While the first quarter of 2023 started on a cautious note with a 19% year-on-year decline in office space leasing in the top six cities of India, the office sector continues to dominate institutional investment inflows attracting over 44 per cent of total investments in the last five years (2018-22), according to a new report released by property consultancy Colliers on Friday.
“Amidst global recalibrations of office space, markets like India continue to benefit due to lower costs with quality of assets, talent pool availability and increased institutionalised framework,” reasoned Piyush Gupta, managing director (capital markets & investment services) at Colliers, adding that institutional buyers remain bullish over the medium to long term as the underlying demand for office space remains strong.
Office occupancy levels across the top 6 cities in India currently stand at 84 per cent, well ahead of the 80 per cent average in Asia Pacific and 65 per cent in Europe. The said metric is hovering around 50 per cent in the world's largest office investment market - North America - with signs of improvements across key cities.
This divergence globally comes on the back of varying return-to-office approaches post the Covid-19 pandemic, underlying fundamentals of cities, ESG-compliance and market reaction to inflation and interest rates.
India in this backdrop remains a preferred market driven by growth opportunities in tier 1 and tier 2 cities, attractive and stable yields and strong demand in established markets, the report noted.
However, limited availability of quality office assets at attractive valuations comprises a pain point which has pushed investors towards creation of new platforms and joint ventures with developers for new projects across larger markets, it added.
The report warned of slower fund deployment in the short term amidst an uncertain and cautious environment, while maintaining that India’s economic resiliency, supportive government policies and an improving business environment will enable it to maintain its position as an attractive market in the long term.
The consultant expects market sentiment to recover as an expected peak of the interest rate cycle comes to fruition over the second half of 2023.
“As demand improves towards the latter part of the year, higher occupancy levels will likely push rentals northwards in 2024, which remained largely range bound for the last 2-3 years,” said Vimal Nadar, who is a senior director and heads research at Colliers India.