INDIA’S TOP TO INVEST INrai.net.in/KnightFrank_Commercial_Investment Report 2013.pdf · India’s Top Business Districts to Invest In KnightFrank.co.in KnightFrank.co.in INDIA’S

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RT 2013: India’s Top Business Districts to Invest In

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KEY TAKEAWAYS

02 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN

•WhiletheIT/ITeSindustrywillcontinueto remainthelargestofficespaceoccupier,it willnotensuresuperiorinvestmentreturns.

•Theongoingslowdownintheglobal economyhasseverelyimpactedIndia’sIT/ ITeSsectorandweestimateittogrowatan annualaveragerateof11%forthenextfive years.

•BythevirtueofbeingIT/ITeSdriven markets,mostofthebusinessdistrictsin Bengaluru,Chennai,PuneandHyderabad wouldlagintermsofinvestorreturns.

•Issuanceofnewbankinglicensesandour forecastof16%pagrowthduring2013- 2017willboostdemandforofficespace fromtheBFSIindustry.

Table1:India’stopbusinessdistrictstoinvestin

•Mumbaiwillcontinuetobethefulcrum ofBFSIactivityasfarasfreshinvestments fornewoffices,expansionandrelocation areconcerned.Thiswillbefollowedby BengaluruandNCR.

•Demandforofficespacefrom manufacturingandotherservicesectorsis expectedtomoderateasweestimatethem togrowat12%paand13%parespectively overthenextfiveyears.

•Mumbai,NCR,Bengaluru,Chennai, HyderabadandPunewillwitnessthe maximumtractioninofficespace absorptioninthecountryoverthenextfive years.

•Investorreturnduring2013-2017inthe33 businessdistrictswithinthesesixcitieswill rangefrom8%-19%pa.

•Inmostofthebusinessdistricts,the demandsupplyequationduringour forecasthorizonwillremaininfavourof occupiers,therebylimitingrentalgrowthto contractualobligations.

•At19%pa,Mumbai’sCentralMumbai businessdistrictwillyieldthebest investmentreturninthecountry.With 15%pa,Mumbai’sSBDWestrankssecond amongstallthemarketsinthecountry.

•Offeringinvestorreturnof14%pa, HyderabadandPunehaveonebusiness districteachalongwithMumbai’sBKC& Off-BKCsharingthethirdrank.

•BusinessdistrictsofNCRandBengaluru, thelargestofficemarketsinthecountry,lag behindothercitiesintermsofinvestor return.

MumbaiMumbai

HyderabadMumbai

PuneChennaiMumbaiChennai

HyderabadChennai

PuneBengaluruChennai

PuneBengaluruBengaluruBengaluruMumbaiMumbai

NCRHyderabad

NCRNCRNCRNCRNCRPune

HyderabadChennai

BengaluruPunePuneNCR

Central MumbaiSBD West

SBDBKC & Off-BKC

SBD EastCBD & Off-CBD

SBD CentralSBD OMRPBD West

SBDPBD West

ORRPBD OMR & GST

PBD EastSBD

CBD & Off-CBDPBD East

CBD & Off-CBDPBD

PBD Gurgaon Zone APBD East

PBD NoidaPBD Greater Noida

CBD DelhiPBD Gurgaon Zone B

SBD DelhiSBD West

CBD & Off-CBDPBD Ambattur

PBD SouthCBD & Off-CBD

SBD North & SouthPBD Gurgaon Zone C

47%28%23%25%25%20%22%19%18%19%19%17%16%17%15%13%16%16%16%25%10%13%10%13%22%10%10%8%8%9%8%8%13%

63%42%36%37%38%34%35%33%31%32%32%30%29%30%27%26%29%29%29%44%23%27%17%17%42%23%23%20%20%21%20%20%31%

19%15%14%14%14%13%13%13%13%13%12%12%12%12%12%12%12%12%12%11%11%11%11%10%10%10%10%10%10%10%9%9%8%

123

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City Business District Rental Growth2012 - 2017

Capital Value Growth2012 - 2017

Investor Returnper Annum Rank

Indiahassteadilyemergedasoneofthemostpreferreddestinationsforglobalbusiness.ThechangingskylineofIndiancitiesisaproofofthis.Withthistransformation,camethepressingneedfortherealestatesectortokeeppacewiththegrowingofficerequirementsofIndiaInc.

ItakethisopportunitytopresentouroutlookonIndia’stopbusinessdistrictsfromaninvestor’spointofviewfortheperiodof2013-17.Ouranalysiswillhelpyouasaninvestortoidentifytoppre-leasedofficedestinationsacrossIndia’smostconducivecitiesthatareexpectedtowitnessrelativelybettertractioninofficespaceabsorption.

WhileMumbaicontinuestobethecentreforthebankingandfinancialsector,BengalurustillremainsmostpreferredforIT/ITeS.

WELCOMEInterestingly,therehasbeenanemergenceofnewbusinessdistrictswithinthesecitiesthatareattractingofficespaceoccupiers.Wehaveidentifiedthetopbusinessdistrictsandrankedthemonthebasisofinvestorreturnsfortheperiodof2013-17.

WithmoreandmoreglobalcorporationssettingbaseinIndia,realestatewillremainanimportantsectoroftheIndianeconomy.Itisourconsciousendeavortohelpyoumakeintelligentinvestmentdecisionswithourresearchandexpertise.

Hopeyoufindthisreportusefulandrelevant.Iwouldlovetohearyourviewpoint,too.

INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 03

“WithmoreandmoreglobalcorporationssettingbaseinIndia,realestatewillremainanimportantsectoroftheIndianeconomy.Itisourconsciousendeavourtohelpyoumakeintelligentinvestmentdecisionswithourresearchandexpertise.”

Shishir Baijal CountryHead& ManagingDirector,India

BestRegards,

ShishirBaijal

KeyTakeaways

Welcome

Introduction

Bengaluru

Chennai

NCR

Hyderabad

Mumbai

Pune

Approach&Methodology

Disclaimer

02

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CONTENTS

Cover imageSergios/shutterstock

Formoreinformation,pleasecontact:[email protected]

The focal point of any investment decision is balancing return with the associated risk. The trade off between risk and return varies across asset classes be it equity, debt, commodity or real estate. We believe real estate as an asset class offers the best combination of risk and return.

Fromtheperspectiveofreturn,realestateinvestmentinIndiahasgarneredsuperiorreturnsincomparisontootherassetclassessuchasequityanddebtoverthepreviousfiveyears.Intermsofrisk,propertyinvestmentfaresbetterbecauseassetpricegenerallyremainsstable.

Ithasbeenestablishedthataninvestmentinrealestatebasedonsoundresearchcanseldomgowrong.Incomparisontoanassetclasslikeequitywhichisdependentonseveralfactorsrelatedtotheunderlyingbusinesslikeprofitability,leverageandcorporategovernance,arealestateinvestmentisbasedontheunderlyingasset.Soundresearchisinherentlyfoundedonadeepunderstandingofthepropertymarketalongwiththestudyoffactorsthatdriveit.

Realestate,whencoupledwiththeotherassetclasses,canmakeforanoptimallydiversifiedportfolio.Inmostcases,investmentdecisionsinrealestatearebasedongutfeelingandtipswhichresultinpoorreturns.Hence,aninvestorhastoclearlydelineatearealestateinvestmentfromspeculation.Soundresearchbackedbymarketexpertisecanensuresuccessinrealestateinvestmentandinourendeavourtoadviseinvestorsinachievingthis, KnightFrankResearchhascarriedoutanin-depthstudyofIndia’sofficespacemarketandpresenteditsfindingsinthisreport.

Officespaceinvestmentreturnsarederived

INTRODUCTION

bythemovementinrentalsandcapitalvalues.Theseinturnarefunctionsoftheunderlyingstrengthofthedemand-supplydynamicsprevailinginthatmarket.DemandforofficespaceisprimarilydependentupontheperformanceofthedriverindustriesandcanbebroadlyclassifiedintofourcategoriesnamelyIT/ITeS,manufacturing,BFSIandotherservicesectors.Ahighergrowthrateintheseindustriesculminatesintoincreasedrequirementforofficespacethatultimatelyflowsintothevariousurbancentresofthecountry.Factorssuchasavailabilityoftalentpool,excellentinfrastructure,domestic&internationalconnectivityandfavourablegovernmentpoliciesplayacriticalroleinattractingoccupiersandsincethesefactorsareprimarilypresentinurbanareas,preferenceofoccupiersisalsolimitedhere.

Inordertounderstandthedynamicsofofficespacedemand,itisimperativetostudythedriverindustriesandfactorsthatleadtothepreferenceofaparticularcityoverothers.Basedonthisanalysis,alistofcitiesthatareexpectedtowitnessmaximumtractionfromoccupiersinthecomingfiveyearshasbeenpopulated.ThislisthasbeenfurtherrefinedtoshortlistthosecitiesthatareexpectedtoremainthemostpreferredoccupiermarketsinIndia.

Growth Drivers of India’s Office Space

IT/ITeS Sector

ThegenesisoftheIndianIT/ITeSsectordatesbacktotheearly1980swhensoftwaredevelopmentstartedgainingprominenceworldwide.However,itwasnotuntilthemid-1990swhentheIndiangovernmentinitiatedvariouseconomicreformscommitted


“Theobjectiveofthisreportistoidentifythetoppre-leasedofficespaceinvestmentdestinationsacrossIndiaoverthenextfiveyearsperiod.Thesedestinationshavebeenidentifiedonthebasisoftheforecastedinvestorreturnfrom2013-2017.Investorreturnisthesumofannualrentalincomeandtheexpectedcapitalappreciationovertheinvestmenthorizon.”

Samantak Das ChiefEconomistandDirector,Resaerch&Advisory

Figure1Office space investment framework

Source:KnightFrankResearch

RealEstateInvestment

Residential

IT/ITeS

BFSI

Land

DriverIndustries

Manufacturing

OtherSectors

Office

City

BusinessDistrict

Retail Hotel


LargescaleinvestmentfromtheIT/ITeSsectoroverthelastdecadehasledtotheunprecedenteddevelopmentoftherealestatesectorinmanyofthelargeurbancentresofIndia.Thebiggestbeneficiaryhasbeentheofficespacemarketwhichwitnessedunparalleledgrowthinthesecentres.OfficemarketincitieslikeBengaluru,Hyderabad,Mumbai,Delhi-NCR,Chennai,Pune,Kolkata,Kochi,Mangalore,Coimbatore,JaipurandChandigarhhasdevelopedsubstantiallyinthelastdecadethankstothehugequantumofspacerequiredbythissector.However,amongthesecities,Bengaluru,Hyderabad,Chennai,Delhi-NCR,PuneandMumbaihaveemergedasthemostsoughtafterlocationsascomparedtotherestandtogetheraccountfor94%ofthetotalIT/ITeSspaceabsorbedduringthelastthreeyears.Kochi,Mangalore,Coimbatore,JaipurandChandigarhlagthesefrontlinecitiesinfactorssuchasavailabilityoftalentpool,physical&socialinfrastructureandinternationalconnectivity,therebyrestrictingthegrowthofthissectorinthesemarkets.Kolkata,despitescoringhighonmostoftheaforementionedfactors,hasremainedunattractiveduetotheabsenceoffavourablestategovernmentpoliciesandarelativelynon-conducivebusinessenvironment.

Goingforward,Bengaluru,Hyderabad,Chennai,Delhi-NCRandPunewillcontinuetoattractthemaximumamountofinvestmentfromtheIT/ITeSsectorincomparisontotheotherurbancentresofIndia.Relativelyloweroccupancycostofofficespace,rapiddevelopmentofinfrastructureandfavourablestategovernmentpolicieswillworkinfavourofthesecities.Mumbai,despitescoringstronglyinalltheessentialfactors,isexpectedtoachievelimitedsuccessinattractingIT/ITeScompaniesduetotherelativelyhighcostofrealestate.WhileothercitieslikeKolkata,Kochi,MangaloreandChandigarhwillalsoattractinvestmentfromthissector,thequantumwillbenegligibleduetothevariouslimitingfactorsmentionedearlier.

Theon-goingslowdownintheglobaleconomyhasseverelyimpactedIndia’sIT/ITeSsectorandreducedthesector’sgrowthratefrom19%in2010-11toanestimated11%in2012-13.ThecontinuingcrisisintheEurozoneandlargespendingcutsinUSA’sbudgetareexpectedtolimitthespendingcapacityofcompaniesonIT/ITeSinthesemarketsinthecomingyears.SincethesecountriesaccountforthemajorityofglobalITspending,India’sIT/ITeSsectorwillbe

towardsliberalizationandprivatizationthatledtotheemergenceoftheIT/ITeSbusiness.

