Office rentals have been on an upswing with the average rents going up by 8 per cent year-on-year (YoY) in first half of 2016.. (Representational Image: Reuters)

What makes Bengaluru, NCR, Pune among top commercial rental cities in India

Office rentals have been on an upswing with the average rents going up by 8 per cent year-on-year (YoY) in first half of 2016.. (Representational Image: Reuters)

By: FE Online | Published: July 26, 2016 3:34 PM

Office rentals have been on an upswing with the average rents going up by 8 per cent year-on-year (YoY) in first half of 2016.. (Representational Image: Reuters)

Office rentals have been on an upswing with the average rents going up by 8 per cent year-on-year (YoY) in first half of 2016. NCR, Pune and Bengaluru are cities that led the rally with rents moving up in the range of 10-14 per cent year-on-year during the same period, according to property consultancy Knight Frank India. It further added that vacancy levels in the top six cities (Bengaluru, Chennai, Hyderabad, Mumbai, NCR and Pune) fell marginally, from 17 per cent in first half of 2015 to less than 15 per cent in first half of 2016. The rental market in the current real estate scenario has witnessed 12% growth in the transaction volume across top six cities of India. Transactions increased from 17.9 mn sq. ft. in first half of 2015 to 20 mn sq. ft. in the last six months. Hyderabad reported the sharpest jump in transactions, from 1.5 mn sq. ft. in H1 2015 to 2.8 mn sq. ft. in first half of 2016, resulting in a 91 per cent Y-o-Y increase, followed by Mumbai, which reported a 50 per cent YoY rise in transactions.
The first half of 2016 has been an encouraging period, as more than 19 mn sq. ft. space was delivered, compared to just 15.8 mn sq. ft. in the same period the previous year in terms of new completions. While Mumbai, Bengaluru and Hyderabad witnessed a sharp spike in new completions, NCR, Pune and Chennai reported a fall.
“The lack of good quality office space in prime areas has given landlords an advantage, and concepts such as preferred location charges (PLC) are seen to be picking up in the office market thereby putting an upward pressure on rentals,” Knight Frank India said.
With help of Knight Frank India, we take a look at reasons behind increase in rentals in top six cities:
Bengaluru: Bengaluru retained the top slot for the highest office space transactions in the country in the first half of 2016 (H1 2016), citing substantial occupier interest, the demand being driven primarily by the IT/ITeS sector, with big players such as Google, Infosys, HP and TCS occupying large spaces, which resulted in H1 2016 emerging as the period with the highest transaction in four years, falling marginally short of the H1 2011 level. The city’s office market clocked a total transaction space of 6.1 mn sq. ft. during the period January–June 2016, almost matching the 6.01 mn sq. ft. of space transacted during the corresponding period in 2015.
Chennai: The Chennai office market has traditionally been anchored by the IT/ITeS sector, but recent periods— especially the last 18 months— have seen the manufacturing and other services sectors also gaining in market share. The BFSI sector, which had built some momentum over the last four periods, saw its share plummet to 12%, as BFSI majors could not expand or set up new back office operations due to the lack of large format office spaces. The IT/ITeS sector continues to be the largest consumer in the Chennai office space market. H1 2016 witnessed the maximum number of transactions during this period, as occupier demand continues to remain strong even at lower deal sizes. This bodes well for the market and depicts its underlying strength.
Hyderabad: There is ample demand for office space in the Hyderabad market – incentives offered to IT/ITeS companies by the state government and affordable rentals are attracting a number of occupiers to the city. The Hyderabad office market experienced approximately 3.6 mn sq. ft. and 2.8 mn sq. ft. of supply and transaction activity, respectively, during H1 2016 – a 140% and 91% growth, respectively, compared to the same period in the previous year. The IT/ITeS sector took the major share of the transaction pie in H1 2016. Nearly 1.6 mn sq. ft. of office space was transacted by IT/ITeS occupiers, which is a 168% jump compared to the same period in 2015. Hyderabad continues to attract IT/ ITeS occupiers due to its well-developed infrastructure, well qualified talent pool, the availability of large office campuses and lower rentals compared to other markets.
Mumbai: The Mumbai office market recorded a stellar growth in transactions as well as new completions in H1 2016. Transactions grew by 51 per cent to 3.8 mn sq. ft., and new completions jumped 115 per cent to 4.9 mn sq. ft. The improving business sentiment is translating into more take up of office space in the city. While the BFSI and consulting media sectors—the traditional demand drivers of office space in the city—took up more space, it was the push from the IT/ITeS and manufacturing sectors that strengthened the city’s demand growth. The manufacturing and IT/ITeS sectors led the demand growth in H1 2016. Manufacturing sector transactions recorded a growth of 95%, with companies from the chemical and pharmaceutical sectors taking up office spaces in Andheri–Kurla, BKC, Vikhroli and Powai. IT/ITeS sector transactions jumped by 92%, with a strong preference for Trans Thane Creek (TTC) and Ghodbunder Road in the PBD. Corporates such as Hexaware, TCS and NCR Corporation took up space during this period. Going forward, we forecast office space transactions to increase by 10% YOY, recording 5.4 mn sq. ft. in H2 2016. For the year 2016, this will imply transactions of 9.3 mn sq. ft. – the highest since 2010.
NCR: In terms of leasing, NCR saw a total of 3.5 mn sq. ft. of office space transactions in H1 2016, registering a 5% drop compared to the same period in 2015. Vacancy levels continued to hover around 20.6% in H1 2016 due to the less-than expected leasing activity. The other services sector drove the office space demand in NCR during this half, backed by strong demand from consulting and e-commerce companies, such as UrbanClap, Cheil, Oyo Rooms, McKinsey and Bechtel. Going forward, we expect the weighted average rentals to increase by 4% from the current values in H1 2016, to around Rs73 per sq. ft. per month in H2 2016. However, quality office space in the micro-markets of Gurgaon, such DLF CyberCity and Golf Course Road, are expected to witness significant upward pressure on price.
Pune: The trend of demand outstripping supply continued in H1 2016 too, as only 1.3 mn sq. ft. of new supply entered the market. Vacancy levels have reached a historic low of 9% as of June 2016. This is a significant reduction from the 15% vacancy level just a year ago. The IT/ITeS sector has made a sharp turnaround in terms of transactions, as its share jumped to 64% in H1 2016 from under 32% just a year ago. The shares of other industries, including BFSI and manufacturing, have fallen from the previous year’s levels, as the shortage of space in prime areas is delaying the expansion plans of most of the occupiers from these sectors.The average deal size in H1 2016 was reported to be 40,000 sq. ft., which is similar to the H2 2015 level. This, despite the fact that the number of deals have fallen since then, indicates that most of the tenants are choosing to lease larger spaces. The IT/ITeS sector led in terms of big-ticket deals, with Infosys leasing more than 600,000 sq. ft. of space in Hinjewadi during this period. The weighted average rental value is expected to rise by 10% from Rs 56/sq. ft. /month in H2 2015 to more than Rs 61/sq. ft. /month.