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Strong demand for Grade A offices leads to a healthy rise in monthly office rentals

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Strong demand for Grade A offices leads to a healthy rise in monthly office rentals

While rentals stagnate in Mumbai, Delhi-NCR, other key markets witness over 5% hike in rental values

  • Hyderabad tops the chart with 9% hike in rental values Y-o-Y; Bengaluru and Pune follow with 6% and 5%, respectively
  • Grade A office supply still constrained in most cities – a key demand of occupiers

Strong demand for offices coupled with low vacancy have led to rental growth in IT/ITeS dominated cities such as Bengaluru, Hyderabad and Pune. Rentals in office spaces have grown by more than 5% on a Y-o-Y basis during the third quarter of 2019 as compared to the corresponding period in the previous year.

These cities are becoming preferred destinations for occupiers who are expanding their footprint. Availability of developable land and higher rental arbitrage is making it easier for occupiers to look at these cities.

Rentals are on a rise

Cities Q3 2018 (INR per sq ft per month) Q3 2019 (INR per sq ft per month) Y-o-Y Growth (%)
Bengaluru 68.83 72.93 6%
Hyderabad 51.50 56.20 9%
Pune 64.81 68.17 5%
Kolkata 50.83 52.14 3%
Chennai 57.00 59.00 4%
Mumbai 122.76 123.87 1%
Delhi-NCR 77.86 77.25 -1%

Source: JLL Real Estate Intelligence Service; the numbers above indicate average rentals across cities

The strong demand has restricted vacancy levels to single digits despite addition of more than five million sq ft in Hyderabad and more than three million square feet in Bengaluru in Q3 2019.

Mumbai and Delhi-NCR are the only exceptions, where office rentals have not shown any movements. In both these cities, their most sought-after business districts like BKC in Mumbai and DLF Cyber City in Delhi-NCR are experiencing vacancy levels less than 5% with healthy rental movements. However, as a whole, there are many peripheral and suburban business districts in these two cities, with high vacancies, leading to almost non-existent rental movements when observed from a macro-level.

City-wise trends:

  1. Top performers:

Hyderabad

Considered to be another milestone year for the city, year 2019 so far has witnessed an absorption of 4 mn sq ft of Grade A space. The continued expansion by IT/ ITeS occupiers combined with increasing interest from large co-working occupiers like WeWork led to a substantial increase in the rental values. Hitec City drove the rental values with select projects commanding higher rentals when compared to the average market rates. As a result, average rents increased by 9% on a Y-o-Y basis.

Bengaluru

The city continues to reflect India’s growth story in truest sense. As availability of ready to move in Grade A office spaces remained constrained, rents witnessed a substantial increase of 6% on a Y-o-Y basis with good quality buildings witnessing a steady upward movement. Tenants are vying for and agreeing to pay premium rental amounts for high quality office spaces and projects developed by reputed builders of the city.

Pune

Sectors such as co-working and consulting have gained share in the last few quarters in the city. The rental arbitrage opportunities and growing office market in the city is attracting corporates to set up their offices in the city. With increasing absorption and decreasing vacancy, rents in Pune increased by 5% on an annual basis. This was driven primarily by the SBD and Suburbs (Hinjewadi) submarkets which saw increased activity.

  • The big metros

Cities like Mumbai and Delhi NCR witnessed negligible rental change in Q3 2019. With a limited supply of Grade A commercial properties in the Mumbai market, select submarkets like BKC are tilting towards becoming landlord favourable and the rents are expected to go up in the short term. Delhi-NCR’s story is no different. DLF Cyber City is a burning example where we are observing healthy upward pressure in rental momentum already. Today, the availability of ready-to-move-in premium office spaces remains constrained, especially in the core submarkets.

Against this, the occupier interest in quality office assets is high as cities like Hyderabad and Bengaluru witness strong pre-commitments. The demand in the office market is expected to grow strongly in the next few years. With time, this growth in commercial demand is likely to transfer into higher residential demand which augurs well for the future of the real estate market in India.

ALSO READ : Office absorption on-track to break records in 2019; Flexible spaces leading the charge

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