Itslowdown, Demonetisation - Doublewhammyforrealestate: 11 Nov 2016, by Ketan Chaphalkar

ITSlowdown,Demonetisation
DoubleWhammyforRealEstate
11 Nov 2016 , by Ketan Chaphalkar
Finally as a buyer of real estate for residential purpose you are in the drivers seat. Avoid real estate for investments
and real estate stocks, especially the leveraged ones. Real estate company bonds are best left alone until spreads
spike sufficiently enough for the risk.
Real Estate sector is being hit by a double whammy of IT Sector slowodown and demonetisation. IT sector has been
growing in high double digit levels since the last two decades but is now witnessing a major slowdown as the whole
business of outsourcing is under question in a new age technology world. The high growth in IT sector has helped
both commercial and residential real estate across major IT hubs of Bangalore, Hyderabad, Pune, Goregaon,
Mumbai, Chennai and other smaller cities and towns. The slowdown in the IT sector will hit both commercial real
estate and residential real estate.
The demonetisation of Rs 500 and Rs 1000 notes will have a major impact on real estate transactions as a majority
of transactions have a black money component. Prices of real estate will fall sharply as cash is taken out of the
trasnaction. The thumb rule is that without a cash component, prices are quoted 25% to 50% lower by buyers.
IT & Real Estate
The S&P BSE Information Technology Index has declined 13% in the last one year as opposed to the S&P BSE
Sensex which rose 7% in the same time period.
Total hiring by the top four Indian IT companies in the September quarter was at 14,421 down 43% year on year and
24% in the first half of FY 2016-17 to a net of 29,686. The decline in hiring is mainly due to the slow pace of growth of
the companies. The decline in hiring is expected to slow down the leasing of commercial real estate by the
Information Technology and Information Technology enabled Services industry.
Mumbai, National Capital Region, Chennai, Hyderabad, Pune, Bangalore and Kolkata are the cities where
concentration of Information Technology industry is primarily seen in India.
There are two aspects to the growth in rentals for the mentioned cities. The rentals tend to increase if there is limited
supply and it tends to decrease if there is oversupply even though demand is moderate.
Non-IT developments continued to lead supply with a share of more than 40% of new space completed, followed by
IT buildings that accounted for a share of about 30%.
Office absorption witnessed sustained momentum with Grade A absorption totalling 9.6 million sq. ft. making it 28.26
million sq. ft. in the nine months ended October 2016. The absorption was 10.5 million in the third quarter and 30
million sq. ft. in the nine months ended October 2015 of last year indicating a slowdown. Start up and small sized
companies showed an increase in inclination towards serviced and co working space.
Mumbai
Leasing activity picked up across Mumbai micro-markets and a quarter on quarter increase of 54% was observed in
the third quarter of 2016 with gross leasing volume recorded at 1.09 million sq. ft. About 53% of this demand was
concentrated in western suburbs followed by Bandra Kurla Complex (BKC) 19% and Navi Mumbai 16%, CBD,
Central suburbs, Central Mumbai and Thane shared only 12% of the total demand.
Sector wise, BFSI companies drove the office demand with 30% share in leasing, engineering and manufacturing
came in next with 27%, other industries occupied 19%, while health and pharmaceuticals shared 14% of leasing
volume owing to one large deal. On the other hand, consulting and IT /ITeS sectors observed the least volume of 5%
each. Pharmaceutical sector reported the highest absorption of about 34% share, followed by BFSI 33%,
Manufacturing 10% and IT/ITeS 8% in the same time period last year. The share of IT/ITeS has come down to 5% in
the current quarter from 8% last year.
Delhi
Corporate leasing activity remained stable in third quarter of 2016 with total absorption recorded at 0.20 million sq ft
taking the YTD absorption to 0.63 million sq ft. Analogous with the past trends, leasing activity was driven by demand
from manufacturing and Banking, Financial Services and Insurance (BFSI)firms.
Sector wise, demand was driven by manufacturing firms with 60% share in leasing activity. BFSI firms comprised
20% of the office leasing pie followed by Media firms and pharmaceutical companies which contributed 11% and 6%
respectively.
Bengaluru
Overall office demand in third quarter of 2016 failed to keep pace with the previous quarter as about 2.27 million sq.
ft. gross leasing volume was recorded in Bengaluru. This was about 36% less than the last quarter.
Sector wise, Information Technology and Information Technology Enabled Services (IT-ITeS) constituted nearly 66%
of the total leasing volume. Banking Financial Services and Insurance (BFSI) and Healthcare accounted for only 4%
and 2% of total leasing volume respectively. 11 % was constituted by other sectors such as engineering, FMCG and
telecom.
Pune
A slight uptick in absorption was observed in the Pune commercial market since second quarter of 2016 with 0.9
million sq. ft., making it 2.74 million sq. ft. year to date. A big chunk of leasing activity was taken up by the IT-ITeS
sector in the July September quarter, amounting to around 68% of the total transaction volume. This was due to
one of largest deals this year by ZS Associates who signed up for 240,000 sq. ft. at Kharadi location. Engineering and
Manufacturing came in next with 18%, followed by BFSI with 8%, consulting and other industries with 3% each.
Engineering and manufacturing demand would tend to increase in the future owing to promising developments in the
automobile industry at peripheral locations such as Chakan and Ranjangaon.
Hyderabad
Healthy demand from occupiers in Information Technology and Information Technology Enabled Services (IT-ITeS)
segment took the gross leasing volume to 1.88 million sq. ft. in Q3 2016 totalling to about 5 million sq ft year to date.
Most of this demand was driven by IT-ITeS mainly due to some large ticket sized transactions concluded in the third
quarter of 2016. Almost half of this absorption was recorded in IT-SEZ spaces with an average deal size of 47,000 sq.
ft. Prominent leases in this quarter included a 580,000 sq. ft. lease by Google and 500,000 sq. ft. lease by Cognizant.
Conclusion
Mumbai and Delhi have clearly shown a trend of decline in the overall leasing from the Information Technology
industry. Bengaluru has shown decline in the pace of addition as compared to the April June 2016 quarter and on a
year on year basis.
Pune and Hyderabad have shown increase in the leasing activity primarily due to shortage in the supply of
commercial space. Shortage in the commercial space for leasing does indicate a slowdown as higher demand should
increase the supply.
Banking, financial services and insurance along with Healthcare, Pharmaceuticals, Manufacturing and Telecom have
seen increase in the demand for leasing.
As far as the information technology industry is concerned the hiring of employees and leasing of office space has
seen a slowdown and in the near future would see more decline if quarterly performance and guidance continues to
be dismal.

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