IT/IteS holds the key for revival of commercial real estate in 2014

With the real estate industry's fortunes are closely tied to the economic situation, a Knight Frank Research report has predicted that the revival of commercial real estate (CRE) in the second half of 2014 would largely depend on the results of the upcoming Parliamentary elections and the performance of IT/IteS as the fractured result would further take the economy to uncertainty mode.

“Increased likelihood of a fractured mandate in the upcoming general elections will put a question mark on the chances of economic stewardship in H2 2014.  With the economic momentum having slowed down drastically from over 9% in three years preceding the global financial crisis period to an estimated 4.8% in the current financial year, employment and income growth have suffered a severe setback,” the research firm said in its recent report on commercial real estate in India.

Pointing out that the slowdown has impacted the revenue growth and profitability in industries that drive office space demand, the report further stated that, “With the slowdown in IT/ITeS, manufacturing, BFSI, telecom and media sectors the rate of employee addition has declined drastically thereby adversely impacting demand for office space. Such a scenario raises a question mark over the fate of several CRE projects that are either completed or under construction across the urban landscape of the country. If at all there is light at the end of the tunnel, it cannot be assessed without conducting a threadbare analysis of the present financial health and future prospects of industries that consume office space.”

The report also noted that IT/IteS, compared to other sectors, still has the lions share in the commercial real estate. In the six major cities -- Mumbai, NCR, Bengaluru, Chennai, Hyderabad and Pune -- the IT/ITeS has absorbed 52% of the total office space during the last four years till 2013. In other words, the growth prospect of IT/ITeS sector has direct impact on the growth of CRE.

Blaming the multiple offices led to an increase in administrative costs and a bloated wage bill that took away the cost advantage India enjoyed in the global IT/ITeS market, for that the 43% decline in the absorption of office space by the IT/IteS companies during FY11-13, the report asked the IT/IteS entrepreneurs ‘to rethink their strategy in order to protect margins and have a sustainable business model.’

The report also noted that austerity measures taken by IT/IteS companies to cut cost had an adverse impact on the commercial office space demand as companies preferred to operate from multiple locations to single location.

As for as manufacturing sector, the Knight Frank research report noted that a stable central government and an unambiguous policy framework would be the key catalysts for the resumption of investment in the sector.

On BFSI, which contributes 16 per cent of total absorption of commercial real estate spaces, the report hoped that the, “The issuance of banking licenses will encourage office space absorption in the BFSI stronghold of Mumbai and provide a significant buffer for its commercial office space market.”

Predicting that the commercial office space would clock the absorption to the tune of 35-36 mn.sq.ft.in 2014, the report said, “The absorption levels in the IT/ITeS sector would dominate other markets as the sector outlook has eased considerably. Among the IT/ITeS pack Pune and Chennai markets would witness the highest growth in office space absorption during 2014 while Bengaluru, which is the IT/ITeS capital of India, would see the highest quantum of office space absorbed. Mumbai and NCR, considered to be the prime real estate markets in India, are expected to grow at a steadier pace. Similarly the NCR office space market which has a healthy share of IT/ITeS and BFSI sectors is expected to grow at a conservative rate of 3.8% in 2014.”