BANGALORE: The commercial real estate market is facing tough times, with office space absorption across India's seven largest cities dropping 12% quarter-on-quarter in the January-March 2012 period due to uncertain economic conditions coupled with the euro zone crisis.
The trend is likely to continue for the next few quarters, with absorption of office space expected to drop by 10-15 % for 2012 due to lower demand from the information technology sector.
Demand from IT/ITES sector has dropped from the peak of 68% in 2005 to 35% at present due to increasing cost pressures faced by these firms. Growth expectations of India's IT sector has been lukewarm so far, with software services exporters complaining of clients' delay in deciding on the technology spend. Compared to around 16% growth in year to March 2012, trade body Nasscom has forecast an 11-14 % growth rate for the year to March 2013. "Things are not as rosy as they were in 2010.
Most corporates are adopting a 'wait-and-watch' policy . The majority of demand in the first half of 2012 was spillover of work-in-progress deals from 2011. The demand thereafter will be influenced by the Indian economic performance and outlook of global markets," said Rohit Kumar, head of research, DTZ India, a real estate consultancy firm. Total commercial office space absorption for Q1 of this year was 7.4 million sq ft, representing a decrease of 12% q-o-q and 15% y-o-y. Vacancies across cities are expected to rise in 2013, except Bangalore," a recent report by DTZ India said.
Currently, demand for Grade A office space is driven by foreign companies from the US and European Union, which contribute a lion's share of lease transactions across major cities in the country. Demand for office space from the US-based companies have been stagnant; these companies have been contributing 48% of the total office space demand in the country, followed by India and European countries.
Larger IT firms such as Infosys and Wipro have projected negative to flattish growth in June ending quarter, and analysts expect at least another 1-2 quarters before the sector hits the growth track, depending on recovery in the US and Europe. "There has been no escalation in realty budget as companies look to reduce operating costs.
IT/ ITeS firms have reduced their real estate budget by 5-8 % this year as they wait for renewal of contract from clients before they can take on additional floor space," said Sridhar Raghavendra, founder of FM Zone India, a real estate and facility management firm representing IT/ITes firms.
Some of the companies, which are looking to occupy large space and are yet to sign deals, are Juniper Networks (500,000-700 ,000 sq ft), Intel (120,000 sq ft), Cyprus (200,000), Volvo (700,000 sq ft) and Eurospace (300,000-500 ,000 sq ft) "There are some larger commercial space requirements floating in the market, but no deals have concluded so far. Decision making by corporates have slowed down since fourth quarter of last year.
Companies are also staggering occupancy time line and do not want to occupy large space at one go," said Naveen Nandwani, director of property consulting firm Cushman & Wakefield at Bangalore.