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'India Is A Top Offshoring Destination Globally’: CBRE’s Anshuman Magazine On Real Estate Growth

Anshuman Magazine of CBRE explains the factors that are influencing the growth and expansion of commercial real estate market in India, post Covid.

By The Core Team
New Update
real estate

In the July-September quarter, office leasing in nine cities rose by 33% compared to the same period last year. According to a report by CB Richard Ellis (CBRE), a commercial real estate company, companies leased 15.8 million square feet of space during the July-September quarter, a 17 percent increase from the previous quarter, driven by more companies bringing employees back to the office. 

According to Anshuman Magazine, Chairman and CEO, India, South-East Asia, Middle East & Africa, for CBRE, the market for commercial real estate in India has been better than expected. While everywhere else globally, the office market has slowed down, as people are resorting to work from home, in India new office space is being added.

Magazine explained, “The big demand still comes from offshoring, outsourcing and we are seeing financial services being the most active and the financial services, not only banking but all other financial services you can think of which is happening, I would say that is the most active right now. We are also seeing activity in the pharma sector. Again, the scale is small but it is increasing. I think life sciences and pharma are two areas which are going to be very active going forward.”

As for international markets, reports indicated despondent projections in commercial real estate for the United States, especially in the office sector, which faces the greatest risk due to the widespread adoption of remote work after the pandemic. “One of the struggles which corporates are facing, especially in the US is to get people back to work. And in spite of everything else, people are really not coming back to work. I think two years of Covid has really changed the whole mindset of employees as well as expectations, and that certainly is having an impact on the office space. So not only the economies are slowing down but also employees are not coming back to work and that is causing the vacancy.”

For The Core Report’s weekend edition, Govindraj Ethiraj spoke to Magazine about the broad state of the commercial real estate market in India. They also discussed the factors that are influencing its growth and expansion, both from outside as well as within the country along with the the bigger trends that are being witnessed within the commercial estate. 


Here are edited excerpts from the interview: 

How are you seeing the market for commercial real estate right now?

The market for commercial real estate is better than expected. We had a great year as a country in office absorption last year and I was expecting with all the global gloom and doom on the economy front, some of the Western markets slowing down that there will be maybe some impact on India. But we are really fortunate that this year, the office market has been good and although there is still one quarter left and a lot of the space takeup happens in the last quarter but where we are today, I'm hoping that the leasing which will take place by corporate this year would be almost close to what we did last year, which is good news. Of course, we always talk about percentage increases but coming from Covid times and whatever else is happening, I think if we do that this will be a good year. 

So can I then ask you before we look at international comparisons, what is the total stock that we are at this point looking at in terms of real estate on offer both for sale as well as for leasing in India?

See sale is a difficult one because sale is still limited and I'll come to that a bit later. But what we closely track is office and majority of the corporates do not buy, they rent space because most of the companies want to be asset-light. Sale is happening at a real estate investment trusts (REIT) level now, so I'll talk about that bit later. But if you look at leasing, last year about 55-56 million square feet of space was taken up. And this year again we're keeping our fingers crossed that if we can be close to that, that itself will be an achievement because everywhere else globally, the office market has slowed down for obvious reasons which we can discuss. So we are hoping anywhere about 50 million plus will be leased this year. And if that happens, it will be one of the highest leasing or absorption of office space globally. I think there's a good chance that would happen. 

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So what's the stock available versus what has been leased at this point of time? Obviously, fresh stock is getting added all the time. But if you were to look at it today, what is the absorption or the utilisation versus what is on offer?

If we look at the supply you're talking about, every year in India, anywhere from 40 to 45 million square feet of new office space is being added on, and that is increasing the entire office supply we had. There was a time when India's entire office supply was very small. Today you ask a good question. What is the relevant supply where corporates are taking space? It is close to about 800 million sq ft, which if you look at it from one perspective, Tokyo and greater Tokyo has a billion square feet of office space. We as an entire country of 1.4 billion people, still have 800 million square feet of office space. So on one end, if you compare it to even Tokyo and one city of the greater Tokyo of a relatively small country, we are still less. But if you take it from another angle where we were some years back, it's a big jump in space. And a lot of this has come in the last 5-7 years. Before that, the market was less than half the size. So that is the supply. And the supply still continues because of what has happened in the market, there are two things why there is still construction happening in the office space. One is, of course, demand. India is still, I would say number one offshoring destination globally, especially for the US. And India has got a track record of delivering quality services at a competitive cost.  So all the large multinationals, as you know, do their offshoring. What has also added since last few years are the GCCs, which are opening up in India. Again, there's a lot of confidence in India and they are expanding. So the demand is good. 

