BENGALURU: Office demand in the first quarter of 2016 increased by 19% to 11.7 msf (million square feet) across the top eight cities backed by high pre-commitments, as compared to the corresponding quarter last year, according to property consultants Cushman & Wakefield.
While the sluggish net absorption levels is marked by characteristic slow Q1 fraught by delayed decision making by Indian companies, the two southern cities of Bengaluru and Hyderabad bucked the trend registering strong uptake of space.
Pre-commitments more than doubled compared to same quarter last year and were noted at 4.6 msf, representing 40% of the total demand. In order to sync real estate requirements with business growth strategy, a number of companies have committed space foreseeing limited availability of upcoming quality stock in select markets.
Bengaluru and Hyderabad accounted for a chunk of total demand – at approximately 72% – on the back of strong activity from companies in the IT-ITES sector, which expanded their footprint. Bengaluru witnessed demand of 6.1 msf a 47% increase from the year-ago quarter. The city has seen steady pre-commitment levels over last couple of years with the first quarter witnessing 2.8 msf, a three-fold increase compared to same quarter last year.
Despite a 66% increase in supply during Q1 2016 (as compared to Q1 2015), the city’s vacancy level was noted at 10.5% – the lowest in 13 quarters due to high leasing activity. This signals the importance of the Bengaluru, which has remained the dominant market, especially for companies in the technology space.
Availability of quality space, competitive rentals, availability of talent and political stability have been major reasons that have cemented Bengaluru‘s position as a leader in the commercial office space.
Karun Varma, Managing Director, Bangalore, Cushman & Wakefield, “The rise in demand was driven by the IT-ITES occupiers who executed their expansion strategies and increased their real estate footprint in Bengaluru. The IT driven sub-markets such as the Outer Ring Road (ORR) are currently witnessing all time low vacancy rates as the demand has consistently outpaced supply, creating an upward pressure on rents.”
The demand has also impacted the rental values of Grade A offices in the city Karun adds “The Grade A rent in the submarket of ORR has therefore increased by approximately 16% year on year. While the supply is expected to pick pace in the next quarter, the absorption level is also likely to increase as about 2.2 msf of pre commitments are scheduled to get absorbed in Q2. On the back of increased spend on technology from key sectors such as BFSI, telecom and healthcare, the IT-ITES sector is expected to remain buoyant and grow its share in demand. The vacancy rates are expected to continue to remain low over the next quarter whereas the rents could further increase.”
The IT-ITES sector continues to fuel the Hyderabad market as well, leading to a 107% increase in demand to 2.3 msf in Q1 2016, over Q1 2015 levels. The city saw heightened net absorption of 1.2 msf and equivalent pre-commitments during the quarter owing to greater business confidence. After four quarters of staggered supply levels, supply too increased by 49% to 1.4 msf during Q1 2016.
“Demand looks promising going forward with increasing business confidence backed by policy announcements and government initiatives. The first quarter began by recording a high pre-commitment level ensuring healthy momentum the next few quarters’ especially in south cities. Moreover, the year 2016 began with some outright purchases in top cities, which have fueled optimism into the sector. Overall, with the government streamlining the taxation structure of REITS, the market might witness higher investment activities towards the later end of the year,” says Ritesh Sachdev, Managing Director, Tenant Advisory Group, India, Cushman & Wakefield
The supply across the eight cities witnessed a huge surge (41% increase) to 11.1 msf, majority noted in Bengaluru, followed by Delhi-NCR and Hyderabad. Despite high infusion of supply and comparatively lower absorption, the overall vacancy across eight cities was seen at 17.12% at the end of Q1 2016, the lowest vacancy level in 10 quarters.
Credits ET Realty