The Indian Commercial Real Estate sector is one that is rapidly expanding. With this in mind, it is essential to understand where the industry stands today and what to expect in 2023.
However, before we look at the year ahead, here’s a quick recap of how commercial real estate in India fared in 2022.
Commercial Real Estate: Key Highlights 2022
Here’s a segment-wise overview of commercial real estate investments in 2022:
Office Space Investments: The segment performed very well in 2022, with record office leasing as total leasing surpassed 50 mn sq ft. The leasing was driven by pent-up demand from the previous two (pandemic ) years and a general recovery in demand.
Notably, per a study, in 2022, tech firms saw a slight decline in space take-up while healthcare, manufacturing, healthcare, and flex were major drivers of office demand.
Retail: Per a report, during 2022, retail leasing rose by 21% Y-o-Y touching 4.7 million sq. ft., supported by a spurt in footfall, sales, and the discontinuation of rent concessions. These conditions reinforced retail expansion plans and the significance of brick-and-mortar retail formats nationwide.
- Bangalore and Delhi-NCR jointly accounted for more than 60% of the annual and half-yearly leasing.
- Bangalore and Pune were the main contributors to supply addition.
- Fashion & apparel, homeware & department stores, hypermarkets, and F&B players dominated leasing.
Warehousing & Light Manufacturing: India’s warehousing sector switched to the fast lane in H1 2022, backed by a steady post-pandemic recovery while garnering traction from domestic and global institutional investors. Furthermore, in 2022:
- According to Dr Samantak Das, JLL, this sector was projected to cross 40 mn sq. ft in space demand, the highest ever.
- Institutional developers and investors showed significant interest in India’s warehousing market, resulting in fresh supply, particularly Grade A space.
- Upward rent corrections were observed after being stable for the last three years.
Notably, 2022 also saw ESG becoming a critical real estate parameter with users and occupiers, pushing for increased sustainability certifications and procurement of green power in both - commercial and warehousing - sectors.
The Road Ahead - Commercial Real Estate in 2023
Notwithstanding the prevailing economic concerns, in 2022, the real estate sector performed well and witnessed improved traction.
The year 2023 started on a note of caution, with prospects of a looming global recession and a slowdown in some sectors. So let's take a closer look at studies about how the office and industrial real estate markets across the country are likely to perform in the coming year.
1. Office Space: During 2023, the spate of retrenchments in the tech space and cautious demand for commercial real estate in the face of a looming global recession is expected to impact the overall traction.
Some notable trends include:
- Flex Spaces: Due to the layoffs, 2023 may experience a further slowdown in demand from the tech sector - especially for traditional office spaces. However, the share of demand by tech companies in flex spaces is expected to increase.
- Hybrid Work Spaces: While this model gathered pace in 2022, occupiers will focus on policies in 2023 to further define hybrid arrangements and see the workforce coming to the office for 2-3 days a week.
- Upgradations: In the six leading cities, namely Delhi-NCR, Mumbai, Pune, Hyderabad, Bengaluru, and Chennai, there are about 120 mn sq ft Grade A office buildings that can be refurbished. This could result in improved employee productivity and other intangible benefits.
- Micro-markets: Prominent micro-markets in the six main cities, for example, BKC, Andheri (Mumbai), and Whitefield (Bengaluru), will continue to witness growth thanks to their robust ecosystem, which is preferred by large corporations.
- Green Properties: ESG considerations will play a more significant role in influencing space decisions. In fact, by 2025-2030, listed developers plan to boost their green portfolio by about 25% and increase the usage of renewable energy.
- About 58 mn sq ft of further green Grade A spaces have either received pre-certifications or are being discussed for green certification, which is expected to enter the Pune, Hyderabad, and Delhi-NCR office markets.
- In general, during 2023, green financing is expected to impact investment decisions and drive investment opportunities as domestic and offshore investors seek good quality, sustainable, ESG-compliant Grade A projects.
- Preference for Core Office Assets: Office assets continue to be a main attraction for investors, especially in the case of global funds.
- While investors explore alternate asset classes to diversify portfolios through high-yielding alternate assets, including data centres and life sciences, recessionary fears will restrict these high-risk investments.
- Others: Demand for office space will also be fuelled by improved connectivity, quality office stock, and other catalysts.