And the other is that for the investors, REIT structure has provided the exit, which wasn't there before. So that's why you see large financial institutions like Blackstone, Brookfield, GIC are putting money in the real estate market, in the office market, because they can put a REIT structure and get an exit as well as their professional way of managing the asset. So these two are encouraging the supply of space and that's why we see 45 million plus square feet of new supply coming in, which is also kind of rare in these times anywhere else globally. 


Let me address a slightly larger trend, and you did mention international markets. The United States for example. A report said that projections are quite despondent, to put it mildly, and there is actually some predictions about a crash in commercial real estate in the United States. Now, part of that, I would imagine, is being driven by the way people are working. What are the factors that's driving expansion or absorption in India versus other countries?

I think that's a very relevant question because one of the struggles that corporates are facing, especially in the US. Is to get people back to work. And in spite of everything else, people are really not coming back to work. I think two years of Covid has really changed the whole mindset of employees as well as expectations, and that certainly is having an impact on the office space. So not only the economies are slowing down but also employees are not coming back to work and that is causing the vacancy. Europe next to it is slightly better but again similarly depending on different countries, generally speaking, employees are not coming back to work as many as they should. 

The only area, globally where there are employees coming back and in some countries at pre-Covid levels like India is Asia, and in India also leaving some of the exceptions, maybe some IT firms in most of the corporates, we are back at the pre-Covid levels as far as the occupancy is concerned. So no doubt the office space impact in the West is also because now they're struggling to get people back to work and the entire lifestyle question, work-life balance is in. Will they be able to improve the occupancy of office space going forward? We will know hopefully by next year because the question is will the power– is not the right word but I can't think of the word— shift from employee to employer or will it still remain with the employees? I think that question will be answered. Why I'm saying by the next six months, twelve months because that has quite a bit to do with how the economies are going to fare, especially in the West. 


It is an interesting tension point between the two. I mean in India for example, more companies are now pushing, particularly the big IT companies are now pushing or inching towards five-day weeks having moved to three-day weeks earlier. What are the other sectors that you're tracking within overall commercial real estate and what are the areas where you're seeing either trends or interesting developments?

Well, where there is a lot of activity is industrial and logistics. We're seeing a lot happening on the logistics side. Almost 80-90 million square feet of new spaces is expected to come in three years and of course the trigger point was Covid. which is it sort of triggered the e-commerce activity. So e-commerce still remains important. However, what is helping the demand also is an increase in manufacturing, increase in retail and of course now the entire supply chain management has changed. Especially after Covid inventory management has become even to the next level where it has become more efficient and also deliveries, thanks to e-commerce, after Covid, people want shorter time of delivery and closer to where the consumption is. So all that has led to logistics being one of the I would say fastest growing sectors in real estate right now. I think this trend will continue for some time because again if you look at the size of our country we are undersupplied. Although in one end you can look at these millions and millions of square feet which is coming in, which is unprecedented. And sometimes people, you may think that that's a lot, but then again, compared to our size, we are undersupplied. So I do see that trend continuing for some time in the logistics and industrial sector. And again, the institutions who are big players there now, so that does help in larger investments and at least money being there for construction and better quality of delivery of space. 

The other area, of course, is retail, which, as you know, during Covid struggled the most. But we have seen a recovery since last year. There is, as aspiration levels increase, as consumption or per capita income is slowly increasing. There is activity in retail, of course, there are certain segments within retail that are more active than others. For example, F&B, and entertainment, there is more activity in other fields. But overall, retail is showing activity. And we are seeing, if you think of… I'm just thinking of a trend, there are two trends I can think of on top of my hat, and both are important. One is that retailers are expanding to tier-2, and tier-3 towns. I think whatever the growth numbers you're seeing in retail right now, one major contributor is that retailers are going to tier-2, tier-3 towns. And the reason, of course, is that if they need to scale up, they need to go to tier-2 and tier-3 towns. Second is income levels have improved in these towns and aspiration levels, of course. And third is for retailers, again, they may be lower volume of sales, but there are higher margins because of the cost being less. So that's a clear trend. And again, as I mentioned, the growth we have seen since last year or a couple of years in retail is thanks to that trend of going to tier-2, tier-3 towns. The second is that there are more international players now looking at retail in India than they did in the past as consumption improves. 

I just thought of a third trend, which is that the Indian retailers are expanding. So in the past, we had not seen the Indian retailers being as aggressive as they are now in expansion. So put all of these three trends put together, there is activity. Although I must say it can be better than it is. But still, post Covid, there has been, I would say, a good recovery in retail.