In1994,thegovernmentrelaxedtherestrictionsonthetelecomsectorandreleaseditfromitsdirectcontrolinordertoencourageprivateparticipation.Laterin1999and2000,reformmeasuressuchasintroductionoftheNewTelecomPolicy,changesintheventurecapitalpolicy,relaxationofforeignownershiprulesandframingofintellectualpropertyprotectionguidelinesattractedtheinterestofdomesticaswellasforeigninvestorstowardsthesector.

TheexponentialgrowthoftheIT/ITeSsectorpost2000canbelargelyattributedtothevariousinitiativesbythegovernmentintermsofpoliciesandtaxexemptions.SchemessuchasSoftwareTechnologyParksofIndia(STPI)andSpecialEconomicZones(SEZs)thatexemptedsoftwareexportingcompaniesfrompayingtaxforacertaindurationfacilitatedinvestmentfromalargenumberofstart-upsduringtheearly2000s.Additionally,statespecificIT/ITeSpoliciesenabledcertainstateslikeKarnataka,Maharashtra,AndhraPradeshandTamilNaduinattractingIT/ITeScompaniesinsettinguptheircentreshere.

Apartfromgovernmentpolicies,therearevariousotherreasonsthathaveenabledthegrowthofIT/ITeSsectorinIndia.Availabilityoftalentpool,developedphysicalinfrastructure,internationalconnectivity,

aconducivebusinessenvironmentandaffordablerealestatepricesaresomeoftheprominentfactorsthathavehelpedinattractinginvestmentfromthissector.However,majorityofsuchinvestmentshasbeenlimitedtoafewlargeurbancentresonly.Absenceofoneormoreoftheabovementionedfactorsinsmallercitiesandruralareashasrestrictedcompaniesfromsettinguptheiroperationsbeyondlargecities.

0%

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bn

Revenues Growth (RHS)

Figure4IT/ITeS sector revenue growth

Source:NASSCOM,KnightFrankResearchNote:FY2014onwardsestimatesareby KnightFrankResearch,therestareasreported byNASSCOM.

Figure2City-wise share of IT/ITeS sector absorption

9%

17%

26% 18%

11%

13%

6%

Mumbai Delhi-NCR Bengaluru

Hyderabad Chennai

Pune Others

*OthersincludecitiessuchasKolkata,Kochi,Mangalore,Coimbatore,JaipurandChandigarhSource:KnightFrankResearch

Availabilityof talent

pool

Favourablestate

governmentpolicies

IT/ITeS

Affordablereal estate

cost

Excellentphysical & social

infrastructure

Internationalconnectivity

Conducivebusiness

environment

Figure3City-specific factors responsible for attracting IT/ITeS sector


thisimageandhencetheBFSIfrontofficesarethebiggestconsumersofthemostpremiumpricedofficespacesinallmarkets.Incontrast,theirbackofficesarelocatedinlow-costlargeformatofficespacesinperipheralmarketssothattheirrealestatecostfootprintisminimized.

TheBFSIsectorhascharacteristicallygravitatedtowardmarketsthathavebeenhubsofcommercialactivityasabulkofthebankingandfinancialsectorconsumershavebeenconcentratedthere.MumbaiandKolkataaresuchcitiesonIndia’scoastlinethatevolvedascommercialandfinancialhubs.KolkatahoweverfailedtogrowinthedecadesfollowingIndia’sindependenceduetounfavourablestategovernmentpoliciesandarelativelynon-conducivebusinessenvironment.Yet,Mumbaicontinuedtogrow,asbusinessactivitythrivedanditsstandingasIndia’scommercialcapitalwasconsolidatedasthesector’sregulatorybodiesandmajorstockexchangeswereestablishedhere.

Theoutsourcingboomthatstartedinthelate1990sopenedupawholenewuniverseofBFSIcompaniesinthewesternworldwhichwerekeentocapitalizeonthehugecostsavingstheycouldavailbyoutsourcingtheirbackofficeoperations.NearlyeverymajorwesternbankandfinancialinstitutiontodayhasoutsourcedbasicprocessingfunctionstoIndia.Infact,IndianoutsourcingsetupscateringtotheBFSIsectorhavequicklysteppedupthevaluechainasmoreandmoreanalyticalandstrategicfunctionsarenowcompletelyexecutedfromhere.Bengaluru,MumbaiandtheNCRwerethefirstmarketstappedbyforeignbanksandfinancialinstitutionsduetoampleavailability

oftalentandqualityofficespaceshere.HyderabadandChennaihavealsoseentractioninthisparticularsegmentinrecenttimes.Nearly15.2mn.sq.ft.ofofficespacewasconsumedbytheBFSIsectorinthe2010-2012period.

Goingforward,MumbaiwillcontinuetobethefulcrumofBFSIactivityasfarasfreshinvestmentsforfrontofficeexpansionandrelocationareconcerned.Thesectorhasbeenactivelyreducingitsoverallrealestatecostfootprintandshiftingitsmidandbackofficeoperationstoperipheralmicro-marketsorevenconsideringshiftingentireoperationstolowerpricedmarkets.E.g.:ICICIshiftingmostofitsbackofficeoperationstoGachibowliinHyderabad.ThiswillseeallfreshinvestmentsintheBPO/KPOandprocessingoperationsmovetolowerpricedmarketslikeBengaluru,Delhi-NCR,HyderabadandChennai.

TheBFSIsectorwasarguablytheworsthitbytheglobaleconomiccrisisthatbroughtdownfinancialbehemothslikeLehmanBrothers.Itsparkedoffaseriesofeventswhichtodaythreatenthegrowthstoryofthefinancialoutsourcingindustryasunemploymentratesinthewesternworldcontinuetotrendupwards.TheBFSIsector’srevenuegrowthhasbeentrendinglowersinceitsFY2011highsofalmost24%.WeexpectamoderaterecoveryintheBFSIsectorduringtheforecastperiodandestimateanaverageannualgrowthrateof16%from2013-2017.Thiswillprimarilyaffectthesector’sappetiteforofficespaceintheyearstocome,


adverselyaffectedresultinginamutedgrowthrateforthenextfiveyears.Weestimateanannualaveragegrowthrateof11%fortheIT/ITeSsectorfrom2013-2017.ThisinturnwillculminateintoasubdueddemandforincrementalofficespaceandwilladverselyimpacttheofficemarketofcitieswhereIT/ITeSsectoristhedominantoccupier.

BFSI Sector

TheBanking,FinancialServicesandInsurance(BFSI)sectoraccountsforapproximately14%ofthetotalofficespaceabsorptioninIndiatodayanditsoriginscanbetracedbacktothe19thcenturythatsawtheestablishmentofthefirstbankandstockexchange.Indiadidnothaveacentralbankingauthoritytill1935whentheReserveBankofIndiawasestablished,postwhichtheeconomywitnessedrapidgrowthinthebankingsector.ThethrustonliberalizationintheearlyninetiessawprivateplayerslikeICICIBank,AxisBankandHDFCBankemergewhichsawtheindustrygrowintermsofproductrange,technologyandgeographicreach.Additionally,alliedfinancialservicessuchasinsurance,financialbrokingandwealthmanagementwitnessedunprecedentedgrowthastheIndiangrowthstoryunfolded.

TheBFSIsectorisassociatedwithbigbusinessesandbanksandfinancialservicescompaniesneedtoprojectthemselvesasthebestinthemoneymanagingbusiness.Therealestateoccupiedbyfrontofficesofsuchorganisationsneedstocorroborate

Presence ofBFSI sectorregulatory

bodies

Wealthconcentration

BFSI

Presenceof stock

exchanges

Evolutionas a

commercialhub

Excellentphysical& social

infrastructure

Availabilityof

talent pool

Figure5City-specific factors responsible for attracting BFSI sector


Financialregulators:RBI, SEBI,

FMC & AMFI

CommodityExchanges:

MCX, NCDEX

MumbaiStock

Exchanges:BSE, NSE

Depositories:NSDL, CDSL

Figure6Mumbai: The financial capital of India


Figure7City-wise share of BFSI sector absorption

Mumbai Bengaluru

Delhi-NCRChennai

HyderabadOthers

36%

24%

21%

8%

5% 6%

*OthersincludecitiessuchasKolkata,Pune,AhmedabadandChandigarhSource:KnightFrankResearch


especiallyinmarketsthathaveapresenceoffinancialoutsourcingsetups.

Manufacturing Sector

Themanufacturingsectorcurrentlyaccountsformorethan16%ofIndia’sGDPandisoneofthelargestemployersinthecountry.Metal,petroleum,foodprocessing,chemical,automobile,textileandengineeringarethemajormanufacturingindustriesthattogetheraccountformorethantwo-thirdofthetotalmanufacturingoutput.ThemanufacturingunitsoftheseindustriesarespreadacrossvariousregionsofIndiawithstatessuchasMaharashtra,Gujarat,TamilNadu,KarnatakaandAndhraPradeshhavingthemaximumconcentration.Availabilityofrawmaterial,accesstoport,stategovernmentpolicies,taxincentivesandvariousothersfactorsarekeytoattractingcompaniestosetuptheirmanufacturingunitataparticularlocation.However,whenitcomestosettingupthecorporateoradministrativeoffice,atotallydifferentsetoffactorsisconsideredandthesemaybeabsolutelyunrelatedtothelocationofthemanufacturingunit.

Themajordeterminingfactorsforlocationofacorporateoradministrativeofficeareavailabilityoftalentpool,presenceofbanksandfinancialinstitutions,excellentphysicalandsocialinfrastructure,importanceasapoliticalhubandinternational&domesticconnectivityamongothers.Sincethesefactorsarepredominantlypresentinlargeurbancentres,locationsofsuchofficesarealsorestrictedtothesecentreswithminimal

presenceinsmallercities.

Mumbai,Delhi-NCR,Bengaluru,Chennai,HyderabadandPunearetheleadingcitiesofIndiatohaveattractedthemaximumamountofinterestfromoccupiersofthemanufacturingsectorinthelastdecade.Despitehavingevolvedasamajorbusinesshubovertheyears,Kolkatahaslostitssheeninrecenttimesasarelativelyuncertainbusinessenvironment.Thishastarnished

itsimagewithfewoccupierspreferringtolocatehere.Ontheotherhand,despiteaveryfavourablebusinessenvironmentinAhmedabad,thecityhasachievedlimitedsuccessinattractingoccupier’sinterestbecauseofthelimitedavailabilityoftalentpoolandlackofsocialinfrastructure.

Goingforward,MumbaiandDelhi-NCRwillcontinuetoattractthemaximumlevelofinterestfrommanufacturingsectoroccupiersasboththesecitiesscoresignificantlyhigh

Figure9Share of major sectors in India’s total manufacturing output

MetalPetroleum

ChemicalAutomobile

Food Processing

TextileEngineeringOthers

15%

15%

12%

9% 5% 5%

5%

34%

Source:AnnualSurveyofIndustries, KnightFrankResearch

Figure10City-wise share of manufacturing sector absorption

MumbaiDelhi-NCR

HyderabadChennai

Bengaluru

PuneOthers

24%

26% 20%

7%

12%

6% 5%

Note:OthersincludecitiessuchasKolkataandAhmedabad Source:KnightFrankResearch

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Evolution asa commercial

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Excellentphysical &

socialinfrastructure

Manufacturing

Availabilityof talent

pool

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institutions

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Conducivebusiness

environment

Figure11Factors responsible for attracting office occupiers from the manufacturing sector



inallthenecessaryfactorsresponsibleforattractingoccupiers.Bengaluru,Chennai,HyderabadandPunewillalsoattractoccupier’sinterestbutinalimitedwayaseachofthesecitieslackineitheronefactorortheotherascomparedtoMumbaiandDelhi-NCR.

TheongoingglobaleconomicslowdownhasnegativelyimpactedthemanufacturingsectorinIndiawiththegrowthrateplummetingto10%duringtheprevioustwoyearsfrom15%in2010-11.However,withthevariouseconomicreformsinitiatedbythegovernmentinthelastsixmonthsandtheimprovingglobaleconomicsituation,weexpectthemanufacturingsectorinIndiatogrowatanannualaveragerateof12%inthecomingfiveyears.Thiswillleadtomoderategrowthindemandforofficespacefromthemanufacturingsector.CitieslikeMumbaiandDelhi-NCR,thathavealargeshareofthemanufacturingsectorintotalabsorption,areexpectedtowitnessthemaximumbenefitfromsuchatrend.

