Bengaluru, Mumbai, NCR Record Strong Office Rentals in Q1 2017

Office rentals in the cities of National Capital Region, Mumbai and Bengaluru will continue to outperform thanks to strong demand from office space occupiers, according to a recent RICS’ India Commercial Property Monitor. Bengaluru is in fact expected to do better than the other two cities.

RICS’ India Commercial Property Monitor is a quarterly guide to the trends in the commercial property investment and occupier markets. The guide is based on survey questionnaires sent out to RICS members over a month long period ending 10 July, 2017. Respondents were asked to compare conditions over the latest three months with the previous three months and give their views on the outlook.

Office rental forecasts over the next twelve months have been lowered slightly to 3.3% in Q2 from 3.5% in Q1 of 2017. This is due to a moderation in rent expectations for prime office space, though office rental forecasts are still seen up 6.3% over the next year.

“Strong economic growth is generating demand for office space.The last two years 2015 and 2016 have been quite good for the segment with pan India office vacancy at its lowest over 5 years. Vacancy levels in some cities such as Bengaluru, Chennai, Hyderabad and Pune is around 5-10%. On the supply side, there is a shortage of grade A office space. It is less than half of the current office stock across top eight cities at 280 million sq ft. The gap between demand and supply of good quality office space Is keeping office rentals strong,” said Sachin Sandhir, Global Managing Director-Emerging Business, RICS South Asia.

Retail properties in NCR are however expected to see significantly less rental value appreciation over the next year than their counterparts in Bengaluru and Mumbai. The Q2 2017 results show occupier demand continuing to rise in the office sector, while, similar to Q1, respondents reported virtually no change in demand across the industrial and retail segments over the quarter.

investor demand was flat in Q2 though investment enquiries for offices increased during the quarter. This trend was mirrored in the data on enquiries from foreign buyers. The supply of property for investment purposes was unchanged for the third consecutive quarter across all three market segments.

Respondents are modestly bullish on capital values over the next three months. However, this is mainly driven by the office segment as the outlook for the industrial and retail segments are flat over the next quarter. Respondents however do expect capital values to increase across all market segments over the next year.

When viewed at the city level, respondents revised capital value forecasts over the next year lower, particularly in Bangalore. Headline capital values are now seen increasing 3.9% over the next year after contributors forecast a 6.1% appreciation last quarter. However, this market is still seen outperforming Mumbai and the NCR where headline capital values are seen up 3.8% and 2.9% over the next twelve months, respectively.

The Occupier Sentiment Index inched higher to +7 from +6 in Q1. This slightly positive reading indicates marginally positive momentum in the occupier market.

The Investment Sentiment Index moderated slightly from +9 in Q1 to +6 in Q2. This is consistent with only modest overall momentum behind the investment market.