" said Navin Makhija, MD, Wadhwa Group.

It is developing residential project W54 spread over two acres in Matunga with base FSI of 1.33. According to Makhija, the company has already sold over 60 percent of the apartments at W54, mainly because of 85 percent area being dedicated to recreational space.

Developers are also using base FSI to avoid any uncertainty that may occur due to policy decisions by authorities as experienced earlier in case of parking FSI scheme.

"From experience, I believe that incentive FSI schemes in Mumbai have, in the recent past, added undue risk on projects that have ultimately led to severe delays and uncertainty. Also, these incentive schemes would lead to multiple users that have competing requirements and dilute the project's exclusivity. For example, a single plot may have to accommodate high-end residences and public parking or slum rehabilitation/low income housing," said Adarsh Jatia, MD, Provenance Land, owner of Mumbai's Four Seasons Hotel.

Provenance is also using base FSI to develop Four Seasons branded private residences in Worli and the project on 1.5 acre will have only 26 residences in a 55-story tower.

Another developer Indiabulls Real Estate has also opted for base FSI for it’s over 10.5-acre project Indiabulls Blu at Worli for the same reasons, as it offers five acres of open space. According to a company's spokesperson, the project has the lowest density of 33 per acre.

In Delhi too, this holds true as projects with low density are fetching a premium.

"When I bought my apartment in the under-construction DLF Magnolia project in 2009, open space and low density were key reasons behind it. Apartments here are more than twice the money you pay for projects in the vicinity," said Sameer Jasuja, CEO, PropEquity, while highlighting large apartments in Magnolia are priced about Rs 16-17 crore against Rs 6-7 crore for similar flats in the locality.

There are many advantages for customers preferring a development with 1.33 FSI instead of 4 FSI, like open spaces, better planning, better socio class neighbours, exclusivity, privacy, low maintenance cost, fast elevators, etc.

Source - TOI