Office sector to attain new benchmarks this year says JLL Research
India’s economic growth and a strong business support ecosystem continued to drive commercial office demand across the top seven cities in the country. Positive developments such as the listing of REIT by Blackstone-Embassy JV have opened the market for similar REITs by other players. Additionally, a significant change in occupier trends has been witnessed with a marked increase in the collective take up of co-working spaces. The share of co-working spaces in total office leasing increased to 15 % in H1 2019 from less than 10% in H1 2018. This type of disruption may bring ambiguity in the market initially; however, it also opens up opportunities for different stakeholders – disruption equals demand.
India Office Market Snapshot
Source: JLL REIS, Note: Top 7 cities include Delhi NCR, Mumbai, Bengaluru, Chennai, Hyderabad, Pune and Kolkata
A) Net absorption likely to record a new high of 42 mn sft by the end of 2019
The office market continued its strong streak and exhibited a 21% growth Y-o-Y during H1 2019. Net absorption across the top seven cities touched nearly 22 mn sft, indicating optimism amongst occupiers with continuity of governance and a stable government. A ramp-up by co-working players (15% of overall leasing) and occupiers in the IT/ITeS space (37% of overall leasing) drove the strong growth in demand.
This momentum is expected to continue in the second half of the year with net absorption estimated to reach 42 mn sft mark by the end of 2019.
B) Bengaluru continued to dominate; Hyderabad sets a new paradigm
Source: JLL REIS
Hyderabad saw a significant surge with net absorption multiplying almost four times as compared to the corresponding same period last year to 5.8 mn sft in H1 2019 from 1.5 mn sft in H1 2018. This pushed the share of Hyderabad to around 27% in H1 2019 from 8% during the same period last year. Strong expansion plans of IT/ITeS, BFSI and co-working occupiers amidst sturdy business confidence have led to the growth. As has been the trend, Bengaluru’s position remained unparalleled with a share of 30% which reported 6.5 mn sft of net absorption during H1 2019.
Hyderabad is seeing a rise in demand. The net absorption in the city is expected to touch the levels of Bengaluru by the end of 2019. Delhi-NCR is anticipated to make a strong comeback during the year, with net annual absorption likely to rise by 22%.
C) New completions to ramp up in 2019 after a prolonged phase of limited supply
New completions to the tune of 24 mn sft was witnessed during H1 2019, registering a robust growth of 16% Y-o-Y. 2019 will also set a new benchmark in terms of new completions which is expected at nearly 47 mn sft, finds JLL Research.
Hyderabad to lead new completions at 13 mn sft in 2019.
Bengaluru continued to account for the largest share in terms of new completions at 35%. Interestingly, this was followed by Hyderabad which saw nearly 5.5 mn sq ft of new completions, forming 23% of the overall new supply across the top seven cities. At the same time, Delhi NCR also constituted nearly 23% of the new completions at 5.7 mn sq ft. This clearly indicates that quality supply continued to draw in occupiers who are willing to pre-commit especially in cities like Bengaluru and Hyderabad where vacancies continued to remain tight and in single digits. Mumbai continued to reel under pressure owing to limited availability of quality supply coupled with steady demand.
City-wise distribution of New Completions in Office Segment in H1 2019
Source: JLL REIS, Going ahead, Hyderabad is likely to be the front runner constituting 28% of the overall new completions by the end of 2019 followed by Bengaluru and Delhi NCR.
D) Strong demand in large IT/ITeS dominated markets continues to weigh down on vacancy levels in 2019
Cities like Bengaluru, Hyderabad and Pune continued to witness single digit vacancies and have resulted in higher rental growth in key office markets. The office markets of Bengaluru, Hyderabad and Pune, where vacancies were below 5%, have registered a rental growth of 6-7% on a Y-o-Y basis.
In the rest of the cities, the rental growth was below 3% on a Y-o-Y basis at the end of June 2019. Despite the expected strong augmentation in supply, vacancy levels are expected to witness a marginal dip at the end of 2019 on a Y-o-Y basis in anticipation of a sturdy increase in demand. Thus, larger firms (mainly IT/ITeS) will have to align their space requirement to pre-lease future space in single-digit vacancy markets such as Bengaluru, Hyderabad and Pune.
At the same time, several large mainstream corporates are also exploring the option of moving into managed spaces of co-working operators and this trend is likely to gain traction in the short to medium term.
The Mumbai office market in H1 2019 witnessed net absorption of 2.94 mn sft. along with strong demand from the BFSI sector in Greater Mumbai and from IT/ITES in Navi Mumbai and Thane. However, this was 9% lower than net absorption in H1 2018. Completion of six new projects was recorded, taking total stock in the city to 122.5 mn sft in H1 2019. Strong demand combined with limited influx of new supply kept the rental values range-bound. With rising investor interest, the capital values of commercial assets are expected to stay on an upward trajectory whereas rental values are likely to be stable.
Hyderabad office market added its highest ever supply in H1 2019 and the vacancy rate has dropped to a low of 3.6% on the back of strong demand from IT/ITeS firms and Co-working operators. Co-working was the major driver of demand for office space in the first half of 2019, contributing to over one-third of the total absorption. With limited availability of office space in Hitec City and Gachibowli, rental values for these submarkets increased in H1 2019.
5.7 mn sft of supply became operational in H1 2019, with a strong supply pipeline for the remainder of the year. Majority of the projects which are slated to become operational belong to non-IT, thus increasing the options for corporates and non-IT occupiers. Half of this expected supply will be concentrated in Gurugram and 46% in Noida. 3.5 mn sft of net absorption was recorded in the first half of 2019, with the second quarter witnessing the highest quarterly absorption in the past 4.5 years. This was driven by IT/ITES, telecommunication, research & consulting and flex space operators.
Pune office market witnessed lower absorption in H1 2019 compared to the same period last year. On the supply side, new completion has recorded even a higher drop during H1 2019 which led to a decline in vacancy levels. However, a healthy supply is expected in the city in the near term. In the past couple of years, Kharadi has been the most dominant sub-market in terms of leasing followed by areas such as Yerawada and Viman Nagar. Firms in the IT services sector were the most active in terms of space take-up in H1 2019.
Leasing activity in Bengaluru remained stable in H1 2019, as compared to the same period last year. Although IT/ITES remained the primary demand driver, H1 2019 saw demand from other sectors such as hospitality, healthcare, advertising, education, manufacturing, and e-commerce. Co-working operators too have been active recently in terms of space take-up. Pre-commitments in office buildings that are under construction improved in H1 2019 as compared to H1 2018. Bangalore International Airport (BIA) Expressway is witnessing a lot of investment in terms of joint development for development of office spaces. The expansion of the airport is progressing and there is not much developable land available along the Outer Ring Road. These factors are driving the developments along BIA expressway.
Leasing activity in Chennai slowed down in H1 2019, as compared to the corresponding period last year. Net absorption in H1 2019 reported a 36% drop Y-o-Y. The drop in net absorption is attributable to low occupancy in the newly completed office projects. IT/ITeS remained the primary demand driver but occupiers from other sectors such as health care, furniture, manufacturing, and e-commerce also leased space in the city. Co-working operators have also begun expanding their footprint in Chennai.
Net absorption in H1 2019 improved over the absorption in H1 2018 by about 50%. Due to the limited availability of Grade A stock, tenants are opting for good quality Grade B properties in prominent locations. The recent unveiling of the Information Technology and Electronics Policy, 2018 by the government supporting the expansion of the IT/ITeS industry, has raised hopes for the city’s office sector.