2. Industrial Spaces: Upcoming policies like the DESH Bill and National Logistics Policy will provide momentum to the sector. Based on the study, in terms of industrial spaces, trends to look forward to are:
- Development Hubs: The DESH Bill aims to establish development hubs to boost WTO-compliant domestic manufacturing. With attractive incentives for attracting a wide range of companies to operate in such hubs in newer regions, more companies will likely seek out industrial spaces in and around these hubs.
- Demand from Electronics and Engineering Sectors: The market from 3PL companies during 2023 is expected to stay intact. However, as consumption levels rise and supply chain bottlenecks reduce, real estate demand from the engineering and electronics business is expected to increase.
- The 2023 budget announced incentives for manufacturing batteries for Electric Vehicles (EV). This is expected to boost battery manufacturing in 2023. There’ll likely be a significant land requirement in the next few years to build factories for manufacturing batteries.
- Decentralisation of China as a Manufacturing Base: The growing emphasis on the ‘China plus one’ strategy will encourage global companies to relocate some of their manufacturing to India, creating an ideal opportunity for real estate investors to explore industrial spaces.
3. Warehousing: Some critical trends in warehousing for 2023 that emerged from the study are summarised below:
- Dark stores/Micro-warehouses: As the demand for speedy deliveries rises and quick commerce (q-commerce) players move closer to end users, the need for storage facilities for in-city small fulfilment centres has grown.
- These fulfilment centres take up about 3-5 times less space than typical warehouses.
- As the number of dark stores increases, the scale of operations will increase, consequently fueling demand for hub warehouses.
- Investment-led Development: Over the last few years, global investors have increasingly begun partnering with Indian developers for new Grade A industrial developments.
- These newer, state-of-the-art warehousing structures with AI and IoT-enabled monitoring and management systems will transform the structures into on-demand warehousing centres.
- About $2 bn worth of platform deals were announced in 2022. Over the next few years, these funds will be used to develop greenfield assets /brownfield projects.
- Rise in Rents: According to another study, in 2023, rents for warehousing & light manufacturing will likely continue to increase at ~4-5% y-o-y growth rate.
- Specialized manufacturing sectors, 3PL, and retail businesses seeking technical facilities will fuel the growing demand.
4. Retail Spaces: The country’s retail sector witnessed strong demand in 2022; per studies, the prospects seem buoyant too. Here are some quick snapshots of the study of the retail sector realty.
- 2023 Mall Supply: Around 10 million sq. ft is anticipated to become operational; 25 new malls are entering the market across Delhi-NCR, Mumbai, Pune, Bangalore, Hyderabad, and Kolkata.
- Leasing Demand: F&B, electronics, accessories, jewellery, casual clothing, athleisure, formal wear, and beauty and cosmetics are experiencing increased demand.
- Institutional Investment: With upcoming quality supply and established developers announcing new malls, the retail sector is expected to attract more institutional investment.
- Vacancy Polarisation: Superior-grade shopping malls are in high demand as retailers seek prime retail spaces with high footfalls.
- The vacancy in high-end malls is lower and in the single digits compared to good and average-quality malls.
- Retailers and consumers are expected to continue showing a preference for high-end malls.
- Evolving Allocation: F&B space allocation in some shopping malls has increased to 25-30%, up from the pre-pandemic 12-15%, and is expected to continue being a vital part of mall development.
- Mall developers and retailers are proactively enhancing customer experience through technology upgrades and innovations.
- Occupancy by Global Brands: With global retailers and popular F&B brands entering India, Indian shopping malls are implementing a brand mix to house international brands.
- 2023-25 Mall Supply: Around 60 shopping malls spanning a total retail space of 23.25 million sq. ft are anticipated to become operational during this period across India’s top seven cities. Delhi-NCR and Bengaluru will be the leading contributors, commanding a 53% share in the upcoming supply.
5. Real estate investment trusts (REITs): REITs have provided unitholders stable returns ranging between 6-7%, thus. Their performance and success for office market assets have also enabled a solid basis for other asset classes.
- Players in the industrial sector have begun amalgamating portfolios with an eye on Industrial REITs, influenced by expansion activity in this segment.
- India’s first public issue of retail REIT is expected to hit the markets in H1 2023.
How Strata Can Help You
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