Finally as a buyer of real estate for residential purpose you are in the driver’s seat. Avoid real estate for investments and real estate stocks, especially the leveraged ones. Real estate company bonds are best left alone until spreads spike sufficiently enough for the risk.
Real Estate sector continues being hit by a double whammy of IT Sector slowdown and demonetisation. IT sector had been growing in high double digit levels since the last two decades but is now witnessing a major slowdown as the whole business of outsourcing is under question in a new age technology world. The high growth in IT sector has helped both commercial and residential real estate across major IT hubs of Bangalore, Hyderabad, Pune, Goregaon, Mumbai, Chennai and other smaller cities and towns. The slowdown in the IT sector would continue to hit both commercial real estate and residential real estate.
The demonetisation of Rs 500 and Rs 1000 notes continues to have a major impact on real estate transactions as a majority of transactions had a black money component.
The S&P BSE Information Technology Index has declined 12% in the last one year as opposed to the S&P BSE Sensex which rose 20% in the same time period.
Five mid-tier Indian IT services companies, which together employed 69,000 people (end-March numbers) and generated $2.5 billion in revenue in 2016-17, saw their aggregate workforce shrink as compared to last year, highlighting a situation created by a perfect storm of tough business conditions and increasing automation.
The decline in hiring is expected to slow down the leasing of commercial real estate by the Information Technology and Information Technology enabled Services industry.
Mumbai, National Capital Region, Chennai, Hyderabad, Pune, Bangalore and Kolkata are the cities where concentration of Information Technology industry is primarily seen in India.
There are two aspects to the growth in rentals for the mentioned cities. The rentals tend to increase if there is limited supply and it tends to decrease if there is oversupply even though demand is moderate.
Gross office take-up in India amounted to 9.3 million sq ft (863,998 sq m) in Q1 2017. The market also recorded about 2.5 million sq ft (232,258 sq m) of pre-commitments signifying healthy demand. Although Q1 leasing volume represents a 25% decline q-o-q, volume is up by 8% y-o-y. The technology sector continued to generate demand for office space across cities, representing 51% of the total take-up in Q1 2017, followed by engineering and manufacturing on 11% and banking, financial services and insurance on 9%. The Bengaluru (Bangalore) market maintained its top position across nine cities despite low vacancy and recorded an overwhelming share of 37% of total absorption. Mumbai and Delhi NCR1followed with shares of 18% and 17% respectively in total absorption. Chennai, Pune, Hyderabad and Kolkata accounted for 11%, 9%, 6% and 2% respectively in the overall leasing volume.
In Q1 2017, relocation transactions outnumbered expansions and new entrants, thereby dominating the office leasing market in Mumbai. With absorption of 1.7 million sq ft (157,935 sq m), the leasing market remained subdued in Q1 2017 recording a 10% decline q-o-q.
Traditionally dominated by the banking and financial services sector, the Mumbai commercial market experienced diverse new leasing activity in Q1 2017 with demand driven primarily by companies in the logistics, media, advertising, fast-moving consumer goods (FMCG) sectors and law firms.
Although banking and financial services usually account for a big share in Mumbai leasing, a major shift in leasing concentration was observed in Q1 2017. Companies in logistics, media, advertising, FMCG and law firms accounted for a 35% share in total leasing volume, while other demand drivers like engineering & manufacturing, technology firms, banking and financial services (BFSI) along with healthcare & pharmaceuticals recorded a 20%, 19%, 18% and 5% share respectively of the overall leasing volume.
The Western suburbs recorded a 37% share in leasing volume with occupiers’ preference concentrated in Andheri and Goregaon. Owing to the available Grade A stock, Central suburbs and Navi Mumbai recorded a 27% and 15% share of leasing; while other micro markets like Central Mumbai, Thane, BKC and CBD accounted for 21% share in absorption.
Corporate leasing activity remained relatively subdued in Q1 2017 with the gross absorption standing at only about 0.33 million sq ft (30,658 sq m), down by 15% q-o-q.
The Engineering and Technology sectors kept the market alive by contributing 34% and 26% share of overall leasing volume respectively. Contrary to the expectation, demand from Banking, Financial services and Insurance (BFSI) and the manufacturing sector remained subdued, together contributing only 14% of total leasing volume.
In Q1 2017, Bengaluru retained its top position in attracting overall occupier interest across nine key Indian cities. Driven by a handful of large transactions and numerous mid-sized space requirements (less than 100,000 sq ft), gross leasing volume was recorded at nearly 3.5 mn sq ft (326,900 sq m) with about 33% increase year on year (y-o-y).
Information Technology and Information Technology Enabled Services (IT-ITeS) sector’s share in the overall leasing volume remained at par with the previous quarter at 69% followed by flexible workspace operators (7%), healthcare (6%), media and telecom (4%) and other sectors (14%).
Absorption continues its downward trend primarily due to the inadequate supply of quality office space in the city. Absorption in Q1 2017 came down to 0.78 million sq ft (72853 sq m) from 1.29 million sq ft (119,845 sq m) in Q4 2016.
In the Pune market, the technology sector accounted for a primary share of 54%, followed by engineering & manufacturing (16%), consulting (14%), banking & financial services (7%) and healthcare (4%).
In the first quarter of 2017, gross leasing reached 0.51 million sq ft (48,800 sq m), which is at par with the previous quarter. In comparison to Q1 2016, this figure represents a 60% decrease.
Hyderabad’s commercial office sector remained in a healthy phase as large occupiers in the Information Technology and IT-ITeS segment continued expanding their footprint. Such expansion requirements led by occupiers trying to lock long-term leases has created an acute paucity of supply in the city restricting the leasing activity temporarily.
Mumbai, Hyderabad and Delhi have clearly shown a trend of decline in the overall leasing from the Information Technology industry.
Pune has shown increase in the leasing activity primarily due to shortage in the supply of commercial space. Shortage in the commercial space for leasing does indicate a slowdown as higher demand should increase the supply.
Banking, financial services and insurance has seen decrease while Healthcare, Pharmaceuticals, Manufacturing and Telecom have seen increase in the demand for leasing.
As far as the information technology industry is concerned the hiring of employees and leasing of office space has seen a slowdown and in the near future would see more decline if quarterly performance and guidance continues to be dismal.