Other Service Sectors

Theservicesector’sshareinIndia’sGDPcurrentlystandsat59%,accountingforthelargestcomponentintheeconomy.TheservicesectorincludesIT/ITeS,BFSI,transport,communication,tradeandothers.However,forthepurposeofthisstudy,wehavecategorizedservicesintothreebroadgroupsnamelyIT/ITeS,BFSIandotherservices.Hence,otherservicesincludeallthoseserviceswhicharenotapartoftheIT/ITeSandBFSIsectors.Someofthemajorsub-sectorsofotherservicesectorsareconsulting,telecom,transport,mediaandinfrastructure.

Sincetheservicesectorprovidessupporttootherindustries,itisprimarilyconcentratedinthecitieswithastrongpresenceofotherindustries.Asdiscussedintheearliersections,citiessuchasMumbai,Delhi-NCRandBengaluruhavethelargestconcentrationofofficespacefromthemanufacturing,BFSIandIT/ITeSsectorsfollowedbyChennai,HyderabadandPune.Thishasledtomajorityofoccupiersfromotherservicesectorslocatingtothesecities.Additionally,thefactorsresponsibleforattractingoccupiersfromotherservicesectorsareakintothoseofthemanufacturingsector.Overthelastthreeyears,Mumbai,Delhi-NCRand

Bengaluruaccountedforapproximatelythree-fourthofthetotalofficespaceabsorptionbyotherservicesectors.WhileChennai,HyderabadandPuneaccountedfor22%,theremaining4%wasspread

Goingforward,Mumbai,Delhi-NCRandBengaluruwillcontinuetoattractthemaximumamountofinterestfromotherservicesectoroccupiersasthesecitiesareexpectedtodominateabsorptioninthemanufacturing,BFSIandIT/ITeSsectors.Wehaveforecastedanaverageannualgrowthrateof13%forotherservicesectorindustriesoverthenextfiveyears.Thiswillresultinamoderatedemandgrowthscenarioforofficespacefromtheoccupiersofthesesectorsfrom2013-2017.

Figure13City-wise share of other service sectors absorption

MumbaiDelhi-NCR

HyderabadChennai

Bengaluru

PuneOthers

33%

27%

14%

8%

8%

6% 4%

Note:OthersincludecitiessuchasKolkataandAhmedabad Source:KnightFrankResearch

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Figure14Other service sectors revenue growth


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Figure16Most conducive cities in India for office space


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pace

affo

rdab

ility

MumbaiDelhi-NCRBengaluru

HyderabadChennaiKolkata

PuneAhmedabad

KochiMangalore

ChandigarhCoimbatore

Figure15Relative strength of each city in attracting office space occupiers


BENGALURU


Bengaluru is one of the key office markets in the southern part of the country. The office market in the city has evolved primarily due to the growth of the IT/ITeS sector. Although a number of industries like manufacturing, automobile and biotechnology have their stake in the economy of Bengaluru it is the IT/ITeS sector that has predominantly been the driving force.

Thefactthatthecityishometoover2000STPIregisteredcompaniesandemploysover0.5millionpeople,hasevidentlyproventhatBengaluruisthepreferredITdestinationforsettingupanewunitorforexpansionofexistingoperationsofIT/ITeScompanies.Thecityhasturnedintoanexchangeforthesectorwherebothrecruitersandpotentialemployees,mostlyfromtheneighbouringsouthernstates,cometogethertofulfiltheirrespectiveobjectives.TheavailabilityofthistalentpoolhasattractednumerousIT/ITeScompaniestothecity.Theinfluxofmultinationalcompaniesaswellasexpansionofdomesticfirmshaslargelycontributedtothegrowthofthecity’sofficespacemarket.

TheIT/ITeSindustrycontinuestodominatetheofficespaceabsorptioninthecity,albeitataslowerpaceinthefaceoftheglobaleconomicslowdown.Currently,thesectoraccountsfor57%ofthetotalofficespaceinBengaluru,followedbytheBFSIandmanufacturingsectorsat18%and15%respectively.Oflate,therehasbeenanincreaseinthenumberofcompaniescomprising‘OtherServiceSectors’thathavetakenupofficespaceinthecity.TheseprimarilyincludetheinternetretailingsectorwithcompanieslikeAmazon,eBay,FlipkartandSnapDeal,aswellasthetelecomsector.

Atpresent,thetotalofficespacestockinBengaluruis99.3mn.sq.ft.ofwhich86.3mn.sq.ft.isoccupiedresultinginavacancylevelof13%.Thevacancylevelshaveconsistentlybeenonadeclinesince2009whentheywereatanaveragevalueof23%.Thisbodeswellforthecity’sofficemarketassteadydemandforofficespacehasaidedBengalurutomaintainitsabsorptionlevelsonayear-on-yearbasis.

TheslowpaceofinfrastructuredevelopmentinBengaluruhaslongthreatenedtoadverselyaffectthehealthoftheoffice

market.Nevertheless,thecityhasbeenabletosustainitspositionastheleadingdestinationforofficespaceabsorptioninthecountry.WithnewersectorsbesidestheIT/ITeSenteringthecity’sofficemarket,Bengaluruhasgarneredasignificantabsorption.However,thispositivetrendofhighofficespaceabsorptionislikelytoslowdownduetoreduceddemandinthefaceofincreasedglobaluncertainties.Weestimateanincrementalabsorptionof37mn.sq.ft.overthenextfiveyears.

Witharevivalindemandpost2009,developerswhohadearlierpostponedtheirofficeprojectslaunchedtheirconstructionactivitiesafreshin2011and2012,withprioritygiventotheprojectsthathadalreadyseenpre-commitmentsorconfirmedinterest

BENGALURU

Demand for office space in Bengaluru is likely to be relatively subdued, compared to the past three years, with corporates contemplating their expansion plans amidst a gloomy economic scenario.

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Figure1Bengaluru office market analysis


Mn.

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Figure2New supply & absorption of office space in Bengaluru


Figure3Industry-wise split of Bengaluru’s office space absorption

BFSIIT/ITeS

ManufacturingOther service sectors

18%

57%

15%

10%



fromoccupiers.Mostoftheseprojectsareslatedtoenterthemarketinthenexttwoyears.Awellstaggeredofficespacesupplyof41.1mn.sq.ft.isestimatedtocomeonlineduringtheperiod2013-2017.Further,asteadierdemandduring2013-17,willensurethatthevacancylevelachievesanacceptablevalueof12%by2017andrentalscontinuetobestablewithoutmuchdrasticvariations.

Bengaluruhasstrivedtooccupythetopslotforthehighestofficespaceabsorptioninthecountrydespiteglobaluncertaintiesloominglarge.Alargenumberofinnovationcentresacrosstheworldpreferbeinglocatedinthiscity,owingtotheconduciveenvironmentandtalentpoolavailability.TheavailabilityofofficespacesinnumerousSEZsforITexpansion,goodconnectivitytotheORRbywayofinfrastructureprojectsandtheambitiousMetroRaildevelopmentcorridoraresignificantfactorsthatmakeofficespacesviableinthecity.

Goingforward,Bengaluruofficemarketisenvisagedtowitnessanoptimisticyetcautiousdeliveryofprojectsintheshorttermonaccountofthepresenteconomic

uncertainty.Thecitywillbeinfusedwithsubstantialofficespacesupplyperiodicallyinthenextfiveyears.Demandisalsolikelytoberelativelysubdued,comparedtothepastthreeyears,withcorporatescontemplatingtheirexpansionplans.Asaresultofthesefactors,rentalsareexpectedtoremainstable,withafewmarketswitnessingupwardrevisionintheshortterm.Nevertheless,theentryofnewersectorsinthecity’sofficemarkethaslentapositiveoutlook.Also,consolidationofofficespacesbymostlargesizedcompanieswillcontinuetobethenorm,inspiteoftheuncertaintyinEuropeanmarkets.

Inordertounderstandthedemandsupplyequationofthecity’sofficemarketfurther,weshallhavetodelvedeeperintobusinessdistrictlevelanalysis.TheBengaluruofficespacemarketcanbeclassifiedinto5businessdistricts:CBD&Off-CBD,SBD,PBDEast,PBDSouthandOuterRingRoad(ORR).

CBD & OFF-CBD

TheCBDandOff-CBDmarketsofBengaluruhavetypicallybeenpreferred

bycompanieslookingforsmallerofficeconfigurations.CentrallocationslikeMGRoad,ResidencyRoadandLavelleRoadaswellasneighbouringInfantryRoadandCunninghamRoadformtheprimeofficemarketsinthecity.Theselocationsaremarkedbytheirexcellentconnectivitytotheairportandmajorresidentialareasaswellasthepresenceofadequatephysicalandsocialinfrastructure,whichinturnhaveabearingonthehighrentalsintheregion.

TheCBDandOff-CBDmarketsofthecityhaveastrongpresenceofoccupiersfromthemanufacturing,consultingandBFSIsectors,aswellasIT/ITeScompanieswithsmallerset-ups.Thetotalstockinthesemarketsasof2012standsat12.1mn.sq.ft.ofwhich11.3mn.sq.ft.isoccupiedresultinginavacancylevelof7%.

DearthofqualityofficespacesupplyintheCBDexertedconsiderablepressureontherentalsduringtheperiod2007-08andsawaveragevaluesreachapeakofINR77/sq.ft./month.However,in2009,rentalvaluesintheselocationsbottomedouttoanaverageofINR68/sq.ft./month,withvacancylevelsashighas17%.Post2010,withsteadyabsorptionandabsenceofanysignificantnewsupply,vacancylevelshavebeenonadecliningtrend.Despitetheconsistentlowvacancylevels,therentalshavenotseenmuchnorthwardmovementintheCBDandOff-CBDofficemarkets.Ason2012,therentalvalueshavemanagedtomoveuptoanaveragevalueofINR70/sq.ft./month.

CBDandOff-CBDregionsareprojectedtohaveavacancylevelofaround5.5%by2017withonly1.8mn.sq.ft.ofnewsupplyscheduledtoenterthemarketduringthese

Major Roads

Railway Line

Existing Metro

Under Construction Metro

Proposed Metro

Legend

Business Districts of Bengaluru

MG RoadResidency RoadRichmond Road

Lavelle RoadInfantry Road

Cunningham Road

CBD/OFF.CBDSBD

Indira Nagar

Airport Road

Koramangala

Old Madras RoadPBD EAST

KR PuramHoodi

Brookefield

Whitefield

PBD SOUTHHosur Road

Kanakpura Road

ORR

KR Puram ORR

Marathalli ORR

SBD

Figure4Business district classification


CBD & Off-CBD

SBD

PBD East

PBD South

ORR

MG Road, Residency Road, Richmond Road, Lavelle Road, Infantry Road,Cunningham Road

Indiranagar, Koramangala, Airport Road, Old Madras Road

KR Puram, Whitefield, Brookefield, Hoodi

Electronic City, Hosur Road, Kanakpura Road

KR Puram ORR, Marathalli ORR

Business District Micro-markets


rentalsprevailingintheSBDmarkets.Also,thefactthatthedemandenvisagedintheregionisrelativelyminorascomparedtotheotherpartsofthecity,alsoaidsinkeepingtherentalsincheck.Consideringthis,weforeseerentalvalueincreasingfromINR70-80/sq.ft./monthin2012toINR79-91/sq.ft./monthby2017.Similarly,capitalvalueisexpectedtorisefromINR8,400-9,600/sq.ft.in2012toINR10,550-12,000/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe12%pafrom2013-2017.

SBD

TheSBDmarketsinBengaluruevolvedprimarilyowingtooccupiers’demandforqualityofficespaceswithlargerfloorplatesthanwhatwasbeingofferedintheCBD,i.e.goodinfrastructure,connectivitytotheairportandeasyaccesstothecitycentre.Asaresult,aslewofofficeprojectscameupinsuburbanlocationslikeKoramangala,OldMadrasRoad,OldAirportRoadandSarjapurRoad.TheseofficeprojectsmainlycateredtothespacerequirementsoftheIT/ITeSsector,besidesotherservicesectorssuchasconsultingandtelecom.

TheSBDmarketsarealsocharacterizedbystandaloneofficeprojectsthatareoccupiedbymid-sizedIT/ITeS,manufacturing,healthcareandBFSIcompanies.Oflate,thesemarketshavelosttheirsheenwiththeemergenceoftheORRandPBDEastofficemarketsthatofferlargerfloorplatesandstate-of-the-artamenitiesatcheaperrentals.

CurrentlythetotalofficespacestockinSBDis23.2mn.sq.ft.ofwhich21.1mn.sq.

ft.isoccupied.Steadyabsorptionovertheyearshasledthevacancyleveltoachieveitscurrentlevelof9%,whichin2008wasat25%.ConsequentlythishasresultedinanupwardmovementofrentalsfromINR43/sq.ft./monthlevelsin2009toINR47/sq.ft./monthin2012.

