Bengaluru, 26 July, 2018
- RICS India, in association with its knowledge partner Colliers International India released a report “Opportunities in a changing world: Making the most of an uncertain environment” at its Corporate Real Estate Conference, 2018 in Bengaluru. The report highlights the key changes in the business environment that are likely to impact CRE requirements and suggests strategies for occupiers and developers to harness the full potential of the opportunities derived from this change. The report also highlights the increased role of investors in changing business environment.
Colliers Research forecasts that commercial real estate is likely to dominate the real estate investment in coming years. The report mentioned that India witnessed investment transactions totalling to INR156 billion (USD2.4billion) in H1 2018, up 26% compared to H1 2017 (USD1.9billion). The commercial segment dominating with global players such as Blackstone, Brookfield, Xander, etc. remained bullish on investment in commercial real estate in H1 2018. With increasing investment, the CRE market has also started witnessing profound structural changes in the way commercial real estate is built, financed and managed. According to Colliers research the change in ownership from local developers to institutional investors and advent of REITs should lead to the institutionalisation of the CRE in the next three years.
According to Colliers Research, about 120 million sq ft (11.2 million sq m) of gross office absorption in the next three years. The demand is likely to be well supported by robust supply pipeline of about 124 million sq ft (11.5 million sq m) of office stock in major Indian cities.
“In 2018 and beyond, we believe the demand for office space will be led by technology, engineering, manufacturing, e-commerce, logistics and finance sectors, along with co-working operators. The growth in corporate real estate will however not be without its challenges. Change in global policies, protectionist trading positions taken by some countries and a resultant fluctuation in global growth are already affecting the way occupiers lease or buy office space. We have seen the emergence of co-working spaces in a big way. It represented about 8% of office space absorption in 2017 compared to the previous year's share of 3%. Technologies such as automation/artificial intelligence could replace traditional job roles in industries such as IT and BFSI. A loss in jobs and a change in the work culture are likely to have an impact on the way companies lease or buy office space,” said Nimish Gupta, Managing Director, RICS South Asia.
Despite the recent strong demand for office space, macroeconomic factors such as government policies, automation and AI have started significantly disrupting the Indian CRE market. CRE heads are increasingly focused on workspace efficiency and cost-effectiveness while keeping flexibility, collaboration, adaptive designs and employee retention in mind.
“Supported by a firm economy, we expect the office market to remain robust over the next three years, reflecting strong employment growth and economic reforms. However, we do not expect the absorption level to grow further since despite strong demand other factors such as the quest for workspace efficiency and the possible start of adoption of disruptive technologies such as Blockchain and Artificial Intelligence (AI) may hold down overall absorption volumes”, says Ritesh Sachdev, Senior Executive Director, Occupier Services at Colliers International India.
As per the report, the dynamism in the business environment will probably lead to uncertainty in real estate requirements. Both occupiers and developers need to work together to find optimal solutions that can create a win-win situation. The three factors driving the changes in today’s workplace requirements include:
01. AI to add uncertainty to future headcount and talent requirements
AI is likely to replace many routine and replicable jobs. One significant consequence of this will likely be reduced visibility over future headcounts and talent requirements especially in the financial sector, possible negative implication for Mumbai in particular. The older strategy of acquiring sizeable traditional office spaces may no longer work. As AI becomes more common in workplaces, uncertainty over headcount and space requirements will increase. Developers, as well as occupiers, will likely need to respond to the latest technological trends before the market forces them to do so.
02. The workforce is changing, and workspace requirements should follow
It is estimated that by 2025, millennials will represent 75% of the global workforce. We expect the rising millennial quotient in companies to influence the layout and design of office space, as millennial (Gen Y and Gen Z) staff are highly conversant with technology. To attract and retain talent, it is critical to provide innovative built environments in tune with the expectations of employees.
03. New government policies drive diversified business opportunities
In India, demand for Grade A office space has been traditionally driven by technology companies. The technology occupiers accounted for 56% of total office demand in 2017. Although, we expect office demand in India to remain driven by technology companies, the share of engineering and manufacturing companies to increase.
With the changing workplace requirements, the key to the future growth of any organisation lies in the practical implementation of advanced workplace strategies that are capable of driving the digital change and of ensuring value creation for businesses. As per Colliers International research, the occupiers should explore the following strategies to conquer business in the digital era even beyond millennial (Gen Y and Gen Z):
- Flexibility is the way ahead – Stay vigilant about the destructive side of flexibility
- Productivity directly correlated with a healthy environment – Adopt wellness strategies
- Increase amenities - Focus on technology
Flexibility, collaborative workspaces, workspace efficiency, employee retention and cost-effectiveness will likely be the key focus areas of CRE in 2018 and beyond. Thus, developers should focus on the following three key strategies to harness the opportunities derived by the millennial (Gen Y and Gen Z):
1. Add value to commercial portfolio
2. Be future proof - Adopt newer technologies and build efficiently
3. Last mile connectivity can be a differentiator
Amidst the changing business scenario and workplace environment, we have witnessed increased optimism for commercial real estate sector among investors. Building a high-quality premium commercial development requires expertise as well as a large capital investment. The limited availability of debt from domestic _financial institutions and banks has led developers to look for private investment in the form of debt as well as equity. Traditionally, most equity in commercial real estate was in the hands of local developers, but in the last two years well capitalised institutional investors have started acquiring premium Grade A assets and making strategic partnership with developers. The ownership and management of CRE is gradually shifting from the private developers to large sophisticated institutional entities. Colliers research forecasted REITs to be a game changer, bringing in professional management, data transparency and international standards to income-yielding commercial assets.
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