Office market soars across India, But is it good for investment?

The residential real estate market is explained in our article titled “Real Estate vs Mutual Funds”. This article is mainly focussed on the office/commercial real estate market.

Commercial/Office Market in India

The India office market has seen a dearth of supply in the recent past. The demand has been consistent over the years with a steady growth. This lead to low vacancy levels and upward pressure on rental income. The average rental values grew 3% YoY in 2017. The rental yields across India are in the range of 7-9%. The office market in India is predominantly occupied by IT/ITeS followed by manufacturing, banking, financial services and insurance (BFSI) and other services.

The recent trends show that IT/ITeS share of transactions has been weakening due to the macro headwinds in the form of a slowdown of spending as well as an inclination to insource by the USA and several European countries. With companies busy in restructuring their businesses with the implementation of GST, IT companies have paused their expansion plans and this lead to a further slowdown of transactions in the office market.

Others services sector is competing with IT in the share of transactions. Manufacturing and BFSI have a similar transaction share in the office market. Retail and e-commerce have also seen an increasing share in the office space market.

A new phenomenon of co-working has come into the limelight in Bangalore, Mumbai, Pune, and NCR region. This new concept in the market has experienced a significant growth in the recent years. It alone has 1.3 Mn sft office space in 2017.

The Office market in the top 7 cities of India

The office market for the top 7 cities has been analyzed below.


The new completions in Delhi have dropped 11% in 2017 and so did the transactions. With lesser supply, the rentals increased 4%. Major sectors that consisted of this year’s transactions are the other services followed by manufacturing. IT/ITeS and BFSI’s together consisted of only 21% of the transactions. The rentals in the prime locations namely, DLF Cyber City and Golf Course Road in Gurugram, and Noida – Greater Noida Expressway and Sector 62 in Noida witnessed a pressure on rentals due to limited supply.


The overall office transactions witnessed a 6% growth in 2017. Other services transactions witnessed a significant growth, mainly due to increase in co-working players. IT demand was led by bulk deals by big names. Manufacturing transactions fell mainly due to them restructuring their business to be GST complaint and went slow on expansion. The overall weighted average rent fell in Mumbai mainly due to the transaction composition being concentrated in a low price area. A higher vacancy was due to a higher supply this year.


Even though Chennai has seen an increase in the supply of office space, the lack of good and viable space lead to the fall in transactions by 12%. With the slowdown of IT sector, their transactions were limited to 25%, whereas other services contributed 38% of the office space transactions in Chennai. Manufacturing is still lagging behind with 16% of the transactions. The weighted average rentals stood at Rs 57/sft. The rentals increase 4.5% mainly due to the decline in vacancy and the lessor’s ambition to increase their real estate footprint in the city.


Though Bengaluru recorded 11.7 million sft leasing volume, the rate of growth in transactions remained only marginally higher at 3% over 2016. The new completions in the market fell by 15% this year leading to a drop in vacancies to 3%. IT/ITeS has retained its position in the office transactions followed by other services. The co-working market has contributed 6% to the overall transactions. Another major contributor to the transaction volume is the e-commerce (16%) space, where the big players like Amazon and Paypal leased large office space. The weighted average rental in Bangalore witnessed the highest growth of 9%.


A marginal fall (4%) in transactions has been witnessed in Hyderabad which was led by a fall in supply by 46%. Lack of good office space supply led to the fall in the transactions. This also led to a record low vacancy of 5%. IT/ITeS still remain a dominant part of the office transactions. They contribute 75% of the transactions followed by other services, manufacturing, and BFSI. Lack of vacant office stock coupled with steady demand has pushed the weighted average rentals in the Hyderabad office market to Rs 51 per sft per month, a growth of 9% YoY.


Ahmedabad witnessed a 53% increase in office space transactions. The major contributor being BFSI’s followed by other services. IT/ITeS is still in the nascent stage here. The high transaction growth can be attributed to good offices space with state of the art technology. The new completions grew by 75% this year. The double-digit vacancy is due to the infancy stage of the office market in this city when compared to metros like Mumbai and Bengaluru. The rental movement hasn’t gone up much due to excessive supply and less demand.


The decline in the new project completions in Pune was 17% this year. This didn’t affect the transactions which saw 18% growth. Pune seems to have a balanced growth in all the sectors when compared to the other cities. There is no dominance of one sector in the transactions of office space. IT/ITeS, BFSI, Other services, and manufacturing have 36%, 23%, 21% and 30% share in transactions this year. Lower supply led to falling in vacancy rates to 5.8%. Weighted average rental saw a marginal growth and currently is at Rs 63/sft/month.

Mutual Funds continue to remain the best investment product

Despite a growth in average rentals, the rental yield in India is around 7-9% which is much lower than an average return of mutual funds (12%). With new developments in the real estate market, in the form of REITs, one can now invest in commercial office space with a minimum investment of Rs 2,00,000. Regardless of the convenience to invest in real estate market, in the form of REITs, the future of REITs is still unknown in the India market. REITs are supposed to roll out anytime soon in the India market. One can only hope a good return from these. But as of now mutual funds still remain the best investment product in the Indian Market even for real estate investments. Check out the  Smart City & Infra Plan portfolio. The Smart City & Infra Plan portfolio invests in companies that will benefit most from Govt. spending on Infra. A Rs 5,000 SIP started 5 years (Rs 3,00,000) back would’ve reaped 20.20% return (Rs 4,96,000) by now.

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1 comment
  1. I am from Ahmedabad. and I can say that coworking spaces are coming in the picture when
    it comes to the corporate sector.

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