Goingforward,theSBDmarketswillcontinuetobesoughtafterbycompanieslookingforofficespaceinprimelocations,whichareinthevicinityofresidentialmarkets.Anevenlystaggeredsupplyof10.83mn.sq.ft.ofnewofficespacesupplyisinthepipelineforthenextfiveyears,contrastedwithanequallypositiveabsorptionof10.06mn.sq.

ft.Vacancyisestimatedat8.3%in2017.Thesefactorswillputanupwardpressureontherentalgrowth,althoughnotmuchupswingisexpectedduetothepresenceofimprovedfacilitiesinthePBDofficemarketsatcompetitiverentals.Hence,weexpectmoderategrowthinrentalandcapitalvalueswhichwillincreasefromINR45-65/sq.ft./monthandINR5,400-7,800/sq.ft.toINR52-74/sq.ft./monthandINR6,850-9,950/sq.ft.from2012to2017respectively.Thiswillyieldaninvestorreturnof12%paduring2013-2017.

PBD East

TheofficemarketslocatedinthePBDEastregionhavebeensomeofthemostpreferredofficedestinationsinthecity.Whitefield,housingtheiconicInternationalTechnologyParkBangalore(ITPB)andKRPuramforms

fiveyears.CBDandOff-CBDwillcontinuetowitnesssteadydemandfromoccupiersinterestedinbeingcentrallylocated.

Approximately1.9mn.sq.ft.ofofficespaceislikelytobeabsorbedduring2013-17,mostlylimitedtonon-ITcompanieswithsmallerspacerequirementssincethecity’sofficemarketisdominatedbytheIT/ITeSsectorwithlargerofficespacedemand.Meanwhile,thetrendofobservingaminimalincreaseinrentalvaluesintheCBDandOff-CBDofficemarketsisexpectedtocontinueintheforthcomingyearsaswell.Rentalappreciationintheselocationswillnotseedrasticmovementsowingtothecompetitive

Figure5Business district-wise split of stock

CBD & Off-CBD

2012 2017E

SBD PBD East PBD South ORR

12%

23%

27%

11%

27%

10%

24%

27%

11%

28%


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Figure6CBD & Off-CBD office market analysis


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Figure7SBD office market analysis



thePBDEastmarket.AdjacentlocationslikeBrookefieldandHoodialsoformapartofthePBDEastofficemarket.Theseofficemarketsarefavouredbyoccupiers,primarilyduetothecheaperrentalsprevalentaswellasthepresenceofresidentialprojects,malls,hotelsandothersocialamenities.

Bengaluru’sgrowthstoryasapreferredofficemarketevolvedwiththesettingupofWhitefieldasoneoftheprominentIThubsofthecity.Over80%oftheoperationalofficespaceintheregionisoccupiedbytheIT/ITeSsectorwhileothersectorslikebiotechnology,pharmaceuticalsandFastMovingConsumerGoods(FMCG)aswellasResearch&Development(R&D)organizationsalsohavetheirofficesinthearea.Whitefieldishometoalargenumberofnon-captiveIT/ITeSSEZslikeDivyashreeTechnoparkandGopalanGlobalAxis,besidestheITPB.

Thetotalofficestockasof2012inPBDEastis26.5mn.sq.ft.withavacancylevelof20%.Althoughthevacancylevelsarehigh,ascomparedtootherofficemarketsinthecity,theyhavedroppedconsiderablysince2008whentheywereatanaveragevalueof33%.Therelativelyhighvacancyratecanbeattributedtothesubstantialsupplyenteringthemarketeveryyear.AlthoughtherentalvaluesintheregiondeclinedtoanaverageofINR33/sq.ft./monthin2009fromINR36/sq.ft./monthin2008,theyhavebeenabletoregainmomentumandachieveanaverageofINR38/sq.ft./monthin2012onaccountofincreasedleasingactivity.

Intheshortterm,rentalsforSEZspaceinPBDEastofficemarketsarelikelytostrengthenmarginallyowingtohighdemandaswellasgraduallydecliningvacancylevelsthatareestimatedtocomedownto17.9%by2017.Therentalappreciationwill,however,beimpactedbythenewofficespacesupplyestimatedtocomeonline,therebyleadingtherentalstoremainunderpressure.Around11.4mn.sq.ft.ofincrementalofficespacewillenterthemarketby2017,whichisenvisagedtobemetbyademandfor9.9mn.sq.ft.ofofficespace,nearlydepictingademandsupplymatch.RentalvalueinthismarketisforecastedtorisefromINR30-45/sq.ft./monthin2012toINR35-52/sq.ft./monthby2017.CapitalvalueisestimatedtoincreasefromINR3,600-5,400/sq.ft.toINR4,650-6,950/sq.ft.duringthesameperiod.Theprojectedinvestorreturnis12%pafrom2013-2017.

Thus,whilegrowthinthePBDEastregionhassloweddownduetoglobaluncertaintiesaffectingtheIT/ITeSsector,factorslikeconnectivitytotheairport,relativelylowerrentals,existingtenantprofile,proximitytotalentpoolandresidentialmarketswillstillensuresteadyabsorptioninthecomingfiveyears.

PBD South

ThePBDSouthregiondenotesmainlytheofficemarketinElectronicsCity,anothermajorIThubinBengaluru,aswellasotherlocationssuchasHosurRoadandKanakapuraRoad.ThesettingupofElectronicsCityasanExportPromotionIndustrialPark(EPIP)ZonewasoneofthekeyfactorsbehindtransformingBengaluruintotheSiliconValleyofIndia.TheregionprimarilyhousescaptiveunitsofmajordomesticIT/ITeScompanieslikeTCS,InfosysandWipro,besidesahostofothersectorfirmssuchasbiotechnology,pharmaceuticals,engineering,electronicsandalliedmanufacturingunits.Significantly,IT/ITeSsectoroccupiesonlyaround58%ofthecurrentofficespacehere.

CurrentlyPBDSouthhasatotalofficespacestockof11.2mn.sq.ft.ofwhich9.4mn.sq.ft.isoccupied.Thestockdoesnotincludethevariouscaptivecampusespresentandaccountsonlyforthoseprojectsthatareavailableforlease.Constrictedsupplyofaround5.4mn.sq.ft.intheregionduringtheperiod2008-2012hasbeenpivotalinbringingdownthevacancylevelsfrom25%in2010to16%in2012.AlthoughPBDSouthattractedconsiderableoccupier

interest,primarilyduetofactorssuchaspresenceofbusinesshotelsandcheaperofficespacerentals,oflate,theregionhasbeenoverlookedinfavourofotheremergingofficemarkets.Thismaybeattributedtolackofpremiumresidentialdevelopments,largeretailprojects,entertainmentavenuesandsocialinfrastructureaswellasdistancefromtheairport.Thisnotwithstanding,aconsistentdeclineinvacancyratesledtoariseinrentalvaluesfromINR35/sq.ft./monthin2009toINR39/sq.ft./monthin2012.In2008,theaveragerentalvaluewasaboutINR38/sq.ft/month.

Goingforward,absorptioninPBDSouthwillslowdowninthefaceofhigherleasingactivityexpectedintheORRandPBDEastofficemarkets.Besides,thereislimitedscopeforsupplytoenterthemarketduetounwillingnessofdeveloperstolaunchofficeprojectsindistantpartsofPBDSouthwithnascentsocialinfrastructure.Thesupplyinthepipelinewillamounttoamere4.1mn.sq.ft.ofofficespaceduringtheperiod2013-2017,contrastedwithaflaggingdemandof3.7mn.sq.ft.Consequently,nosubstantialincreaseinrentalvalueisexpectedinthePBDSouthofficemarketsinthecomingfiveyears.Consideringthis,weexpectrentalvaluetoincreasemarginallyfromINR30-45/sq.ft./monthin2012toINR33-49/sq.ft./monthby2017.CapitalvalueisexpectedtorisefromINR3,600-5,400/sq.ft.toINR4,350-6,550/sq.ft.duringthesameperiod.Theeffectivereturnwillbe10%pafrom2013-2017.

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Figure8PBD East office market analysis


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Figure9PBD South office market analysis



alowerdeclineascomparedtootherIT/ITeSofficemarketslikeWhitefieldandElectronicsCity,therebyemphasizingthedemand-supplybalance.AveragerentalhadbottomedoutatINR39/sq.ft./monthin2009fromINR40/sq.ft./monthin2008.ThisincreasedtoanaverageofINR46/sq.ft./monthin2012.

Inthenextfiveyears,weexpecttheORRregiontomaintainitsattractivenessandevolveintoamatureofficemarketbothintermsofabsorptionandsupply.AvailabilityoflandforfuturedevelopmentensuresmoreactivityintheORRofficemarket.Around12.9mn.sq.ft.ofnewsupplyisestimatedtocomeonlineby2017,cateringtothedemandof11.4mn.sq.ft.ofofficespacebypotentialoccupiersresultinginavacancylevelof11.3%.SomeofthedemandenvisagedinORRSouthwillbeaspill-overfromthesupply-constrictedmarketofElectronicsCityinPBDSouth.Intheshortterm,officerentalsintheORRareexpectedtoincreasemarginallyowingtolowvacancylevels,althoughtheywillstabilizeoncetheupcomingsupplyhitsthemarket.TherentalswillalsobekeptundercheckduetothepresenceofsimilarqualityofficespaceandamenitiesavailableinPBDEastatlowervaluesandtheinherenttendency

ofoccupierstomovetowardscosteffectivespace,especiallyinpresenttimes.RentalvalueinthismarketisforecastedtorisefromINR40-60/sq.ft./monthin2012toINR47-70/sq.ft./monthby2017.CapitalvalueisestimatedtoincreasefromINR4,800-7,200/sq.ft.toINR6,250-9,400/sq.ft.duringthesameperiod.Theprojectedinvestorreturnis12%pafrom2013-2017.

Outlook

TheBengaluruofficemarketispredominantlyoccupiedbytheIT/ITeSindustrywhichcharacteristicallyrequireslargeofficespacesandconstantlyseekstominimiseitsrealestatecostfootprintinordertomaintainprofitability.UrbaninfrastructureinBengaluruhasimprovedsignificantlyinthelast5-7yearstherebyenhancingtheconnectivitybetweentheCBD,SBD,ORRandPBDEastbusinessdistricts.Overtheprojectedperiod,weexpectthesemarketstodominateaspreferredofficedestinations.However,thesemarketscompetewitheachotherasconnectivityandproximitytotheresidentialcatchmentaswellassocialinfrastructurearenotaproblem.Thiskeepsrentalsinallthesemarketsundercheck.ThePBDSouthmarketlagsbehindothermarketsaslackofqualityresidentialcatchment,socialinfrastructureaswellasdistancefromtheinternationalairporthavedeterredofficeoccupiersfromenteringhere.Consequently,nosubstantialincreaseinrentalvalueisexpectedinthePBDSouthofficemarketasrentalshereimmediatelycompetewithPBDEastwhichofferscompetitiverentalscoupledwithbetterresidentialcatchmentaswellassocialinfrastructure.Duringourforecastperiod,officeinvestmentinallthebusinessdistrictofBengaluruwouldprovideaninvestorreturnof12%pafollowedbyPBDSouthmarketwhichshallprovide10%pa.

Outer Ring Road (ORR)

TheORR,encompassingthestretchfromHebbalinthenorthtoSilkBoardjunctioninthesouth,hasemergedasamajorITgrowthcorridorinthecity.IthousesseveralmajorinternationalITplayerssuchasIBM,Intel,AccentureandCisco.ORREast,comprisingthestretchfromKRPuramtoMarathahalliandORRSouth,fromMarathahallitoSarjapurRoad,accountformajorityoftheofficeprojects.TheITparkslocatedalongORRSouthaccountforover50%ofthetotalofficespaceoperationalintheORR.

TheofficemarketsalongtheORRcameintoprominenceduetoseveralfactorslikeproximitytotheCBDandmajorresidentialmarkets,accesstolargetalentpools,availabilityofcontiguouslandparcels,connectivitytotheairportandpresenceofhotelandretailprojects.Besides,thereareseveralinfrastructureprojectsunderwayintheregionthataimtoturntheORRintoasignalfreecorridor.Theregionischaracterizedbylargemulti-tenantedITparks,themajoroccupiersbeingtheIT/ITeScompanies.ThereisminimalpresenceofothersectorsintheORRofficemarkets.

