Anshuman Magazine, Chairman & CEO-India, South-East Asia, Middle East, Africa, CBRE
Despite a high intereste rate environment, macroeconomic challenges and global headwinds, real estate not just stood its ground but also gave a remarkable performance in 2023. While in commercial office segment, diversified sectoral demand maintained the leasing momentum, in retail, notwithstanding cautious stance of global retailers, market remained vibrant, largely driven by domestic retailers. In the residential segment , despite high interest regime, there was a spurt in sales, with both premium and luxury housing maintaining a strong momentum. Going forward in 2024, commercial real estate will continue to witness momentum with strong supply of investment grade office space and strong demand from both prime high streets and shopping centres amidst robust consumer demand. Like in 2023, residential sector will witness healthy demand in 2024, especially backed by Tier 2 cities. Amidst this positive scenario, investment inflows into real estate will remain steady, making it an investment-friendly asset class.
COMMERCIAL OFFICE:
Diversified sectoral demand maintained the leasing momentum
Despite the short-term disruptions and macroeconomic challenges, office leasing in India held ground with almost 42.2 million sq. ft. of leasing reported in Jan-Sep’23. While various sectors feed into this demand, the technology sector has long remained the backbone of office leasing in India. In the last decade, the average share of technology or IT/ITes led demand in overall leasing, typically been around the 35% mark, sometimes even crossing the 40% mark for cities such as Bangalore and Hyderabad. While the technology sector would continue to be a strong demand driver going forward, we have started witnessing increased demand from other key sectors such as BFSI, flexible spaces and Engineering & Manufacturing (E&M). This diversification, in many ways, has been and will be responsible for insulating the office sector from global headwinds, thereby helping India breach the 50 million sq. ft. gross leasing mark by the end of 2023.
Led by strong infrastructure spending by the government and healthy growth in home mortgage offtake, the BFSI sector has witnessed strong space take-up in the recent past. This growth is mainly led by global and domestic banks as well as financial institutions that are expanding their presence in the country, as more employees return to the office. Domestic banks expanded their services as they continue to digitise their capabilities, venturing into spheres such as digital lending and portfolio automation. At the same time, global banks and financial institutions expanded their global capability centres in India, buoyed by the availability of a deeply entrenched technology workforce.
Flexible workspaces are in high demand as organizations adapt to hybrid work and seek long-term value beyond the obvious short-term cost savings. The E&M sector has seen a fair amount of absorption mainly driven by the global supply chain realignment, the ‘China +1’ strategy and the government’s policy push for foreign manufacturers to setup their operations in India. Additionally, life sciences firms too have expanded across the top cities, driven by both domestic and global firms that leased large contiguous spaces for building their research and development capabilities.
Going forward, we expect this demand diversification trend to grow, thereby supporting the overall growth of the office sector. Along with this industry sector diversification, the office sector also witnessed widening of leases across cities, as Chennai, Pune, and Hyderabad saw significant improvement in office space take-up during January – September 2023. Chennai’s absorption grew by 48% to touch about 6.5 million sq. ft during this time, while Pune and Hyderabad’s space take-up increased by 36% and 35% to reach 5.1 million sq. ft. and 6.6 million sq. ft., respectively, during the same time period. Led by a steady influx of investment-grade supply and occupiers’ focus towards flight-to-quality, these cities continue to be on the corporates’ radar.
RETAIL:
Diverse demand drivers reshaped the landscape with domestic retailers taking the lead
Despite inflationary pressures and international retailers remaining cautious around expansionary decisions across most global economies, the retail market in India has remained vibrant. Retail demand during the period Jan-Sep’23 remained strong as leasing to the tune of almost 4.7 million sq. ft. was recorded during the period. Supply also remained robust as 3 million sq. ft of quality supply entered the market during the same period.
However, there has been a notable shift in leasing patterns across various categories compared to the pre-pandemic period. In terms of demand drivers, the post-pandemic years have started to witness a steady diversification in demand categories. While fashion and apparel continue to remain one of the top demand categories even post the pandemic, other segments such as departmental & homeware stores, entertainment zones and the luxury retail categories have gained greater traction compared to 2019. For instance, leasing demand from homeware and department stores rose from 9% in 2019 to 17% in Jan-Sep’23. Furthermore, the F&B sector has also witnessed growth in leasing, with its share increasing from 8% to 13% during the same period. This diversification reflects the evolving market dynamics and the changing preferences of consumers.
Pre-pandemic, most of the retail demand in India was driven by international retailers (with domestic retailers largely focussed on the F&B segment), with most international retailers focussing largely on the fashion & apparel segment. However, post-pandemic, there has been a trend reversal, with domestic retailers accounting for almost 75% of the overall leasing in Jan-Sep’23. Interestingly, this leasing is not limited to only the F&B segment, but spread across segments such as fashion and apparel, footwear, beauty, accessories, amongst others. Also, in terms of footprint, while Tier 1 cities continue to remain the gateway cities; there has been significant traction in the Tier II cities from a quality supply and demand perspective.
As the retail market in India matures, we expect that the demand pie for retail will only gain more colour as more international and domestic retailers make a beeline to tap into the growing consumer market in India. Retail leasing is expected to touch 5.5 – 6 mn sq. ft. in 2023, the highest level after the 2019 peak of 6.8 mn. sq. ft. It is estimated that supply would touch 6 mn. sq. ft. in 2023, the highest in the past five years.
