‘Commercial realty market in a sweet spot’

The commercial real estate market has had a good year with demand outstripping supply. As of now, it is expected that the trend will continue into 2019 and prices will remain firm in select markets, says Rajat Gupta, Managing Director — Advisory & Transaction Services, India, CBRE.

Gupta, recently in Kolkata to attend a CII seminar, spoke to BusinessLine on the outlook for 2019, expected price movement and the impact of GST on commercial real estate. Excepts:

How has the year 2018 played out for commercial real estate?

This year (2018) has been a good year for commercial real estate. The seven large cities — Delhi, Mumbai, Bengaluru, Hyderabad, Chennai, Pune and NCR — are expected to report around 42 million square feet of absorption; which is expected to be an all-time high. The incremental supply this year will hit a high of 30 million square feet. So demand outstrips supply. This is also a reason why most preferred office micro-markets in the country have seen an increase in rentals.

Pension funds, international developers and private equities have all taken an interest in the market, and lot of foreign capital has come in.

What is the outlook for the coming year?

Until and unless there are some unforeseen events globally, we expect the demand to hold up.

Among the seven cities, Bengaluru had the highest absorption in 2018 and we expect its strong run to continue. Hyderabad has been an outperformer in terms of both occupied demand and the quantum of supply coming in. The NCR, especially Gurgaon, has been a strong market.

So why is the supply of commercial real estate falling short of the demand, especially over the last few years?

Launches have been slow on the residential front but not so much on the office side.

I believe this slowdown in supply (in commercial real estate) is a result of combination of factors. Our FSI (floor space index) norms are much lower compared with what prevail globally. In the same parcel of land elsewhere, a developer can build something which is twice or thrice the size of what he could put up here. Barring Hyderabad which has unlimited FSI, most cities in India have lower norms.

Second, the pace of construction hasn’t changed over the years. If you were taking 30 months (to complete a construction) around 10 years ago, developers now are taking 24 months. So the level of mechanisation and technology adoption is still not high. We are still a man-power oriented construction industry. So the pace (of construction) which could have gone up leading to shrinkage in timelines has not happened to that extent. Some of it is happening at a much slower pace.

Does this mean that prices will remain firm in 2019?

In the micro-markets where there will be a huge demand-supply gap, the rise will be higher.

Will investments by pension funds or private equities continue into commercial real estate?

India is a safe market and returns are among the highest here. They all see a fantastic opportunity to cater to their clients in their respective markets. Of the 40-odd million square feet of take-up, nearly three-fourths are by multinational firms.

As long as they perceive India to be a politically stable destination and that their capital does not face any policy risk, I don’t see any reason why investments would not come in.

How has the regulatory environment, particularly GST, played out for commercial real estate?

GST has been a game-changer for the logistics industry, which was a highly disorganised sector before the tax. Previously, there were small land-owners who would set up a shed and that was our warehouse. Post GST, whether it is domestic developer or an international one or investors, they are talking about logistics, investing in the sector, and building new-age warehouses that go well beyond the tin-sheds. Corporates are consolidating and e-commerce is expanding its footprint in a big way. And we are strapped for quality warehouse space.

For the commercial real estate, it has been business as usual post GST.