ThetotalstockintheORRofficemarketsstandsat26.3mn.sq.ft.withavacancylevelof11%.Thevacancyrateshavedroppedsteadilysince2008whentheywereatanaveragevalueof26%,owingtothehighdemandemanatingfromtheIT/ITeSsectortowardstheORRmarkets.Infact,evenduringtheglobaleconomicslowdown,theaverageofficerentalsintheORRwitnessed

The office markets along the ORR came into prominence due to several factors like proximity to the CBD and major residential markets, access to large talent pools, availability of contiguous land parcels and connectivity to the international airport.

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Figure10ORR office market analysis


Figure11Bengaluru’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)


CBD & Off-CBD

SBD

ORR

PBD East

PBD South

70-80

45-65

40-60

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30-45

79-91

52-74

47-70

35-52

33-49

8400-9600

5400-7800

4800-7200

3600-5400

3600-5400

10550-12050

6850-9950

6250-9400

4650-6950

4350-6550

12%

12%

12%

12%

10%

Business District Rental Value2012 2017E 2012 2017E

Capital Value Investor Returnper Annum

CHENNAI


Chennai’s rapid progress over the past decade as an industrial hub in South India with the emergence of various manufacturing industries such as auto & auto ancillary, electronic hardware, apparel and engineering has resulted in the development of a dynamic office space market in the city.

ThishasbeenfurthersupportedbytherobustgrowthintheIT/ITeSsectorasfavourablegovernmentpolicies,excellentinfrastructureandavailabilityoftalentpoolattractedalargenumberofcompaniesinsettinguptheirglobaldeliverycentreshere.Thegrowingdemandfromthissectorledtotheemergenceofsuburbanandperipheralbusinessdistrictswhereavailabilityoflargetractsoflandhelpedinthedevelopmentofofficespace.

Currently,IT/ITeS,manufacturingandBFSIsectorsarethemajoroccupyingindustriesinChennaiandaccountfor56%,20%and10%ofthetotaloccupiedofficespacerespectively.Inadditiontothis,thereisaconsistentdemandforspacefromawiderangeofserviceindustrieslikeconsulting,telecom,shippingandinfrastructurethattogetheraccountfor11%ofthetotaloccupiedspace.Goingforward,theIT/ITeSsectorwillcontinuetoremainthelargestoccupierofofficespaceinthecity.Lowrentals,betterqualityspace,availabilityofskilledtalentpool,rapidinfrastructuredevelopmentandaconducivebusinessenvironmentaresomeofthemajorreasonsthatwillattractcompaniesfromthissector.

AsofDecember2012,thetotalofficespacestockinChennaistoodat49.8mn.sq.ft.,ofwhich37.4mn.sq.ft.isoccupiedresultinginavacancylevelof25%.Thevacancylevelshave

marginallydroppedfromtheirpeakof28%witnessedin2009,whenahugeinfluxofnewsupplytriggeredaglutinthemarket.Steadydemandalongwithrestrictedincrementalsupplyduring2010and2011broughttemporaryrespitetotheoversuppliedChennaimarket,withvacancylevelsfallingto23%in2011.However,vacancylevelsincreasedto25%in2012duetothelargenumberofprojectsthatcameonlineduringtheyear.Theimpactoftheabovetrendwasreflectedintherentalmovementthatremainedinanarrowrangefrom2009to2012inmostofthebusinessdistricts.

Overthenextfiveyears,theIT/ITeSsectorwillcontinuetodrivedemandforofficespaceinChennaifollowedbythemanufacturingandotherservicesectors.Weestimateanincrementalabsorptionof24.9mn.sq.ft.from2013to2017.However,availabilityofvasttractsofvacantlandintheperipheralareasofthecitywillensureaconstantsupplyofincrementalofficespaceandconsequently

CHENNAI

Currently, the IT/ITeS, manufacturing and BFSI sectors are the major occupying industries in Chennai and account for 56%, 20% and 10% of the total occupied office space respectively.

An estimated 25.1 mn.sq.ft. of new supply will enter the Chennai market in the next five years.

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Figure1Chennai office market analysis


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Figure2New supply & absorption of office space in Chennai


Figure3Industry-wise split of Chennai’s office space absorption

IT/ITeSManufacturing

Other service sectorsBFSI Others

56%

20%

11%

10%

3%



resultinavacancylevelof17%by2017.Anestimated25.1mn.sq.ft.ofnewsupplywillenterthemarketinthenextfiveyears.

Thedemandsupplyequationwillhavetobeanalysedfurtherbydelvingdeeperintothebusinessdistrictlevelanalysis,forabetterunderstandingofthecity’sofficemarket.TheChennaiofficespacemarketcanbeclassifiedintofivebusinessdistricts:CBD&Off-CBD,SBD,SBDOMR,PBDOMR&GSTandPBDAmbattur.

CBD & OFF-CBD

Strategiclocationwithinthecity,excellent

connectivitywithprimeresidentialareasandthepresenceofdevelopedphysical&socialinfrastructurearesomeofthereasonsthathaveattractedoccupiersinChennaitowardstheCBD&Off-CBDmarket.SomeoftheprominentlocationsinthismarketareAnnaSalai,RKSalai,Nungambakkam,GreamsRoad,EgmoreandTNagar.

Mostoftheofficebuildingsinthismarketwereconstructedbefore2005andhaveabuilt-upareaoflessthan100,000sq.ft.Thisrestrictedthetenantprofiletosmall&mid-sizedIT/ITeS,manufacturing,BFSIandotherservicesectorcompanieswithalimitedpresenceoflargeIT/ITeSoccupiers.However,

therecenttrendsuggeststhatevensmall&mid-sizedIT/ITeScompanieshavestartedre-locatingtotheSBDorPBDmarketsbecauseoftherelativelyhighrentalsandlimitedscopeofexpansionintheCBD&Off-CBD.

ThetotalstockintheCBD&Off-CBDmarketasof2012standsat9.1mn.sq.ft.,ofwhich7.8mn.sq.ft.isoccupiedresultinginavacancylevelof14%.Historically,thismarkethasenjoyedlowvacancylevelsintherangeof8%-10%becauseoflimitedincrementalsupplyandsteadyyear-on-yearabsorption.However,thefourlarge-sizedprojectswithabuilt-upareaintherangeof100,000to450,000sq.ft.thatcameonlineduring2012inthevariousOff-CBDlocations,resultedinasuddenspikeinvacancylevelsfrom8%in

The total stock in the CBD & Off-CBD market as of 2012 stands at 9.1 mn.sq.ft., of which 7.8 mn.sq.ft. is occupied resulting in a vacancy level of 14%.

Major Roads

Railway Line

Under Construction Metro Corridor I

Under Construction Metro Corridor II

Legend

Business Districts of Chennai

EgmoreGreams Road

CBD & OFF-CBDAnna Salai

Nungambakkam

RK Salai

GuindyNandanam

T Nagar

Taramani

Perungudi

OMRGST road

SBD OMR

PBD OMRPBD GST

AmbatturPBD AMBATTUR

PorurMt. Poonamallee road

SBD



CBD & Off-CBD

SBD

SBD OMR

PBD OMR & GST

PBD Ambattur

Anna Salai, RK Salai, Nungambakkam, Greams Road, Egmore, T Nagar

Mt. Poonamallee Road, Porur, Guindy, Nandanam

Perungudi, Taramani

OMR beyond Perungudi Toll Plaza, GST Road

Ambattur



demandandsupplyat0.7and0.6mn.sq.ft.respectivelyfrom2013to2017.TheriseinrentalswillbecappedastherewillalwaysbeathreatoftenantsmovingouttowardscompetingSBDmarkets,whereamplegoodqualityofficespaceisavailableatlowerrates.Additionally,variousinfrastructureprojectssuchasmetroandmonorailthatareexpectedtobecomeoperationalinthecomingyearswillreducethealreadythinlinebetweentheCBD&Off-CBDandSBD.Consideringthis,weforeseerentalvalueincreasingfromINR60-75/sq.ft./monthin2012toINR72-90/sq.ft./monthby2017.Similarly,capitalvalueisexpectedtorisefromINR7,200-9,000/sq.ft.in2012toINR9,600-12,000/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe13%pafrom2013-2017.

SBD

HighpropertypricesintheCBD&Off-CBDareasandnon-availabilityofvacantlandledtotherapidriseoftheSBDmarketwithlocationssuchasMt.PoonamalleeRoad,Porur,GuindyandNandanamdevelopingasestablishedofficedestinations.DLFITParkonMt.PoonamalleeRoadandGuindyIndustrialEstateinGuindyarethetwomajorofficehubsintheSBDmarket.

TheSBDmarkethasahealthymixofoccupiersrangingfromIT/ITeS,manufacturingandotherservicesectors.However,developmentoftheDLFITSEZ,OlympiaTechnologyParkandTamaraiTechParkhasskewedthetenantprofiletowardstheIT/ITeSsectorinthelasttenyears.

Proximitytothecitycentre,wellestablishedphysical&socialinfrastructureandaffordablerentalvaluehaveattractedvarioussmall&mid-sizedIT/ITeScompaniestowardsthismarket.

ThetotalofficespacestockintheSBDcurrentlystandsat8.5mn.sq.ft.ofwhich6.3mn.sq.ft.isoccupiedresultinginavacancylevelof26%.TheconstantsupplyofincrementalofficespaceduetothelargescaledevelopmentoftheDLFITParkhasresultedinvacancylevelsremaininghighdespitestrongabsorptioninthismarket.Inadditiontothis,SBDOMRhasbeengivingatoughcompetitiontothismarketinattractingIT/ITeSoccupiers.ThishasledtorentalvaluesincreasinginanarrowrangefromINR40-50/sq.ft./monthin2009toINR45-55/sq.ft./monthin2012.

Goingforward,highrentalvaluesandunavailabilityofgoodqualityofficespaceintheCBD&Off-CBDwillcontinuetodriveoccupierstowardstheSBD.Moreover,enhancedconnectivityduetodevelopmentofthemetrocorridorinthecomingfiveyearswillfurtheraugmenttheimportance

2011to14%in2012.RentalvalueintheCBD&Off-CBDmarketincreasedmarginallyfromINR55-65/sq.ft./monthin2009toINR60-75/sq.ft./monthin2012.

Goingforward,theexodusofsmall&mid-sizedIT/ITeScompanieswillcontinuetowardstheSBDandPBDlocations,restrictingthetenantprofileofthemarkettonon-IT/ITeSoccupiers.Althoughdemandfromthenon-IT/ITeSsectorssuchasmanufacturing,BFSIandotherserviceindustrieswillcontinuetoremainstronginthecomingyears,thequantumofspacedemandedwillstillbeinsufficienttosustainarobustgrowthinrentals.Wehaveforecastedincremental

Enhanced connectivity due to development of the metro corridor in the coming five years will further augment the importance of the SBD market.


CBD & Off-CBD

2012 2017E

SBD SBD OMR PBD OMR & GST PBD Ambattur

18%

17%

26%

32%

7% 13%

16%

25%

36%

10%


Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

5%

10%

15%

0

4

8

12

10

6

2

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

E



Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

5%

20%

15%

10%

25%

30%

0

2

6

10

12

8

4

14

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

E

Figure7SBD office market analysis



oftheSBDmarket.ApartfromtheIT/ITeSsector,occupiersfromthemanufacturingandotherserviceindustriesarealsoexpectedtogeneratedemandforofficespacehere.Wehaveforecastedincrementaldemandandsupplyof3.9and3.6mn.sq.ft.during2013-2017whichwillresultinthevacancylevelsrecedingfrom26%to16%by2017.However,toughcompetitionfromtheSBDOMRandPBDAmbatturwillkeeptherentalvaluesincheckandanysignificantriseinrentswillberesistedbyoccupiers,astherewillbeamplevacantspaceavailableinthesecompetingmarkets.WeexpectmoderategrowthinrentalandcapitalvaluewhichwillincreasefromINR45-55/sq.ft./monthandINR5,400-6,600/sq.ft.toINR53-65/sq.ft./monthandINR7,150-8,700/sq.ft.from2012to2017respectively.Thiswillyieldaninvestorreturnof13%paduring2013-2017.

SBD OMR

TheSBDOMRcanbeclassifiedasallthelocationsstartingfromtheMadhyaKailashJunctiontillthePerungudiTollPlazaincludingPerungudiandTaramani.DevelopmentofTIDELParkbythestategovernmentsowedtheseedsoftheofficemarketherethatisalsoknownastheITCorridor.Favourablestategovernmentpolicies,rapidinfrastructuredevelopmentandavailabilityofvasttractsofvacantlandledtotheadventofabustlingIT/ITeSofficehubhere.Mostoftheprojectslocatedherehaveanareagreaterthan500,000sq.ft.,withlargefloorplatesandenhancedamenities.

