When the Reserve Bank of India (RBI) recently announced that it would issue new banking licenses, 26 companies applied. The list included not only the famous names of corporate India such as Tata and Birla, but also public sector entities such as the Indian Post, non-banking financial companies, specialised infrastructure finance and microfinance organisations. Based on the cues given at the beginning of September 2013 by the newly appointed RBI Governor Dr. Rahuram Rajan, the RBI will target to complete this process of issuing licenses around January 2014. The real estate sector will be an immediate beneficiary with the requirement of these new banks for office space and retailing branches, with many of the facilities needed in a short-time span.

Most retail branches of banks in India operate with a space of around 3,000 sq ft. We expect that the new banks might open around 25 branches each by end -2014 with a foray targeted towards Tier I cities and supported by subsequent expansion in Tier II and Tier III cities. Therefore, even if only five of the applicants get licenses by January 2014, there will be a requirement for half a million sq ft of retail banking space. This space will be mostly in the high streets of the cities, boosting the demand for retail real estate. In addition, registered offices, corporate offices and regional headquarters could mean another 0.5-1 million sq ft of office space per bank. In addition, the back-office locations would require another half a million sq ft. As a result, about 4.5- 5 million sq ft is likely to be taken up in the short term. In addition, the banks are likely to open up more retail and office transaction opportunities in the long term as observed in the case of not so old private banks such as Yes Bank, which has increased its operation to more than 430 branches by 1H13 from a meagre 30 branches in 2006.

Meanwhile, Tier II and Tier III cities, especially those in states offering better taxation benefits, will come into focus for corporate office locations. Grade B office space could be in demand, at least during the beginning, on the back of its wider availability and lower cost. Hence, the overall transaction scene, while experiencing an increase in the gross leasing volume, may not bring down the vacancy rate in the Grade A office space by much. There will be certainly more build-to-suit office RFPs over the next twelve months and in the long run, these banks are expected to shift to Grade A office space, benefitting the investor grade speculative office market of India.

Interestingly, in the event that some of the organisations seeking banking licences have long-owned captive space, this should not keep them from searching for office space with a better location advantage and business potential. Apart from that, the licences would result in competitive business planning, expansion and strategic relocation by the older banking players and the creation of not only more jobs in the subdued economy but also providing a boost to the office markets of India over the next two years and beyond.

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