Office Leasing, Rents Drop In First Half Of 2021, Says Savills India

Leasing activity across six major cities during the first half of 2021dragged to six year low

Residential and commercial towers are seen through and reflected on an office building in the Lower Parel area of Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Residential and commercial towers are seen through and reflected on an office building in the Lower Parel area of Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Rents and leasing activity fell in India’s top office markets in the first half of 2021 over the same period last year as the Covid-19 pandemic’s second wave disrupted the economy.

Leasing activity in six major cities fell to the lowest in six years during the same period, according to the real estate advisory Savills India. Office space absorption, it said in its half-yearly report “India Market Watch Office”, dropped 38% year-on-year to 10.9 million square feet.

That came as occupiers paused expansion and resumed portfolio optimisation plans, the report, which studied Bengaluru, Chennai, Hyderabad, Mumbai, Delhi-NCR and Pune, said.

India’s commercial real estate thrived prior to the pandemic even as housing suffered because of an overnight cash ban, a strict real estate regulation act and a credit crunch. Investors bet on demand for office space, driven by demand from information technology firms, startups and data centres. The slowdown-proof corner, however, couldn’t escape the pandemic's disruption, and decline in occupancy came even prior to the devastating second wave of the virus.

Businesses started picking up this year but the second wave and subsequent lockdowns forced most organisations to reinstate their work from home policy, dampening overall sentiment of the office market, according to Anurag Mathur, chief executive of Savills India. But he expects this phase to be temporary.

“Amid the crisis, we continued to see few large lease deals being signed up in some of the key markets earlier this year,” he said. “And now with the advent of a strong vaccination drive across the country and India’s office market being fundamentally driven by a booming IT sector, I’m hopeful that we will be able to come back on the earlier growth track sooner than later.”

Information technology occupiers continue to lead demand followed by BFSI segment, the report said. While the IT sector has increased absorption and holds 51% share, their combined share of approximately 63% is same as in the first half of 2020.

Key Highlights

  • Bengaluru, Delhi-NCR and Mumbai constituted around 69% of total leasing activity in the first half of 2021 across top cities.

  • Bengaluru continued to lead with 4.1 mn sqft of leasing activity representing 37% share in the first six months of the year, followed by Delhi-NCR at 2 mn sqft, dropping 37% over a year ago.

  • While Mumbai and Hyderabad shared the third place with approximately 1.4 mn sqft absorption, the annual decline in leasing was sharper for Hyderabad at 46% compared to 39% for Mumbai.

  • Leasing activity for Pune and Chennai stood at 0.9 mn sqft and 1.1 mn sqft, respectively.

Rents Decline

Rents have fallen, on average, by around 6% over last year, the report said, with few exceptions. “A few micro markets have seen a sharper decline as landlords exhibited flexibility to attract new clients, while prime locations with limited availabilities saw stable rents. NCR submarkets saw softening of rents among other markets."

The first half of 2021 has been shaped by the second wave of the pandemic, much against the optimism of initial few weeks, Arvind Nandan, managing director (research and consulting) Savills India, said. “However, despite the slow market during the second quarter and a noticeable annual decline, we estimate that the second half could show some improvement, as vaccinations pick up and occupier confidence returns.”

New Completions Rise

New completions increased marginally by 4% year-on-year to about 18.0 mn sqft, with Bengaluru, Hyderabad, Mumbai and Pune witnessing a rise in new completions compared to the same period last year as deferred supply got completed.

“Bangalore has recorded the highest infusion of new supply constituting a 36% share, followed by Hyderabad and Delhi NCR at 28% and 22% shares, respectively,” it said.

Vacancies Up

Overall vacancy levels increased to 16.2% at the end of June, as supply addition exceeded the pace of leasing activity, the report said.

“Also, some occupiers optimised their real estate portfolios to an efficient space, spiking vacancy rates in select markets,” Savills India said. “It should be noted that this can be a temporary phenomena in markets which are in a state of flux.”

Large Deals Continue

Sizeable consolidations and expansions have contributed to the share of large deals—exceeding 100,000 sqft—in the first half of 2021, accounting for about 43.2% of the overall pie, while mid-sized occupiers leasing stood at 27.7%, the report said.

Bengaluru witnessed the highest share of large deals at 51%, followed by Delhi-NCR and Hyderabad.

The report said, small-sized occupiers, with spaces less than 25,000 sqft, continued to optimise their portfolios that resulted in 27.7% share of the total office leases in the reported period.