The resurgence of Global Capability Centers (GCCs) has helped demand for Grade A office space to return. This has meant an improved rental trajectory for office asset owners who have recently been struggling with muted demand.
In a spillover effect of challenges facing the Indian IT sector, leasing has been battered as technology companies were top contributing tenants for Grade A offices until recently.
However, the tide is gradually turning in favor of commercial real estate. “Gross office take-up in CY23 rose by 15% year-on-year across the top eight cities resulting in absorption of 59.6 million sq ft,” said Viral Desai, senior managing director, occupier strategy and solutions, Knight Frank India.
On average, rents in the top eight cities improved by 5-7% in CY23 and Desai foresees rents increasing in the same range in CY24. This is likely to be driven by the growing share of GCCs in overall rental pie.
Higher traction in total leasing helped the performance of companies in the listed space. Aggregate gross rental of key listed firms rose to multi-quarter in Q3FY24. For Embassy Office Parks REIT, 80% of the total leasing demand in Q3 was driven by GCCs. For Brookfield India Real Estate Trust, GCCs accounted for 54% of new leasing.
“Over the past two years, higher exits, mainly from IT/ITeS companies have resulted in net leasing being negative; while exits have continued in Q3FY24, the pace seems to be slowing down. Consequently, net leasing has been positive for all major developers,” said a report by Nuvama Research.
Gross rent includes renovations, while net rent refers to new additions.
Encouragingly, management comments from listed REITs (Real Estate Investment Trusts) in Q3FY24 indicate that foreclosures have ended. Companies see this metric poised to go higher from here, albeit gradually. For example, Brookfield’s management has guided that by the end of FY25, its portfolio will improve to around 88% from 80% in Q3FY24.
In particular, the Grade A commercial office assets in India are cost-effective for GCCs, which are typically companies of foreign origin that set up their administrative operations and R&D activities in India. The availability of skilled workforce and favorable business environment are some additional advantages for GCCs in India.
In fact, the second half of CY23 in particular witnessed the highest GCC leasing since 2020, reaching 12.4 million sq ft, latest data from property consultancy Colliers India showed.
For CY23, the increase in GCC rental activity was 14%. By 2025, Colliers forecasts about 45-50 million square feet of GCC leasing activity, contributing to about 40% of the total demand for office space in India, it said in a statement on 21 February.
Another factor that is expected to boost office space demand is the recent special economic zone (SEZ) floor notification, which allows floor-renting. This is aimed at boosting occupancies for office spaces in IT/ITES SEZ parks and should lead to lower vacancies subsequently. While the benefits on the rents of the sector will be visible gradually, it is sentimentally positive at the moment, especially for listed companies. But apart from the demand trajectory, investors in listed REITs should also monitor the debt profile and borrowing costs as these companies expand their portfolios.
Meanwhile, the trend of returning to office adopted by Indian IT companies is accelerating, but unless the sector sees a significant revenue growth recovery, its share in the overall leasing of office space is expected to remain low. This could limit steep high-rise growth in occupancies and rents in the short term. Also, any economic downturn in the US or European Union could curb GCC demand for office space in India.