Net office absorption in Kolkata up by 82%

Commercial office supply in Kolkata during the first half of 2013 was recorded at one msf, which is in line with what has been witnessed in last five years, except for H1 2009 and H12011 when it was around 2.0 msf.

The net absorption during Q2 2013 was higher by around 82% on q-o-q basis as majority of the space was pre-committed by IT companies in IT Special Economic Zone developments in the peripheral location of Rajarhat. However, the H1 2013 absorption was still down by about 51% compared to corresponding period last year owing to the domestic and global slowdown that has resulted in occupiers adopting a cautious approach with regard to their expansion plans, says Cushman & Wakefield.

Consequently, though the number of enquiries has remained stable, the deal sizes have shrunk to an average range of 2,000-7,000 sf from 10,000-15,000 sf witnessed in the previous couple of years. 

Around 27% of the total net absorption during H1 2013 was recorded in Rajarhat, which was mainly pre-committed to in past couple of years in IT SEZ developments. During H1 2013, majority of the demand was seen emanating from IT/ITeS and BFSI sectors. However, the share of IT/ITeS sector has dropped substantially to 35% from an average of 90% witnessed in corresponding periods of past two years. 

This could be largely attributed to the slowdown in global IT demand and lack of pro-SEZ policies from the state government. Due to this several IT majors have even got their SEZs denotified. Meanwhile, there is an increase in demand BFSI and Telecom sectors as their share in the total net absorption during the H1 2013 have increased to 23% and 16% respectively from almost negligible share that was witnessed during the corresponding periods of past two years. 

Weighted average rentals have dropped between 0.2-3% on q-o-q basis across sub-markets. However, weighted average rentals in markets such as the CBD, Park Circus Connector and Rashbehari Connector are up by 1-9% in on y-o-y basis. 

Going forward, given the prevailing subdued economic conditions, the net absorption during H2 2013 is expected to remain range bound to around 500,000 sf as was witnessed during H1 2013, taking the total net absorption for the year to about 1.0 msf, slightly lower than the 1.2 msf net absorption recorded in 2012. However, post the general elections next year and in tune with an improvement in the overall economic scenario, we can expect the demand for office spaces to pick up and the net absorption to gradually climb up.

Huge supply of around 2.5 msf that is anticipated during the second half of 2013 would be largely concentrated in sub-markets of Salt Lake and CBD and is expected to push up the vacancy level in these sub-markets. This could further result in creating a downward pressure on rentals, especially in the Salt Lake micro market as it is already plagued with high vacancy at about 33%, recorded at the end of Q2 2013. Around 9.5 to 10.0 msf supply is expected to be infused in next 2-3 years. However, this may spill over to subsequent years as most of the developers have slowed the pace of construction considering the present demand-supply mismatch. 

Sanjay Dutt, Executive Managing Director, South Asia, Cushman & Wakefield, said “Commercial office sector activity in Kolkata is largely concentrated in the peripheral sub-markets of Salt Lake and Rajarhat. These two markets have been consistently contributing more than 80-90% in the overall supply and absorption since past couple of years. However, subdued economic conditions at domestic as well as at international level and the lack of pro-industry policies by the state government have contributed to weak demand, leading to a small decline in overall net absorption across sub-markets and increased vacancies across markets. 

This could put downward pressure on rentals, which would likely to give more negotiating/bargaining power to the occupiers. However, there are expectations that post the general elections next year, the economy will pick up on the whole and occupiers will become active once again. Many companies are still keen on expanding their operations within the city, given its strategic importance as the Gateway to East India and good human resource base and they are actively engaging with the State Government to convince it to provide a better business environment. ”

“To ensure a healthy growth of the office market in the city, the government and the city municipality should encourage redevelopment along with the plans of new business centres. The governing authorities can also incentivise developers to take up redevelopment projects especially in the areas of CBD and SBD which are still preferred locations for office as well as retail”, added Sanjay Dutt.