INDUSTRIAL& LOGISTICS (I&L):
Demand from Third-Party Logistics (3PL) and Manufacturing players continued to fuel growth
3PL players dominated leasing in Jan-Sep’23 with a share of 45%, followed by engineering & manufacturing players. The demand for 3PL services stems from interlinked stakeholders across the supply chain, including wholesalers, retailers, and e-commerce players. These stakeholders have adopted a combination of ‘just in time’ and ‘just in case’ strategies to optimize their inventory storage and delivery capabilities and mitigate long lead times.
Consequently, occupiers with inefficient infrastructure are increasingly turning to 3PL providers to meet their storage and delivery requirements. By utilizing shared space with 3PL providers, occupiers can benefit from cost advantages through the consolidation of transport, distribution, and shared warehouse expenses. This cost-effective approach has led to a strong and continuous demand for 3PL services, which is expected to persist in the foreseeable future.
Moreover, in the past two years, there has been a notable surge in demand from engineering and manufacturing (E&M) players, largely attributed to government initiatives such as the Production Linked Incentive (PLI) scheme. These policy enablers have encouraged growth in the manufacturing sector, leading to increased demand for warehousing facilities within the E&M segments. The implementation of the PLI scheme has had a cascading effect, extending its impact to the auto and ancillary sector as well. As a result, the share of I&L absorption from the auto and ancillary sectors has risen from 3% in 2019 to 7% in Jan-Sep’23.
The I&L absorption would continue to be led by the 3PL and E&M sectors due to the continued adoption of ‘multipolar’ supply chain strategies by occupiers and the government’s pro-investment efforts. Consumer demand for FMCG, retail, electronics, and electrical products has intensified over the last few years. This heightened consumer demand has led these industries to reassess their warehousing and logistics strategies to meet evolving customer expectations. As a result, there is a growing need for efficient and streamlined warehousing and logistics solutions, which in turn has significantly contributed to the overall demand for warehousing within these sectors.
The Industrial and logistics sector is likely to touch a 5-year high absorption mark and touch 36 – 38 mn. sq. ft. in 2023 across the top 8 cities in India. Supply addition, too, is expected to outperform, touching 35 – 37 mn. sq. ft. by the year-end, driven by the completion of pent-up projects.
RESIDENTIAL:
High-interest regime remained a non-deterrent on sales
Despite anticipation around a lagged impact of monetary tightening, residential sales in Jan-Sep’23 exceeded the 230,000 units mark, registering a growth of 5% when compared to the same period last year. Sustained momentum in demand led developers to launch over 220,000 new housing units during Jan-Sep’23, marking a marginal growth of 1%. While mid-end housing continues to pillar overall residential demand, the traction in the premium/luxury category housing segment in 2023 has been noticeable.
The premium and luxury housing segment comprising units priced at INR 2 crores and above in India maintained strong sales momentum, registering a 70% Y-o-Y increase in the Jan-Sep’23 period. The trend is even more pronounced in certain cities such as Delhi-NCR and Mumbai, where the combined share of these categories in overall sales is around 20%. The premium and luxury segment has emerged as a sought-after investment avenue, particularly for HNIs and NRIs seeking to safeguard their investments amid global macroeconomic uncertainties. In fact, sales of only luxury units (priced upwards of INR 4 cr) during the Jan-Sep’23 grew by more than 75% when compared to the same period last year. This demand is supported by quality supply being launched by leading developers, who are launching projects across configurations such as independent floors, villas, and condominiums. Developers operating in this segment are not only tapping the demand for good-quality homes but are also in a position to strengthen their balance sheets via this self-liquidating, high-profit margin segment.
Amid transforming preferences, affordability will no longer be the sole decisive factor for homebuyers as health & safety, community living, sustainability, and integration of smart home technologies have also started to emerge as key factors in home purchase decisions. It is estimated that both sales and new launches could reach a ten-year high in 2023 and may exceed the 300,000-unit mark. Home buyers are expected to continue to display strong preferences for projects which offer enhanced accessibility to essential infrastructure, ancillary amenities and thoughtfully designed indoor and outdoor spaces – which will propel the demand for this segment going forward. Looking ahead into 2024, we anticipate that the homebuying sentiment witnessed in 2023 will persist.
REAL ESTATE INVESTMENTS:
Land investments stay robust as domestic developers take the lead
The land acquisition space has been buzzing with high interest, primarily from developers in the recent past. In 2023, out of the cumulative USD 5.1 billion inflows into the Indian real estate sector, 40% of the overall investment was committed for land acquisition. On a cumulative basis, nearly 7,700 acres of land have been acquired by developers and investors during the 2018-22 period. Evidently, the residential sector has been at the forefront of these commitments as its garnered a share of 83% out of the total USD 2 billion that was committed for land investments during Jan-Sep’23.
This land activity has been on the back of the strong momentum in housing sales over the past two years, thereby enabling developers to ride the wave. Another factor that has insulated the Indian real estate investment scenario from global headwinds has been the strong traction by domestic developers. While activity from North American investment funds slowed down, domestic developers have remained particularly active, with a share of 42% in overall investments in YTD 2023, followed by funds headquartered in Singapore and Japan.
In our opinion, compared to 2022, overall capital inflows are likely to taper in 2023 owing to delays in decision-making and a general sentiment of caution around capital deployment. However, we expect that opportunistic bets for the residential and I&L sector will continue to hold momentum, thereby lending support to land activity. While office will continue to remain the favoured sector, however the interest in alternate asset classes is likely to result in more allocations towards sectors such as data centres, mixed use assets and hospitality.
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