Proximitytothecitycentre,easyaccesstotheairport,availabilityofgoodqualityofficebuildingsandaffordablerentsaresomeofthereasonsthathavehelpedtheSBDOMRemergeasthemostsoughtafterIT/ITeSofficedestinationinChennai.Thismarketislargelyoccupiedbymid&large-sizedIT/ITeSplayerswithlittlepresenceofcompaniesfromothersectors.

Asof2012,thetotalofficespacestockinSBDOMRwas13.1mn.sq.ft.withavacancylevelof19%.Thisissignificantlylowerthanthe32%vacancylevelwitnessedin2009whenmorethan3mn.sq.ft.ofincrementalsupplycameonline.Healthyabsorptionduringthelastthreeyearsalongwithrestrictedsupplyofnewspacehelpedvacancylevelsinrecedingdrasticallyfromtheirpeakof2009tothecurrentlevelof19%.Additionally,astrongpreferenceamongoccupierstolocateinprojectsbeforethePerungudiTollPlazabecauseofitsproximitytothecity

centreandthepresenceofdevelopedsocialinfrastructurehashelpedinbringingvacancylevelsdown.SuchatrendexertedanupwardpressureonrentswhichmovedupfromINR30-45/sq.ft./monthin2009toINR40-55/sq.ft./monthin2012.

Goingforward,weexpectthePBDOMR&GSTtogiveatoughcompetitiontoSBDOMRintermsofattractingoccupiers.Rapiddevelopmentofphysical&socialinfrastructure,cheaperrentalvaluesandproximitytoaffordableresidentialcatchmentswillreducetheresistanceofoccupierstowardsofficemarketslocatedbeyondthePerungudiTollPlazainPBDOMR&GST.Hence,despitesteadyincrementaldemandofmorethan5.4mn.sq.ft.andfallingvacancylevelsfrom19%to15%intheSBDOMRmarketoverthenextfiveyears,weexpectrentalvaluestoappreciatemoderately.Anysignificantincreaseinrentalvalueswillberesistedastherewillalways

bethethreatofoccupiersre-locatingtothecheaperPBDOMR&GSTmarket.RentalvalueisforecastedtorisefromINR40-55/sq.ft./monthin2012toINR48-66/sq.ft./monthby2017.CapitalvalueisestimatedtoincreasefromINR4,800-6,600/sq.ft.toINR6,350-8,750/sq.ft.duringthesameperiod.Theprojectedinvestorreturnis13%pafrom2013-2017.

PBD OMR & GST

TheIT/ITeSdrivenboomintheSBDOMRforofficespace,spilledontotheperipheralareasoftheOMRandGSTRoadastheavailabilityofvacantlandbeforethePerungudiTollPlaza,wheretheSBDOMRislocated,wasexhausted.ELCOTSEZatSholinganallur,SIPCOTatSiruseriandMahindraWorldCityatSingaperumalkoilarethemajorofficehubsinthismarket.ThePBDOMR&GSTmarketisspreadacrossavastareainSouthChennaistartingfromthePerungudiTollPlazatillSiruseriontheOMRandChromepettillSingaperumalkoilontheGSTRoad.

DistancefromthecitycentreandlackofsocialinfrastructurehaverestrictedthetenantprofileofthePBDOMR&GSTtolarge&mid-sizedIT/ITeScompanieswithlittlepresenceofnon-IT/ITeSoccupiers.Abilitytoarrangetransportfacilityfortheiremployeeshasenabledthesecompaniestolocatehere,despitethegreatdistancefromotherpartsofthecity.WhileinitialdevelopmentwasrestrictedtothecaptivecampusesofaselectfewIT/ITeScompanies,constructionofvariousmulti-tenantedprojectsinrecentyearshasattractedtheinterestofoccupiersfromothercompaniestoo.

Asof2012,thetotalofficespacestockinPBDOMR&GSTstoodat15.8mn.sq.ft.with9.8mn.sq.ft.ofoccupiedstockresultinginavacancylevelof38%.StrongdemandfromtheIT/ITeSsectorduringthe2003-2007periodledtothelaunchofvariousprojectsinthismarketwhichcameonlineduringthelastfiveyears.Atotalof9.9mn.sq.ft.ofnewsupplywasaddedfrom2008to2012.However,aslowdownintheIT/ITeSsectorpost2008limitedtheabsorptionpotentialofthemarketensuinghighervacancylevelduringthisperiod.Additionally,theoccupier’spreferenceforlocatingwithinSBDOMRbeforethePerungudiTollPlazabecauseofthevariousreasonsmentionedearlier,hasrestrictedthedemandforofficespaceinthePBDOMR&GST.ThishasledtorentalvaluesincreasinginanarrowrangefromINR24-30/sq.ft./monthin2009toINR28-35/sq.ft./

Proximity to the city centre, easy access to the airport, availability of good quality office buildings and affordable rents are some of the reasons that have helped SBD OMR in emerging as the most sought after IT/ITeS office destination in Chennai.

Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

5%

20%

15%

10%

25%

35%

30%

0

8

16

20

12

4

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

E

Figure8SBD OMR office market analysis



companies.

ThecurrenttotalofficespacestockinPBDAmbatturis3.3mn.sq.ft.withavacancylevelof14%.Mostoftheprojectslocatedherecameonlineduring2008and2009,whichresultedinasuddenspikeinthevacancyleveltoabove40%duringthisperiod.However,vacancylevelsgraduallydippedto14%overthelastfouryearsonthebackofrestrictedincrementalsupplyandsteadyyear-on-yearabsorption.ThishashelpedtherentalvaluesinincreasingmarginallyfromINR22-28/sq.ft./monthin2009toINR26-32/sq.ft./monthin2012.

Distancefromthecitycentre,pooraccessibilityfrommajorityoftheresidentialcatchmentsandstiffcompetitionfromDLFITParkonMt.PoonamalleeRoadintheSBDmarketaresomeofthemajorreasonswhyPBDAmbatturremainedunattractivetooccupiersinthepast.Inadditiontothis,distancefromtheChennaiairporthasbeen

ahindrancetotheIT/ITeSoccupiersandrestrictedthedevelopmentpotentialofthismarket.Goingforward,weexpectthistrendtocontinueanddonotforeseeanysubstantialgrowthindemandforofficespacehere.With3.7mn.sq.ft.ofnewsupplyand2.9mn.sq.ft.ofincrementaldemandexpectedoverthenextfiveyears,thevacancylevelinthismarketisprojectedtoincreasefrom14%in2012to18%in2017.Intermsofrentalvalue,wedonotforeseeanysignificantriseandexpectittomovefromthecurrentlevelofINR26-32/sq.ft./monthtoINR28-34/sq.ft./monthby2017.CapitalvalueisforecastedtoincreasefromINR3,120-3,840/sq.ft.toINR3,750-4,600/sq.ft.duringthesameperiod.Theeffectivereturnwillbe10%pafrom2013-2017.

OUTLOOK

RentalgrowthacrossChennai’svariousbusinessdistrictsisexpectedtoremainmoderateinthecomingfiveyearsbecauseoftheabundantincrementalsupplyanticipatedintheSBDandPBDmarkets.Additionally,anyslowdownintheIT/ITeSsector,whichprimarilydrivesChennai’sofficemarket,willadverselyimpactdemandespeciallyinthePBDandSBDmarkets.DemandforofficespaceintheCBD&Off-CBDmarketwillcontinuetobedrivenbythemanufacturing,BFSIandotherservicesectors.Althoughvacancylevelinthecityisexpectedtorecedefrom25%in2012to17%in2017,themovementinrentalandcapitalvalueswillbedependentonthevariousbusinessdistrictleveldynamicsasdiscussedintheprevioussections.

Goingforward,CBD&Off-CBD,SBDandSBDOMRmarketsareprojectedtoyieldcomparableinvestorreturnat13%pafollowedbyPBDOMR&GSTandPBDAmbatturmarketsat12%paand10%parespectivelyfrom2013-2017.

monthin2012.

Rapiddevelopmentofphysical&socialinfrastructure,cheaperrentalsandproximitytoaffordableresidentialcatchmentshavegraduallychangedtheperceptionofoccupierstowardsthePBDOMR&GSTmarketandasaresultitsacceptabilityasanofficemarkethubhasincreasedconsiderablyinthelast2-3years.Thismarketwillcontinuetoattractcostconsciouslarge&mid-sizedIT/ITeSoccupiers,asrentsareexpectedtoremainrelativelylowincomparisontotheotherpartsofthecity.Weforeseeasubstantialdipinvacancylevelfrom38%to20%overthenextfiveyearsassteadydemandandlimitedincrementalsupplystabilizesthedemandsupplyequationofthismarket.Wehaveforecasted11.9and11.4mn.sq.ft.ofincrementaldemandandsupplyfrom2013-2017.Consideringthis,weexpectrentalvaluetoincreasemarginallyfromINR28-35/sq.ft./monthin2012toINR32-41/sq.ft./monthby2017.CapitalvalueisexpectedtorisefromINR3,360-4,200/sq.ft.toINR4,350-5,400/sq.ft.duringthesameperiod.Theeffectivereturnwillbe12%pafrom2013-2017.

PBD Ambattur

PBDAmbatturisamuchsmallerofficemarketascomparedtoothermarketsofChennai.Locatedinthenorthwesternpartofthecity,ithasonlyahandfulofgoodqualityofficeprojectslargelycateringtotheIT/ITeSandotherservicesectorindustries.WithintheIT/ITeSsectortoo,theoccupierprofileislargelylimitedtosmall&mid-sized

Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

10%

40%

30%

20%

50%

0

2

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7

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3

1

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2009

2010

2011

2012

2013

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2015

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E

Figure10PBD Ambattur office market analysis


Figure11Chennai’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)


CBD & Off-CBD

SBD

SBD OMR

PBD OMR & GST

PBD Ambattur

60-75

45-55

40-55

28-35

26-32

72-90

53-65

48-66

32-41

28-34

7200-9000

5400-6600

4800-6600

3360-4200

3120-3840

9600-12000

7150-8700

6350-8750

4350-5400

3750-4600

13%

13%

13%

12%

10%



Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

10%

40%

30%

20%

50%

0

10

20

25

15

5

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

E

Figure9PBD OMR & GST office market analysis


NCR


The National Capital Region (NCR) is one of the prime office destinations in the country. It consists of Delhi, Gurgaon, Noida and Greater Noida. NCR market plays a pivotal role in the India office market. Delhi has been the political hub of India comprising the headquarters of major political parties as well as administrative offices. This attracts corporates wanting to be in close proximity to the bureaucrats and other decision makers.

Factorslikeavailabilityofcontiguouslandparcels,favourablegovernmentpolicies,conducivebusinessenvironmentalongwithskilledmanpoweraugmenteddemandforofficespaceintheNCRmarketbybothnationalandinternationalcompanies.Further,theNCRhaswitnessedasteepupsurgeinofficespacedemandposttheIT/ITeSboominIndia.Inordertoaccommodatethefastpacedgrowthinofficedemand,secondaryandperipheralbusinessdistrictsemerged.

Intermsofofficestock,theNCRisthebiggestmarketinthecountrywith110mn.sq.ft.ofofficestock,ofwhich88mn.sq.ftisoccupiedresultinginavacancylevelof19.5%.Anupwardtrendisobservedinthevacancylevelssince2009duetoadditionofbulkofofficespaceinthePBDmicro-marketsofNoidaandGurgaon.Nearly21mn.sq.ft.ofincrementalofficespaceenteredtheNCRmarketduring2010and2011;consequentlythevacancylevelspeakedat20.5%intheyear2011.Vacancydippedslightlyintheyear2012to19.5%duetolimitedadditiontotheofficestock.Therecouldhavebeenafurtherdipintheaforesaidvacancyiftheabsorptionlevelsweresteadyandremainedatthe2010and2011level.

EventhoughtheIT/ITeSsectorhaspusheddemand,otherindustrysectorslikemanufacturingandotherservicesectorsalsocontributeequallytotheNCRofficemarket.Currently,theIT/ITeSandmanufacturingsectorsaccountfor42%and22%ofthetotaloccupiedofficespacerespectively.Apartfromthesetwosectors,thereisaconsistentdemandfromthebanking,financialservicesandinsurance(BFSI)sectorandotherservicesectorsaswellwhichaccountfor15%and21%ofthetotaloccupiedstockrespectively.Factorslikeconducivebusinessenvironment,

favourablegovernmentpolicies,lowerrentalsandavailabilityoflargerfloorplateswillattractIT/ITeScompaniestosetuptheirofficesintheNCR.Hence,goingforwardweexpecttheshareoftheIT/ITeSsectorinoverallNCRofficemarkettoremainsteady.