Can you give us some examples of international firms who are moving more directly to tier two? And also you said Indian retail is expanding. So I'm assuming you mean companies like Jio or Reliance or Jio Retail and it's them. Or unless you're referring to someone else. And what's the pace of that at this point in time?

So it's not the international retailers that are directly going to… Just to think they are coming into India and a lot of them who are based in tier one cities are now looking at tier two cities because they've not, of course, one place.

But when you talk about Indian retailers, no doubt that Reliance is a big player. Tata is a big player. We see Birla. So all the top corporates are there who are expanding. And then some of the developers who are into retail, there are few of them besides Reliance is one of the biggest. But if you look at some of the other players who have taken franchisees for four or five different international brands, they're expanding. So they're domestic players, but technically, Indian brands would be people like Reliance and the Tatas and the Birla’s of this world who are expanding. And there are many others. These are the top, RP Goenka group also. So these are all expanding in India.

And you mentioned F&B. So were you referring to restaurants specifically? And if so, what sub-trends are you seeing? Or does your portfolio also include working with hospitality as in chains, hotel chains? Because that's an area where we are clearly seeing a lot of investment. 

Yes. So no doubt F&B, as the younger generation likes to go out, entertainment has become important, work-life balance. We've seen post-COVID, this whole trend of going out for entertainment and food and et cetera has increased. So certainly the F& B restaurants, microbreweries, beer bars, whatever, all of this food and thing is a big trend. And more and more you would see from food courts to high-end restaurants to mid-end restaurants, there's a big, big jump. And as you would notice now, several years back, even on a high-end, you had to go to five-star hotels. Not the case anymore. There are so many new restaurants opening, chefs, etc. I've never seen that before. So F&B is certainly one big trend. 

I also mentioned entertainment. Entertainment is not only multiplexes and movies, but these are gaming parlours, etc. which again, we are seeing quite a bit of trend where people want to go out and it's part of entertainment and that new players who are coming in. 

So you mentioned hotels. Yes, hotels. Since last four or five years, this year, we have seen quite a bit of inquiries, and interest in Indian hotels, for obvious reasons, because the occupancy levels have gone up. And in India, the hotels are doing well. So there is an expansion happening in hotels. We are finally seeing more interest. But there are challenges in India. It's not easy to trade in hotels in India. So a lot of the hotel expansion is greenfield, where people are looking at land and doing development. There are, of course lot of interest from international operators who will come in and as you know, the obvious names who have expanded. But companies like Taj also have been expanding quite a bit. The domestic players are quite active in India. I think at least for next 2-3 years, there will be quite a bit of activity in hotel rooms. But if you look at the actual and I don't have the exact number right now, but if you look at the number of rooms, which are added, relatively small. So the interest has improved. I feel that in next 2-4 years, there'll be lot of new rooms which will be added. But same if you look at our population and our size, the number of rooms which we are adding now is still, I would say is low compared to the size of our country. But it is going to accelerate going forward because the demand is quite robust.

So you talked about commercial real estate and leasing, you talked about logistics and industrial premises, you've talked about  F&B, retail and of course now hospitality. Between all of this, what's the sector that sort of in a way is tracking the economy in growth and what's perhaps maybe moving in a slightly different direction.

When you say tracking growth, are you talking within real estate? I mean, we are looking at the growth certainly within real estate, office, and industrial are the two areas or are you talking about business segments? 

No, from a business point of view, if I were to be investing…

So business point of view. First of all, again, coming to the office, the big demand still comes from offshoring, outsourcing and we are seeing financial services being the most active and the financial services, not only banking, but all other financial services you can think of which is happening, I would say that is the most active right now.

We are also seeing activity in the pharma sector. Again, the scale is small but increasing. I think life sciences and pharma are two areas that are going to be very active going forward. For example, a lot of international firms are setting up their labs here again at a relatively small level but have the potential to grow at a higher speed. So, yes, life sciences and pharma, healthcare, and financial services, come on top of my mind, which are quite active. Certainly. In India, we are so behind in every sector, I feel is active, but these two come to my mind immediately. 

So let me bring another aspect to this and I think you talked about this in the past as well, the ESG mandate and as I understood, almost 30% of new stock is ESG compliant one way or the other, or LEED certified. First of all, is that a correct number and what are you seeing the trends there and what's the kind of investment that's going in to make these new buildings or new premises more ESG friendly? Or rather, what are companies asking for? 

