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Global uncertainty, tech disruptions may hit IT firms’ office space demand in 2017

LiveMint logoLiveMint 28-03-2017 Bidya Sapam

Mumbai: Real estate requirements from software firms—the biggest occupiers of commercial office buildings in emerging markets like India— slowed down in 2016 and may further get impacted this year due to global uncertainty and growing technological disruptions, said the top executive of global consultant JLL Inc.

In an interview with Mint, Christian Ulbrich, global chief executive officer (CEO) and president, JLL, said office space needs of technology and outsourcing firms—especially in terms of software development—slowed down last year. While most tech companies have seen a single digit growth, this year onwards, some of them could even see some implications of US President Donald Trump’s policies, he added.

“Adoption of technology will only continue to increase across businesses in 2017, and this will result in a mismatch in the ratio between growth of a business and its real estate requirements. It will not remain the same, thanks to technology emerging as a disruptor across sectors,” Ulbrich said.

In India, over 40% of the office space demand comes from Information Technology (IT) and IT-enabled companies making them the largest occupiers of commercial office buildings in the country. However, faced with several macro-economic challenges such as Brexit and less spending from their clients, Indian IT companies are reeling under pressure with many of them cutting down on their revenue targets. Besides, hiring of some of the big IT firms has also slowed down significantly in the past one year.

“Unlike earlier, Indian corporates have started showing a propensity towards leasing versus buying, even lease-averse companies like Infosys and TCS. Earlier, many of the Indian IT firms preferred constructing their own campuses,” he said.

Globally, leasing volumes in 2016 were down marginally by around 3% as compared to the previous year while annual rental growth for prime offices (across 26 major markets) slowed to 2.5% in the final quarter of 2016, as per estimates by JLL.

“Further softening is anticipated in 2017 to about 2%, as many markets seek to absorb a larger volume of new deliveries and occupiers keep an eye on costs,” Ulbrich said.

However, despite the slowdown in the IT sector, the overall office asset class in India will continue to gain interest among investors—both domestic and foreign mainly due to the recent changes in the regulatory framework and possibility of Real Estate Investment Trust (REIT) listing in the country, he added.

“Increased consolidation as well as transparency and launching of REITs (Real Estate Investment Trusts) this year are some other important developments that are expected to boost foreign and domestic investor participation like never before. Therefore, office asset class would see the biggest growth and interest among global investors in 2017,” he said.

Besides, he also said that despite Brexit and the repercussions of the presidential elections in the US, Indian real estate market will continue to attract private equity investments in 2017. So far Indian real estate has attracted $32 billion in private equity. The global capital flows into Indian real estate in 2016 stood at $5.7 billion.

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