Office Leasing Scales Historic Highs, Residential Sales Remain Stable: Knight Frank H2 Report

Trends in Bangalore Real Estate: Aerial shot of UB City, Bangalore

Given the latest growth forecasts for the Indian economy, one could be forgiven for feeling like every sector is struggling and experiencing a deceleration. The latest Knight Frank India Real Estate: H2 2019 report suggests that transactions in the Office space have experienced historic high whereas sales of homes have stayed resilient despite numerous sectoral and financial headwinds.

Pan-India Residential Market Remains Buoyant

Across India the residential fared surprisingly well. According to the Knight Frank report, YoY there were 23% growth in launches. Although there was a marginal 1% drop in sales in H2, overall sales grew by 1% during 2019. Even the QTS or Quarters to Sell improved to 8.9 in 2019 compared to 10.2 in 2018. The rigorous implementation of RERA and rationalisation of GST rates have served to keep customer sentiment buoyant. Whereas the setting up of an Alternative Investment Fund (AIF) aimed at providing developers with some financial relief towards unfinished and stressed projects has done much to help them align themselves to the new normal of India’s real estate sector. This can be seen from the increased volume of new launches.

Sector Performance Highlights:

  • Affordable housing has seen a small drop in share of transactions despite 60% residential launches happening in the affordable sector.
  • Weighted average prices in Mumbai, Pune and Chennai witnessed a drop by 2%, 3% and 5% YoY, respectively.
  • Moderating prices, government reforms and incentives have kept the residential market from stagnating.
Performance of MMR residential market. Source: Knight Frank report
Performance of MMR residential market. Source: Knight Frank report

Mixed year for Mumbai Residential Market

According to the report, in Mumbai launches decreased in H2, however for 2019 there was a steady 7% growth in launches thanks to a strong 22% in H1. Sales in H2 however were affected by the weak consumption demand led by the slowing economy and the lengthening shadows of the NBFC crisis which continue to present aftershocks. This has led to an annual decline of 5% in sales for 2019. The biggest highlight from a consumer perspective is the continued decline in prices in the MMR market. This shows a steady price correction to Rs. 7,014 per sq. ft. from a peak of Rs. 8,120 in 2016.

Sector Performance Highlights:

  • Average apartment sizes have shrunk by 25% over the last 5 years across the MMR market from 892 sq. ft. to 673.
  • 6% decline in launches in Mumbai during H2 – 35,988 compared to 43,822 in H1
  • Unsold inventory and QTS have increased over the last two years.
  • Thane market registered highest growth (36% YoY) of new launches 

Gulam Zia, Executive Director– Valuation & Advisory, Retail & Hospitality, Knight Frank India, said, “The residential sector in Mumbai was also impacted by the general slowdown as well as the continued effects of the credit crunch and NBFC crisis which has impacted end-user sentiments with sales declining by 14% YoY in H2 2019. We hope that the series of reforms that the government is undertaking would augur well for the revival of the economy as well as the real estate sector.”

Performance of Office Sector experiences all-time highs

Office leasing in 2019 touched a historic high of 60.6 msf thus recording a 27% YoY growth compared to 2018. This growth was witnessed despite the current economic slowdown. Bengaluru has seen the highest volume of office leasing in 2019 at 15.3 msf to top a decade of leading office leasing in the country. Hyderabad was not far behind at 12.8 msf.

Office leasing in 2019. Source: Knight Frank report
Office leasing in 2019. Source: Knight Frank report

While leasing by IT sector increased in H2 2019 the share of BSFI leasing reduced to 16% thus revealing the direct impact of the of the NBFC crisis. Meanwhile leasing by coworking businesses accounted for 12% of the total space at 4.1 msf in the same period, reveals the Knight Frank report.

Mumbai witnessed a historic year of leasing activity in 2019 touching 9.7 million sq. ft. and thus registering a 22% YoY growth. New supply of office space, however, declined by 18% YoY.

Shishir Baijal, Chairman and Managing Director, Knight Frank India tempered this high with sobering views, “The historic rise in the office transactions is a significant growth indicator for the office market as it represents the continued commitment of domestic and global corporations in the country’s growth potential despite the ongoing economic slowdown. While the office space is expected to sustain demand, increasing supply could weigh on rents and vacancy levels.”

