NEW DELHI -- Commercial property consultant Neeraj Mahajan, who works in the upscale Delhi suburb of Gurgaon, says his phones are busy once again after a five-year slowdown in India's office property market.
"Demand is growing, especially from overseas investors, who are bottom fishing, and fresh construction is happening away from central business districts for affordable office space," he said.
There were several reasons for the slump in the commercial property market. The first was the bursting of a speculative bubble. Investors were able to put down just 30% of the selling price when buying offices, often "flipping" them within two or three years for returns as high as 100%.
Delays in completions and a drying up of liquidity between 2009 and 2011 slowed demand and led to the bubble bursting. This coincided with weaker economic growth and a reduction in private and foreign direct investment. Retailers were reluctant to buy commercial space while prices remained high in prime locations such as Gurgaon.
But the commercial property market is now reviving, with investors becoming bullish. "There couldn't be a better time for them to regain a strong foothold in the sector," said Anuj Puri, chairman of JLL, a real estate consultancy.
The risks of property investments have been reduced with the introduction of tighter regulations on property transactions and a ban on the use of substitute names to hide ownership. The planned introduction of a goods and services tax is also driving black market funds out of the sector.
Another advantage for investors is that the growing debt burden of India's listed developers increased to 832 billion rupees ($12.26 billion) in 2015 from 252 billion over the last decade, encouraging price cuts designed to raise funds.
The November decision by Prime Minister Narendra Modi to withdraw all 500 rupee and 1,000 rupee currency notes from circulation, known in India as "demonetization," is seen as having a direct impact on the real estate sector because investing in property was a popular way of hiding funds from taxation. The move is likely to reduce cash inflows into the sector, encouraging lower prices.
"There are many long-term benefits for the country and ultimately foreign investors from the demonetization, since there may be a downward correction in some property segments over the next six to nine months," said George McKay, South Asia director for office and logistics services at Colliers International, a property consultancy.
"Smart investors should look at this as a buying opportunity," he said, noting that the most attractive places to invest are Bangalore and the Delhi area, followed by Mumbai, Hyderabad and Chennai.
High prices had earlier depressed demand. A good office property typically cost about $80 to $100 per square foot, meaning that a 1,000 sq. ft. office (about 93 sq. meters) cost at least $80,000 -- too high for many retailers.
Property investment is also being made more affordable by a 2014 decision to allow the listing of real estate investment trusts on India's stock markets. Commercial REIT space in the top seven cites is estimated at between 200 million and 300 million sq. ft., according to CBRE, a real estate consultancy, and a positive response among small investors to REIT listings could expand this market.
Another emerging trend is the acquisition of older existing properties, the so-called absorption rate. These properties had been ignored by buyers but are now selling at big discounts. Anshuman Magazine, chairman of India & Southeast Asia for CBRE, said, "2015 was a record year for India's office real estate, with the segment witnessing the highest ever annual office absorption. 2016, too, has witnessed record levels, with third quarter absorption of prime office space hitting a 10-quarter high of 11 million sq. ft."
This reflects the fact that India continues to be a key outsourcing location among global firms. APG, a Netherlands-based property group, partnered with Xander, a London-based property investor, to invest $450 million in November in approximately 3.5 million sq. ft. of property in three outsourcing centers in Bangalore, Surat and Chennai. The funds will be used for existing properties and new construction.
Bangalore was also named as a major target for property investment in a recent forecast by the Urban Land Institute and PwC, a consultancy. John Fitzgerald, chief executive of ULI Asia Pacific, said, "Bangalore is not only the center of India's outsourcing industry, it also is its foremost technology base.
"That combination has created huge demand for new office space and take-up continues to be strong. One foreign fund manager active in that market told us his fund was seeing 15%-20% rental growth there annually, which has a knock-on effect on capital values. Going forward, demand from technology companies, whether startups or otherwise, will probably be the main driver for the office market."
Rajeev Talwar, chief executive of DLF, a major realtor, said the commercial property sector has benefitted from "record foreign investments into the country." Talwar added: "The unsold capacity that was evident between 2009 and 2012 has been absorbed.
"In major cities, such as Delhi and Bangalore, prices have seen a 20% upward move for office space. Pre-leased properties are seeing block deals, and going forward there is robust interest among foreign investors to consolidate their commercial real estate holdings in India."
Hiranandani, an Indian property development group, recently sold 4 million sq. ft. of office space to Brookfield of Canada for an estimated $1 billion. The Brookfield investment in the Powai suburb of Mumbai is pre-leased and has seen a 14% rent appreciation over the past year, according to local property consultants.
KKR, the private equity fund, has invested $3 billion in commercial real estate in the last year. KKR's investments include a township development in Bangalore with a large part devoted to office space. KKR also set up a finance company in 2015 focused on investing in Indian real estate.
GIC, the Singapore sovereign fund, has committed about $1 billion in commercial properties across India, including a $100 million investment in a business park in Mumbai in December 2015. Chinese investors are also looking at Indian office space, with Dalian Wanda reportedly looking to develop an entire city in the state of Haryana, which borders Delhi.
This megadeal has a projected total investment of $10 billion over a decade. But the group has asked for special tax relief, which has not yet been granted by the Indian government, delaying the project. Fosun International is reportedly planning a $1 billion fund for investment in Indian office space.