TheNCRhasbeenlongconsideredasoneofthemostattractiveofficedestinationsinthecountry.Therehasbeenaconstantinterestfromcorporates,duetotheavailabilityoftalentpoolanddevelopedinfrastructure.Officeoccupiershaveabundantoptionstochoosefrom,dependingontheirrequirements.Goingforward,thismarketisexpectedtowitnesssustainedinterestfromtheoccupiers.TheNCRofficemarkethasastrongpresenceofoccupiersfromIT/ITeS,BFSI,otherservicesectorandthemanufacturingsector,thusensuringthatanyslowdowninaparticularindustrywillnotlettheabsorptionlevelsplummettoagreatextent.

Further,ofthetotalexpectedsupplyof45mn.sq.ft.duringnextfiveyears,almost50%willbeaddedin2013and2015alone.Hence,vacancylevelswillpeakduringtheseyearsbeforeitstabilizesat18.8%by2017.ThiscoupledwithhugeavailabilityofcontiguouslandparcelswillkeeprentalsundercheckintheNCRmarket.

NCR

Mn.

sq.

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Occupied stockStock

Vacancy (RHS)

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8%

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20% 22%

18%

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60

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Figure1NCR office market analysis


Mn.

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0

4

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2

2008

2009

2010

2011

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2013

E

2014

E

2015

E

2016

E

2017

E

Figure2New supply & absorption of office space in NCR


Figure3Industry-wise split of NCR’s office space absorption


Other service sectorsBFSI

42%

22%

21%

15%



InordertounderstandtheNCRofficemarket,thedemandsupplyequationwillhavetobeanalysedatabusinessdistrictlevelaseachbusinessdistricthasuniquecharacteristics.TheNCRofficemarketcanbeclassifiedintosevenbusinessdistricts:CBDDelhi,SBDDelhi,PBDGurgaonZone-A,PBDGurgaonZone-B,PBDGurgaonZone-C,PBDNoidaandPBDGreaterNoida.

CBD Delhi

CBDDelhicomprisesConnaughtPlace,BarakhambaRoadandKGMarg.AsonDecember2012,thetotalstockoftheCBDmarketwas7.20mn.sq.ft.ofwhich6.9mn.sq.ft.isoccupiedresultinginavacancylevelof4.3%.Theselocationshavebeenthecentreofbusinesstraditionallywithgovernmentoffices,corporatesandbanks.Centrallylocated,excellentconnectivityand

developedinfrastructurearesomeofthefactorsthatmaketheCBDthemostsoughtaftermarketbyoccupiers.Thismarketisprimarilyoccupiedbythegovernmentandpublicsectorcompanies,BFSI,mediaandaviationcompanies.ThereislimitedpresenceofIT/ITeScompaniesintheCBDasmostoftheofficebuildingshavesmallerfloorplatestoofferandthisisaconstraintforIT/ITeScompanies.

Totalofficestockinthismarketrosefrom6.6mn.sq.ft.in2008to7.2mn.sq.ft.in2012,whilevacancylevelsalwaysremainedinthelowersingledigitsduringthelastfiveyears,trendingbetween3-5%.Mostoftherecentsupplyisaresultofredevelopment

CBD Delhi is the most sought after market primarily due to its central location, excellent connectivity and well developed urban infrastructure.

CBD DELHI

Connaught PlaceBarakhamba Road

KG Marg

SBD DELHINehru Place

Saket

Bikaji Cama PlaceJasola

PBD GURGAON ZONE-A

MG RoadGolf Course Road

Golf Course Extension Road

NH-8

PBD GURGAON ZONE-B

Cyber CityUdyog Vihar

Sohna Road

PBD GURGAON ZONE-C

Manesar

PBD NOIDA

Sec 16

Greater Noida Expressway

Sec 63Sec 62

Sec 18

PBD GREATER NOIDA

Sector Alpha

Tech Zone

Sector GammaSector Beta

Major Roads

Railway Line

Existing Metro


Legend

Business Districts of NCR



CBD Delhi

SBD Delhi

PBD Gurgaon Zone-A

PBD Gurgaon Zone-B

PBD Gurgaon Zone-C

PBD Noida

PBD Greater Noida

Connaught Place, Barakhamba Road, Kasturba Gandhi Marg

Nehru Place, Saket, Jasola, Bikaji Cama Place

MG Road, NH-8, Golf Course Road, Golf Course Extn. Road

Cyber City, Sohna Road and Udyog Vihar

Manesar

Sector 16, 18, 62, 63, Greater Noida Expressway

Sector Alpha, Beta, Gamma, Tech Zone



sectorcompaniesandmajorcorporateswhoneedtomaintaintheveneerofpremiumfrontoffice,prefertobelocatedwithinthejurisdictionofDelhi.Goodconnectivitywithothermarketsaswellasproximitytogovernmentofficescompelledcompaniestohaveabaseinthismarket.Duetothis,despitehighrentalsoccupierspreferCBDDelhicomparedtoothercompetingmarkets.Consideringthis,weforeseerentalvalueincreasingfromINR240-260/sq.ft./monthin2012toINR272-294/sq.ft./monthby2017.Similarly,capitalvalueisexpectedtorisefromINR30,000-35,000/sq.ft.in2012toINR37,900-41,050/sq.ft.by2017.Theeffective

investorreturnisexpectedtobe10%pafrom2013-2017.

SBD Delhi

TheSBDcompriseslocationslikeNehruPlace,SaketandJasola.NehruPlacehasevolvedasahubofsmallscaleIT/ITeScompanies,whereasSaketandJasolaemergedasimportantbusinessdestinationswithrelativelylowerrentalscomparedtotheCBD.CurrentlythetotalofficestockintheSBDis16.74mn.sq.ft.ofwhich14.22mn.sq.ft.isoccupiedresultinginavacancyof15%.SBDDelhihaswitnessedanaverageyearlyincrementalsupplyof1mn.sq.ft.since2008.EventhoughtheSBDmarketwitnessedanincreaseinvacancyintheyear2011,robustdemandcoupledwithlimitedsupplyduring2012hasledtoadropinvacancy.

OccupierprofileoftheSBDcomprisesFMCG,Telecom,BFSI,Manufacturing,IT/ITeS,andotherservicesectorcompanies.UnliketheCBDDelhimarket,bothJasolaandSakethavemuchlargerofficefloorplatestoofferwhichhasfurtheraddedtotheattractivenessoftheselocations.TheSBDalsowitnessedthebottomingoutofrentalsintheyear2009fromthepeakofINR180-200/sq.ft/monthduring2007-2008.RentalshavemovedupwardsduetoconsistentdemandandlimitedsupplyintheSBDmarkets.CurrentlytherentalsrangebetweenINR170-190/sq.ft/month.

TheSBDmarkethasadiversifiedoccupierprofileandisnotcompletelydependent

ofexistingbuildings.Lackofsupplyandsteadydemandfromcompaniespreferringcentrallylocatedofficeswithproximitytothegovernmentoffices,ministryandprimeresidentialandretailmarketsofDelhihaveledtoanincreaseinrentalsintheCBDlocationsespeciallyConnaughtPlace.Landlordshavebeenquotingpremiumrentalsduetolackofsupply.AveragerentalsintheCBDlocationsbottomedouttoINR225-245/sq.ft/monthin2009fromthepeaksofINR280-300/sq.ft/monthduring2007-08,primarilyduetotheeconomicrecession.However,steadyabsorptionandlackoffreshsupplypushedtherentalsupwardstoINR240-260/sq.ft/monthduring2012.

Goingforward,CBDDelhiofficemarketisprojectedtohaveavacancylevelofaround3.7%by2017with0.28mn.sq.ftofnewsupplyscheduledtoenterthemarketduringthesefiveyears.Approximately0.31mn.sq.ft.ofofficespaceisexpectedtobeabsorbedduring2013-17consequentlyleadingtoasteadygrowthinrentals.DespitecheaperrentoptionsinthePBD,existingpublic

Good connectivity with other markets as well as proximity to government offices compelled companies to have a base in CBD Delhi.


CBD Delhi

2012 2017E

SBD Delhi PBD Gurgaon Zone-A PBD Gurgaon Zone-BPBD Gurgaon Zone-C PBD Noida PBD Greater Noida

5% 12%

21%

28%

4%

24%

6% 7%

15%

20%

27%

4%

24%

3%


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Figure6CBD Delhi office market analysis


Mn.

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Figure7SBD Delhi office market analysis



ontheIT/ITeSindustry,implyingalimitedimpactoftheglobaleconomicturmoil.Goingforward,theSBDmarketwillcontinuetobeapreferredlocationforcompanieslookingformid-sizefloorplateoptionswithinDelhi.TheofficemarketofSBDDelhiwillwitnessabsorptiontothetuneof2mn.sq.ft.andabout1.4mn.sq.ft.ofincrementalsupplyintheensuingfiveyears.Thiswillconsequentlybringdownthevacancytoabout10%by2017.Althoughthiswillputanupwardpressureontherentalgrowth,notmuchincreaseisexpectedduetothepresenceofbetterfacilitiesinthePBDofficemarketsatcompetitiverentals.RentalvalueinthismarketisforecastedtorisefromINR170-190/sq.ft./monthin2012toINR188-210/sq.ft./monthby2017.CapitalvalueisestimatedtoincreasefromINR20,400-22,800/sq.ft.toINR25,050-27,950/sq.ft.duringthesameperiod.Theprojectedinvestorreturnis10%pafrom2013-2017.

PBD Gurgaon Zone-A

PBDGurgaonZone-Aispredominantlyacommercialdevelopmentandincludesmicro-marketslikeMehrauli-GurgaonRoad(MGRoad),NH-8,GolfCourseRoadandGolfCourseExtensionRoad.Zone-Aiswell-connectedwithDelhithroughthesix-laneNH-8andMGRoad.Availabilityofcontiguouslandparcels,proximitytotheinternationalairport,qualitycommercialpropertiesandaccesstothetalentpoolattractedmanycorporateshere.Thus,thezoneemergedasamajorhubfortheBFSI,FMCG,consulting,automobileandtelecomindustries.TheresultantincreaseintheemployeebasealsobroughtinahugedemandforhomesandeventuallysawZone-AevolveintooneoftheestablishedresidentialmarketsinGurgaon.PrimeresidentialareaslikeGolfCourseRoadandGolfCourseExtensionRoadquotethehighestcapitalvalueinGurgaon.Further,thezonecomprisesamixedtenantprofileofcorporateoffices,IT/ITeSplayersandalsobuilt-to-suitcampusesviz.AmericanExpressandGenpact.

Otherthanthewell-establishedmarketsofMGRoad,NH-8andGolfCourseRoad,GolfCourseExtensionRoadhasemergedasanupcomingcommercialIT/ITeScentreinGurgaon.Despiteconstructionworkbeingatanascentstageinmostofficebuildings,GolfCourseExtensionisallsettobecomeanimportantofficehubofGurgaon.ConnectivityisanadvantageforGolfCourseExtensionRoadasitiswellconnectedwithGolfCourseRoad,SohnaRoadaswellasSouthernPeripheralRoad.GolfCourseExtensionRoadisexpectedtowitnessalotofdevelopmentinthecomingyearsinalltheassetclasses,beitresidential,commercial,retailorhospitality.Sincethereisampleavailabilityofland,anumberofdevelopershaveplannedtheirprojectshere.ThedevelopersquoteapremiumforofficerentalsinthislocationduetothecontinuitywithGolfCourseRoad.

ThetotalstockinPBDGurgaonZone-Ais21.2mn.sq.ft.ofwhich17.8mn.sq.ft.isoccupiedresultinginavacancyof15.7%.Despitethehighrentalsofferedherein

comparisontoothermicromarketsofGurgaon,PBDGurgaonZone-Acontinuestoattractoccupiers.Theeconomicslowdownof2008hadarelativelylowerimpactontherentalsofthiszone.RentalsdecreasedmarginallyfromINR85-90/sq.ft./monthin2008toINR80-90/sq.ft./monthin2010.However,improvementintheeconomicoutlookanddearthinqualitycommercialbuildingsledrentalstoincreasetoINR85-110/sq.ft/monthin2012.