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Provident Mega Online Home Fest
Provident Mega Online Home Fest
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Affordable Housing Keeps Residential Real Estate Performance Stable: Knight Frank

Knight Frank India released the 11th edition of its flagship half-yearly report on Indian real estate which presents a comprehensive analysis of the performance of both the residential and office markets across eight cities for the period January to June 2019. The highlight of this most-recent edition of the report has been the growth in affordable housing which has kept residential sales afloat despite a recovering market. On the office side the market has seen tremendous growth to reach an all-time high. The coworking segment has appropriated 15% of the share of this growth in office transaction volumes. Here are the quick highlights of the report:

Residential Performance Grows

Overall, the residential market performed well thanks to a stronger and more transparent regulatory environment. According to the report, launch of new units in H1 2019 rose by 21% YoY to 107,143 units while sales grew by a steady 4% YoY to 133,317 units. 51% of launches during H1 2019 occurred in the ticket sizes under INR 5 mn (INR 50 lakhs) and 78% under INR 10 mn (INR 1 Cr) thanks to developers’ focus on the affordable housing sector and lower ticket size offerings.

Residential Real Estate performance
Residential Real Estate performance (Source: Knight Frank)

While NCR and Kolkata saw a drop in unit launches, Hyderabad and Bengaluru grew by 47% and 34%, respectively. Prices have continued to stagnate and remained below the CPI across most markets. The weighted average prices in Mumbai, Pune and Chennai falling by a further 3%, 4% and 3% YoY, respectively.

In Mumbai, residential growth was mostly seen in the suburbs. Thane saw the largest quantum of new launches by some of the biggest corporates. The Peripheral Central Suburbs witnessed the highest sales growth in MMR of 9% YoY during H1 2019. Overall sales of housing units in Mumbai grew marginally by just 4%. Two factors affected the sales negatively – ambiguity around GST and the elections. In fact due to the ambiguity surrounding GST, most developers opted for the earlier GST regime with 12% ITC for on-going projects.

Gulam Zia, Executive Director– Valuation & Advisory, Retail & Hospitality said, “The mood of residential realty in Mumbai continues to be sombre and withdrawn. With more skeletons tumbling out of NBFC cupboards the shadows on Indian housing industry are getting longer. Affordable housing segment has emerged as a silver lining in these dark clouds.”

Office Market Performance Hits All-time High

The Indian office space sector reached a decadal high volume in supply and transactions in H1 2019. Office supply increased by 31% year-on-year (YoY) to 2.2 mn sq m (23.9 mn sq ft) in the current analysis period, the highest level achieved in this decade. Demand from the IT/ITeS (35%) and coworking (15%) segments have contributed heavily to the phenomenal growth of this sector.

Bengaluru achieved a historic high in transactions as well as supply during H1 2019 with transactions hitting 8.3 mn sq. m. while supply increased by over 100% at 7.6 mn sq. m. in H1 2019. Average rental values across the eight cities grew by 10% YoY during H1 2019 with Bengaluru topping at 13.5% YoY.

All India Office Market Performance
All India Office Market Performance (Source: Knight Frank)

Shishir Baijal, Chairman and Managing Director said, “The spurt in demand for higher end roles in the Artificial Intelligence and data security domains have led to a welcome and significant 59% YoY increase in demand from the IT/ITeS sector during H1 2019. Co-working spaces continue to drive transaction volumes and influence occupier demand”

In Mumbai, the transaction activity in the Mumbai Metropolitan Region (MMR) office market was strong at 0.43 mn sq m (4.6 mn sq ft) in H1 2019 thus registering a growth of 61% YoY. The Peripheral business district (PBD), Suburban business district (SBD) Central and SBD West were the three business districts which added supply in H1 2019. The SBD Central market particularly has been gaining traction, witnessing 143% YoY growth in transactions in H1 2019. Central Mumbai witnessed the highest rental growth of 6% YoY during H1 2019, followed by BKC at 5% YoY and SBD Central at 5% YoY.

