A slow residential real estate market notwithstanding, Kolkata witnessed a spurt in commercial space addition and absorption through 2019. We observe particular areas of development that helped the city post phenomenal numbers in commercial real estate.
Kolkata has broken a five-year record in terms of commercial space addition with a fresh supply of 6 million sq ft of inventory in the city in 2019. The Knight Frank Indian Real Estate Market Outlook for 2019 read that due to this increase in commercial space absorption, the total commercial built environment in Kolkata now stands at nearly 10 million sq ft.
The expansion of IT/ITeS, which is responsible for 45 percent of total office space leasing, and co-working firms, with a 14 percent share, are two significant contributors to the commercial growth in the city. Kolkata can be divided into four submarkets consisting of one Central Business District (CBD), one Secondary Business District (SBD) and two Peripheral Business Districts (PDB) - Salt Lake City and New Town -Rajarhat. Let us take a closer look at the commercial real estate activity in these wards of the city over the past year.
Sectors gaining steam in Kolkata
The Cushman & Wakefield Office Trends Report for 2019 revealed that Kolkata witnessed a 12 percent growth, YoY, in the absorption of manufacturing and industrial sector companies in the first half of 2019 compared to H1 2018. The second half of 2019, however, bucked the trend towards IT/ITeS office space absorption, which saw a nine percent increase in uptake, YoY.
A variety of alternative sectors are also occupying the office space market in Kolkata, including co-working, data centres, private educational coaching centres and healthcare facilities. However, the largest portion of commercial real estate is occupied by the Banking, Financial Services and Insurance (BFSI) sector companies, with 49 percent of the total commercial space absorption in 2019. A close second was the professional services sector with a 21 percent absorption during the same period.
Satellite townships of Sector V and New Town, i.e., the PBDs, housed maximum share of the new commercial space addition in 2019, as well as the highest concentration of office space leasing activity, among the known commercial sectors.
Central localities such as Madhyamgram and Ballygunge host an excess supply of commercial space. There are, however, barely any takers, and commercial development is limited to the peripheries and satellite towns. However, connectivity to these peripheral sectors had been a looming issue, until now.
After missing multiple deadlines, the Kolkata East-West Metro will be operational by mid-February 2020, connecting the satellite towns of Salt Lake City Sector V to Howrah, via central districts of Kolkata. This route will take care of the connectivity needs of professionals commuting between the peripheries and central residential localities, providing further impetus to commercial real estate expansion.
Kolkata big on affordability
The leasing rates in Kolkata hover around Rs 25-Rs90 per sq ft, depending on the demand-supply equation of different micro-markets. The prices are almost 35% lesser than the national average office space rentals, which stand at around Rs 85 per sq ft. While Kolkata is currently struggling due to excess new office inventory, IT/ITeS companies and other sectors are expected to drive growth in ‘asks’ in the ensuing quarters. As the commercial sector is highly investor-driven, the appetite of investors has a huge role to play in deciding rental prices in the submarkets of Kolkata. With plenty of tax breaks for foreign investors and sovereign wealth funds, the IT, business and banking sectors are set to receive an overwhelming flow of investment.
Noticeably, Knight Frank predicts large-scale leasing in prime commercial markets of the city during the 2020-21 period, which could directly result in a hike in average rental prices.
Aversion to development in SEZs
The updated Special Economic Zone (SEZ) framework in India allows for flexible long-term leases. Additionally, all existing SEZs were deemed to be multi-sector SEZs, which means developers are now able to amply monetise their unutilised land by leasing it out to multiple commercial sectors.
Excess land in multi-sector SEZs is now open to other sectors, but businesses in Kolkata have not adopted this trend yet. Industry insiders suggest that most of the commercial space absorption in Kolkata continues to occur on non-SEZ land in regions such as Salt Lake City Sector V and Rajarhat. SEZs such as the Falta SEZ and Manikanchan have failed to attract much development or interest from businesses.
“Despite the fiscal incentive packages that come with setting up a business in an SEZ, spaces in non-SEZ locations such as Sector V Salt Lake City are witnessing the majority of inquiries for commercial leasing. Due to various revenue losses from tax exemptions and compliances in SEZs, developers steer clear from buying land here. Consequently, the general interest is leaning towards non-SEZ land for commercial real estate development, “remarks Siddharth Dey, property consultant, Pioneer Property Management Ltd.
The hitherto dormant commercial space witnessed massive absorption in Kolkata in 2019. Commercial real estate has diversified from leasing out to the traditional sectors such as manufacturing and BFSI to emerging alternatives such as co-working and data centres. The unprecedented spike in office space absorption in 2019 in the city could be a sign of the times to come.