First of all, ESG certainly is at the forefront and we are seeing more and more developments that are coming in are ESG, so-called ESG compliant. And the reason for that is because the occupiers in India, especially for office space, as majority of them are large multinational companies, they are more, I guess, conscious. But even the Indian companies now are not behind and overall because a) global legislation, Indian legislation awareness, and occupiers demanding ESG compliance have led to most of the developments coming in are doing something the other with being a green building or being ESG compliant. And this trend is increasing. In fact, I had statistics that I think more than almost 60% of the new construction that is happening is going to be ESG compliant in some form or the other, which is a big number and this clearly shows that there's both push from the demand side as well as legislation. It's just that awareness all put together is pushing developers to be more ESG compliant. And this trend is here to stay. It's only going to increase. 

You asked another question. Investment. Very difficult to put an investment number, but no doubt more and more companies today and developers are following this, there's literally no choice. And sometimes when we are comparing buildings for large occupiers, certainly this is at forefront when you're ticking the box, the ESG box is really important. People want to reduce their carbon footprint and almost every company is committed to getting net zero, including us, CBRE. Everybody has got dates till 2047 to be net zero. So that's really making a big difference. And I think in India, even compared to many other countries in Asia, we are, I would say, more active or proactive in this area than I've seen some of the other countries. 


If I were to go back to a point that you made earlier, you said Tokyo as one city is about a billion sq ft and India is about 800 million sqft for the whole country, roughly for commercial/corporate real estate. Now, obviously, the opportunity is that we could have, let's say, in India, at least 800 million sqft across four cities, or if not five cities, what would it take to get there?

To get to a billion square feet... I think we will get there in the next maybe 3-4 years, which is not far, if not earlier. It depends. 

I meant one city, for example, Mumbai. Can it go to 800 million sqft? Can a Delhi, Bangalore, Chennai..?

Very difficult.  I think, very difficult. So the largest office market in India is Bangalore, which has crossed 200 million sqft. It's a bit more than that. No, I think, that's a stretch, to be honest. And we do not have that kind of a demand and scale. I'm waiting for India to touch one billion. That itself will be an achievement. And like I mentioned earlier, sometimes in India, we overstate things. So comparing this sort of tells us where we are still in the global perspective. But I also mentioned the flip side was when 30 years back, the entire office supply in India, the corporate gate was about 35-36 million. I actually started at that time in real estate. So for me, going from 35 to 800 million itself is a big achievement. But just to keep our feet to the ground, it's good to compare that: Look, we still have a long way to go.

So you're saying that to imagine, let's say, A, Mumbai having 800 million or Delhi, because obviously, we know what these cities are like and how they're built out. It's something tough to imagine and therefore no point projecting right now…

One of the ways is that we'll have to enhance our infrastructure significantly in these cities, because anywhere else in the world, unfortunately, does not happen as much in India. Before you build an office building, you have to do a traffic study for example. The developer is supposed to submit a traffic study and say, look, if you bring in this 200,000-square-foot building, what will it do to exit existing traffic? And then you have to do environmental studies. Now, in India, that does not happen. We already are cities are fairly congested. So you'll have to really enhance the infrastructure and we have to go vertical. So if we do these two things, of course, you need demand. But if we can get the infrastructure and go vertical, no doubt Bangalore and Mumbai have the potential to go up significantly as far as the office supply is concerned. 


As we look ahead, India is projected to become a 5 trillion economy in a few years, 10 trillion later, and so on. Which of the areas that we have discussed is going to really contribute to that bigger growth number or bigger growth effort? 

The services sector will, of course, continue to be the main contributor. And that's why I feel all the commercial real estate side will be big. However, one trend we talked about is manufacturing. I still feel if we have to really have proper growth, we cannot do without manufacturing. The good news is that finally, after so many years, we are seeing activity in the manufacturing sector, and this is only going to increase as consumption increases. But still, I feel the pace is not as much as it should be. China plus one (C+1), everybody talks about it. I also look after some of the other Asian countries like Vietnam, and Thailand, and when I look at the numbers, Vietnam, Thailand, and Cambodia of course, these three countries in particular are getting the maximum benefit of China plus one trend. And I just hope that we can sort of push and accelerate more to get that manufacturing bit in India. Again, definitely, there's been improvement, there's been progress and we clearly see on the ground more manufacturing companies looking at India than they have in the past. 

So the good news is that the trend has started and I think it should accelerate, especially if the per capita income improves. So manufacturing will be a major contributor, no doubt. But certainly, the services side is important. Some of the other smaller things will add up. For example, data centers are going to be important. Residential will continue to expand. Of course, there are always trends of residential slowing down and coming up. However residential is still the largest segment of the real estate market. Whole construction and residential have a multiplier impact on the economy. And I feel that if the interest rates don't move too much and if the economy remains stable, the residential market will be a major contributor to the economy.

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