Infrastructure Boosts Real Estate

The India Real Estate report also focused on the role of infrastructure in lifting living standards and thus boosting real estate markets. A number of infrastructure projects across the country have spurred construction activity in various micro markets. Some of these are Metro rail projects in Pune, Mumbai, Delhi-NCR, Bengaluru and Chennai, new roads such as the Mumbai coastal road, NPR and SPR in Delhi-NCR, new airports in Mumbai, Ahmedabad, 100 smart cities, industrial corridors and the very first bullet train project. The report states that if the Indian economy needs to grow from a USD $5 trillion economy to USD $5 trillion by 2025, then the government needs to increase its spending on infrastructure.

Bengaluru Trumps Mumbai in Uptick of Residential Market

It may seem as if the lean period in Indian real estate market could be turning the corner. Based on Knight Frank’s ninth edition of its flagship half-yearly report on Indian Real Estate for the period January-June 2018 (H1), the residential real estate market seems to be making a comeback from the slowdown caused due to ‘testing triplets’ of demonetisation, RERA and GST.

Knight Frank, an independent property consultant which routinely releases its analysis of the real estate markets around the world and India released this report on July 25th, a day when the Maratha Kranti Morcha called for a state and city wide bandh to protest farmer deaths in the Marathwada region. Most retail establishment across Mumbai were shut for the day and roads were remarkably empty for a city that experiences traffic jams all day. Thankfully the bandh was called off by evening so that people could get home safely. However, the scenario sums up the developmental issues our country and leading cities face, in the backdrop of which the positive news of renewed growth in real estate and its ancillary sectors is a much needed balm.

According to Knight Frank report which analyses the 8 cities of Ahmedabad, Bengaluru, Chennai, Hyderabad, Kolkata, Mumbai, NCR and Pune, there was a 46% YoY increase in units launched during the H1 period, while the increase in units sold was at 3% YoY in the same period. This marks the highest level of launches and sales in the last 18 months since demonetisation was rolled out at 124,000 and 92,000 units respectively.

Mumbai saw a staggering 128% YoY rise in residential launches, accounting for 40% of the total launches across the 8 cities covered in the report. However, the sales grew just 1% casting a shadow on positive sentiments. By contrast, Bengaluru saw a modest but very positive 11% rise in launches and even better 22% increase in sales of residential units. Other markets such as Pune, NCR and Hyderabad also saw a boost in the percentage increase of launches.

Report of Indian residential market
Report of Indian residential market (Source: Knight Frank report)

The key contributor to Mumbai seeing launches to the tune of 35,974 units is the dumping ground reprieve in BMC region and the parallel launches of mega projects in the peripheral suburbs of the financial capital. Dr. Samantak Das, Chief Economist and National Director – Research at Knight Frank noted, “Most developers focused on reducing apartment sizes of their new launches. Accordingly, we have seen shrinkage of 12% in apartment sizes across MMR, with some premium markets witnessing reduction of as high as 31%.”

Some of the key takeaways of the report were:

  • Mumbai saw the most number of launches at 128% YoY while NCR and Pune witnessed more than 75% growth.
  • Most launches were in the lower ticket size range wherein Bengaluru and Mumbai witnessed significant supply of units priced under INR 50 lakh and 1 crore, respectively.
  • Average size of units in MMR shrink by 12% between 2013 and 2018.
  • Mumbai, Pune and Kolkata saw prices of residential units drop by 9%, 8% and 8% respectively. The effective price drop was 10-15% after factoring in developers’ sops such as waiver of GST and stamp duty, and no floor rise cost to customers.
  • Despite growth in launches, government reforms and reduction in prices, sales continue to stagnate across markets. Bengaluru’s positive growth however prevents a pan-India decline in sales.
  • The growth-resistant state of the sector until now has also resulted in a higher Project Life Cycle (PLC) as the Quarters-to-sell (QTS) inventory remains stagnant at around 11.2 or 3 years.

Despite the encouraging numbers across most markets, the analysts at Knight Frank remained circumspect of the future growth of the sector owing to the continuing uncertainty in the market, high inflation and rising interest rates as well as the upcoming general elections.

Shishir Baijal, Chairman and MD, Knight Frank India wrapped up, “It could perhaps still be a rocky way ahead for the real estate industry and we all continue to look ahead for the impetus that is required for the industry to revive.”