By: Anshuman Magazine, CMD, CBRE South Asia
Track2Realty: The key southern markets of Bangalore, Chennai and Hyderabad together clocked in about half of the total corporate real estate space take-up among India’s leading office markets during the first nine months of the year.
Chennai, in fact, saw a strong quarterly growth rate of more than 50% in Grade A office space absorption during the third quarter of 2014, signaling a sustained improvement in office space leasing sentiments. Positive market sentiments and a gradual macro-economic recovery apart, the fruition of office space expansion plans of major IT firms across these southern cities is what drove demand in this real estatesegment down south.
Strong business sentiments drove demand for investment-grade office space across Bangalore and Hyderabad during the third quarter. The two southern cities, with their limited availability of quality space, coupled with a strong end-user preference for fresh Grade-A developments offering larger floor plates, encouraged corporate real estate occupiers to make significant pre-commitments for under-construction investment-grade properties.
Although the Bangalore market experienced a drop in office space absorption rates in the third quarter, a significant quantum of large transactions is expected to reach closure during the fourth quarter of the year. Quite a few corporate occupiers pre-committed to large spaces in under-construction buildings in the Bangalore office market as well.
Over the last three quarters, the most active office districts in these three markets were the Outer Ring Road and Whitefield in Bangalore; Old Mahabalipuram Road, Perungudi, Mount Poonamallee Road and AmbatturinChennai; and the IT and Extended IT Corridors in Hyderabad.
The IT/ITeS sector drove demand
The IT/ITeS sector led demand for corporate real estate space across the key southern cities during the nine-month period. In Bangalore,the sector continued to remain the key demand driver, followed by the pharmaceutical sector, financial services and back-end office requirements.Major office space occupiers in Chennai and Hyderabad also remained the IT/ITeS sector.
Sustained demand from the sector in Chennai’s Off CBD locations of Guindy andTaramanisaw rental values appreciatein Q3 2014 by 2–3% over Q2 2014.The IT/ITes sector led transaction activity in the city’s Suburban Business Districts of Perungudi and Mount Poonamallee Road too.
The seareas along with Thoraipakkam (PBD) sawmost transaction closures taking place in Grade-A IT buildings during Q3 2014.In forthcoming months, IT and back-office operations will continue to remain major contributors to overall office space absorption in the city.
While the second quarter had witnessed a strong performance in Hyderabad’s IT Corridor of Madhapur, Kondapur, HITEC City and Gachibowli; corporate office space occupiers from the IT and back-office sectors continued to be drawn to the micro-market in the third quarter too.
Following a revival in transaction activity during the first half of the year, rental values across Hyderabad’s prominent IT parks and SEZ developments reported a q-o-q rise of 2-5% after a prolonged stagnation for more than a year.
Emerging locations to watch out for
The Bangalore micro-market to watch out for is North Bangalore. A number of new SEZ projects and Tech Parks are either under-construction, or have been planned in this office district; and corporates have been considering it for their various space requirements. The operational International Airport, and all other support infrastructure development that has emerged because of it, are the prime reasons behind the real estate development in this area.
In the case of Chennai, the office district of the peripheral micro-market of Ambattur has been attracting enhanced levels of transactions over the past couple of quarters. Its proximity to the city center, together with its cost-effective rental values have aided the growth of the location as an emerging hub for IT firms seeking office space in the city.
Similarly, the peripheral micro-market of Thoraipakkam and Sholinganalluron the IT Corridor will see increased demand owing to availability of supply and significant cost savings in real estate. The Extended IT Corridor of Hyderabad’s office market, meanwhile, is likely to steal the show in forthcoming quarters from the IT Corridor due to a significant supply of quality office space on the back of low rental values.
Stable rental values across markets
Rental values for commercial office space remained stable for the most part inBangalore; while appreciating across select micro-markets of Chennai and Hyderabad. Sustained occupier interest in prominent SEZ developments of Chennai led to q-o-q rental rates rising in the range of 12–15% during the third quarter. Similar demand trends also led to rental appreciation in select developments along the IT Corridor in Hyderabad. Rentals are expected to increase by about 5% in Hyderabad’s IT and Extended IT Corridors in the near term.
In conclusion it may be added that the Securities and Exchange Board of India’s finalization of norms for Real Estate Investment Trusts in India is likely to lead to fund flows into Grade A office space across leading cities, including the key southern markets. The move is expected to arouse enhanced interest from institutional investors as well as development firms towards buying into income-generating real estate funds and core assets.
With the expected increase in India’s GDP growth, the country’s commercial real estate market in general—and that of the southern market segment in particular—is likely to see accelerated activity in forthcoming months.