Goingforwardweexpectabsorptioninthiszonetoberobustduring2013-17as

occupierpreferencewillcontinuetobestrongovertheforecasthorizon.Overall11mn.sq.ft.ofnewofficesupplyisplannedinthiszoneandabsorptionof9.1mn.sq.ft.isprojectedforthenextfiveyearswhichisexpectedtokeepthevacancyat16.2%by2017.Sincethebuildingsinthiszonetypicallycatertonon-IT/ITeSindustriesandheadquartersofmajorcorporates,rentalswillalwaysberelativelyhighercomparedtootherzonesofGurgaon.Consideringthis,weforeseerentalvalueincreasingfromINR85-110/sq.ft./monthin2012toINR106-137/sq.ft./monthby2017.Similarly,capitalvalueisexpectedtorisefromINR13,600-17,600/sq.ft.in2012toINR19,550-25,300/sq.ft.by2017.Thiseffectivelytranslatesintoaninvestorreturnof11%pafrom2013-2017.

PBD Gurgaon Zone-B

PBDGurgaonZone-BcomprisesDLFCyberCity,SohnaRoadandUdyogVihar.Overthelastdecade,thespurtineconomicactivityhereisprimarilyonaccountofthegrowthoftheIT/ITeSsector.Moreover,ampleavailabilityoflandandfavourabletaxpoliciesarethesolereasonsfortheemergenceofZone-BasanIT/ITeShub.ThiszoneispredominantlyoccupiedbytheIT/ITeSindustryasmostofthebuildingsareeitherITParksorITSEZs.ThereisalimitedpresenceofBFSI,mediaandconsultingindustriesinthiszone.AsonDecember2012,thetotal

PBD Gurgaon Zone-A is predominantly a commercial development and includes micro-markets like MG Road, NH-8, Golf Course Road and Golf Course Extension Road.

Availability of contiguous land parcels, proximity to the international airport, quality commercial properties and access to the talent pool attracted many corporates to Gurgaon Zone-A.

Buildings in Gurgaon Zone-A typically cater to non-IT/ITeS industries, hence rentals will always be relatively higher compared to other zones of Gurgaon.

Mn.

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Occupied stockStock

Vacancy (RHS)

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Figure8PBD Gurgaon Zone-A office market analysis



DevelopmentCorporation(HSIDC),ithasabroadoccupiermixofexporthouses,tradingcompaniesandIT/ITeSfirms.

OtherthanthealreadyestablishedofficemarketsofDLFCyberCityandUdyogVihar,someofthenewofficemarketslikeSohnaRoadandSouthernPeripheralRoad(SPR)havealsoemergedasimportantcommercialdestinationsintherecentyears.SohnaRoadisapreferreddestinationforIT/ITeS&commercialoccupantsandhasalreadyseenimprovementsinoccupancylevels.GoodconnectivitywithbothNH-8andGolfCourseRoadandlowerrentalsworkinfavourofthisdestination.Awell-developedandaffordableresidentialcatchmentfurtheraddstotheattractivenessofthislocation.

AveragerentalsinthezonebottomedouttoINR45-55/sq.ft/monthin2009fromthepeaksofINR50-58/sq.ft/monthduring2007-08,primarilyduetotheeconomicslowdown.However,steadyabsorptionandalackoffreshsupplypushedrentalsupwardstoINR55-70/sq.ft/monthby2012.

Goingforward,Zone-Bofficemarketisprojectedtohaveavacancylevelofaround20.1%by2017with12mn.sq.ftnewsupplyscheduledtoenterthemarketduringthesefiveyears.Approximately10.1mn.sq.ft.ofofficespaceisexpectedtobeabsorbedduring2013-17consequentlyleadingtoasteadygrowthinrentals.EventhoughthereareampleoptionswithcheaperrentalsavailableinthePBDlocationsofNoidaandGreaterNoida,quiteanumberofcompaniesprefertobeintheZone-Bmarket.Consideringthis,weforeseerentalvalueincreasingfromINR55-70/sq.ft./monthin2012toINR67-85/sq.ft./monthby2017.Similarly,capitalvalueisexpectedtorisefromINR9,450-12,000/sq.ft.in2012toINR13,400-17,050/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe10%pafrom2013-2017.

PBD Gurgaon Zone-C

ManesarwhichisoneoftheimportantindustrialdestinationsinGurgaondistrictconstitutestheZone-CmarketofPBDGurgaon.LocatedontheNH-8,itiswellconnectedwithGurgaonandDelhi.OtherthantheexistingconnectivitywithNH-8,

theunderconstructionDwarkaExpresswaywillprovideseamlesstransittothiszone.Thereareanumberofoperationalindustrialunitsinthiszone;Marutihassetupitssecondmanufacturingplanthere.ItisalsoanimportantnodefortheautomobileandautocomponentsindustryintheproposedDelhiMumbaiIndustrialCorridor(DMIC)project.Althoughitisprimarilyanindustriallocation,ithasalsoseenampleresidentialandcommercialdevelopment.ParticularpocketsinthiszonewereauctionedbytheHaryanaStateIndustrialDevelopmentCorporation(HSIDC)todevelopersforsettingupcommercialbuildings.CurrentlyBhartiAirtel,HCLandAgilenthavesetup

stockofthiszonewas29.2mn.sq.ft.ofwhich22.9mn.sq.ft.isoccupiedresultinginavacancylevelof21.7%.

DLFCyberCityisoneoftheoldestandmostpreferreddestinationsforIT/ITeScompaniesinGurgaon.ItislocatedclosetotheNH-8andprovidesgoodconnectivitywithDelhi.MostoftheIT/ITeScompaniesinGurgaonarepresentlyconcentratedinDLFCyberCity.

Despitecriticismduetopoorinfrastructureintermsofconnectivityandhighrentals,DLFCyberCitystillremainsthepreferredlocationforinternationalcompanieswantingtosetuptheirofficesinGurgaon.Progressoninfrastructureinitiativessuchasrapidmetrohasalsoworkedinfavourofthismicro-market.IthasamixofIT/ITeSbuildingsaswellasITSEZs.Besidesthis,UdyogViharalsohousesanumberofcompaniesintheITSEZbuildings.PrimarilyanindustrialareadevelopedbytheHaryanaStateIndustrial

Despite the low rentals offered by PBD Gurgaon Zone-C it has failed to attract occupiers as distance is one of the prime concerns for prospective occupiers.

DLF Cyber City is one of the oldest and most preferred destinations by IT/ITeS companies in Gurgaon having a mix of IT/ITeS buildings as well as IT SEZs.

Other than the already established office markets of DLF Cyber City and Udyog Vihar, some of the new office markets like Sohna Road and Southern Peripheral Road have also emerged as important commercial destinations.

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Figure9PBD Gurgaon Zone-B office market analysis


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Figure10PBD Gurgaon Zone-C office market analysis



theircampusesinthiszone.Otherthanthecaptiveunitsbythesecompanies,thereareITparksdevelopedbyAnantRaj,VigneshawaraandSpireWorld.

ThetotalstockinPBDGurgaonZone-Cis4.3mn.sq.ftofwhich2.1mn.sq.ftisoccupiedresultinginavacancyof50.4%.Despitethelowrentalsofferedhere,PBDGurgaonZone-Chasfailedtoattractoccupiers.Distanceisoneoftheprimeconcernsforprospectiveoccupiers.ThereareampleoptionsavailablefortheIT/ITeSoccupierswithinGurgaonitself,preventingthemfromlookingbeyond.SubdueddemandhasputpressureonrentalsbringingthemdownfromINR40-45/sq.ft/monthin2009toINR25-35/sq.ft/monthin2012.

GoingforwardwedonotexpectmuchgrowthinabsorptionlevelstillFY15beyondwhichdemandwillpickup,especiallyfromoutsourcingandbackofficeoperationcompanieslookingforlargeofficespacesataffordablerentals.MoreovercompletionoftheDwarkaExpresswaywillboostdemandinthiszone.Ithasbeenobservedthatawell-developedresidentialcatchmentisrequiredtosupportcommercialdevelopmentinanylocation.Hence,completionofresidentialprojectsinSector83,84,85,and88willgivethemuchneededimpetustothecommercialdemandinPBDGurgaonZone-C.Alsoconsideringtherentalgrowthinothercommercialmicro-marketsofGurgaontherewillnotbemanyoptionsavailableintherentalrangeofINR35-45/sq.ft./monthby2015;thiswillalsobeabigfactorinpushingdemandfurther.

Overall,1.3mn.sq.ft.ofnewofficesupplyisplannedinthiszoneandabsorptionof1.5mn.sq.ft.isprojectedforthenextfiveyearswhichisexpectedtobringdownthevacancytoabout34.7%by2017.Rentalsarenotexpectedtogrowinthenearfuture,consideringthevacancylevelswhichdespitethedropwillremainhighcomparedtoothermarketsin2017.Consideringthis,weforeseetherentalvalueincreasingfromINR25-35/sq.ft./monthin2012toINR28-40/sq.ft./monthby2017.Similarly,capitalvalueisexpectedtorisefromINR4,000-5,600/sq.ft.in2012toINR5,200-7,300/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe8%pafrom2013-2017.

PBD Noida

NoidaemergedasanaffordablealternativeofficedestinationcomparedtobothDelhiandGurgaon.Thismicro-markethasgainedalotofmomentuminrecentyears.Good

connectivity,plannedinfrastructureandampleaffordablehousingoptionsforemployeesaresomeofthekeycontributingfactorstothegrowingcommercialdevelopmentshere.TherehasbeenasignificantdemandforIT/ITeSofficespaceinNoida.IBM,AONHewitt,TCS,Wipro,HCL,TechMahindra,Adobe,Ericsson,Dell,iGATE,Accenture,SamsungandMetlifearesomeofthecompaniestohavesettheirfootprintsinNoida.

NoidacurrentlycaterstoIT/ITeScompaniesoperatingfromindependentorBTS(built-to-suit)buildingsaswellasITSEZdevelopments.MostoftheIT/ITeScompaniesarebasedoutofindustrialsectorslike16,58,59,60,and61.However,goodtractionisobservedontheNoida-GreaterNoidaExpresswayinsectors16A,94,127,132and143.Inlinewithoccupiers’preference,PBDNoidaoffersqualitybuildingswithlargefloorplates.Additionally,lowerrentalsincomparisontocompetingmarketsof

GurgaonZone-A,Zone-BandSBDDelhiattractcompanieslookingtosetupofficesinPBDNoida.

CurrentlythetotalofficestockinNoidais25.5mn.sq.ft.withavacancylevelof28.6%.QuiteanumberofofficeprojectswerelaunchedbydevelopersintheNoidamarketduring2005-2006,duetoavailabilityofcheaperlandandperceivedofficespacedemand.Theseprojectsenteredthemarketintheyear2008,creatingpressureonthevacancylevelswhichwereupwardsof22%before2008.Incrementalsupplyandsubdueddemandpushedthevacancyfurtherto30%intheyear2011.ModestgrowthoftheIT/ITeSsectoraftertheslowdownmostlyattributedtotheslowerthanexpectedrecoveryoftheUnitedStatesofAmerica(US)economyleadingtolimitedtakeupsduring2009-2010.However,thevacancylevelshavecomedownrecentlyandhelpedthemarkettomaintaintherentals.AveragerentalsintheNoidamarketremainunchangedfromthe2009levelandcurrentlyrangebetweenINR45-55/sq.ft/month.

Noidaisexpectedtowitnessincrementalofficestockof11mn.sq.ftinthenextfiveyears.Moreover,withabsorptiontothetuneof9.44mn.sq.ft.during2013-17,vacancylevelsareexpectedtorecedeandbytheendof2017themarketwillhaveavacancyof24.1%.RelativelylowrentalsandlargerfloorplatesincontrasttothecompetingmarketofSBDDelhiwillboostofficedemandinthePBDNoidamarket.Additionally,theadvantageofbeinginproximitytomajorresidentialmarketswillcontinuetoattractoccupier’sinterestespeciallyfromtheIT/ITeSsector.However,vacancylevelsarelikelyto

Noida emerged as an affordable alternative office destination compared to both Delhi and Gurgaon.

Noida caters to IT/ITeS companies operating from independent or built-to-suit buildings as well as IT SEZ developments.

A number of office projects were launched by developers in the Noida market during 2005-2006, due to availability of cheaper land and perceived office space demand.

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Figure11PBD Noida office market analysis



in2012toINR6,150-7,700/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe11%pafrom2013-2017.

Outlook

WithverylimitedavailabilityoflandparcelswithintheDelhimarket,nomajorsupplyisexpectedtobeaddedtotheDelhiofficemarket.Hence,goingforward,incrementalsupplyisexpectedinthePBDsofGurgaon,NoidaandGreaterNoida.Consequently,shareofthePBDmarketinthetotalNCRofficemarketwillincreasefrom78%in2012

to83%bytheendof2017.

Duringourforecastperiod,officeinvestmentinPBDGurgaonZone-A,PBDNoidaandPBDGreaterNoidawouldprovideaninvestorreturnof11%paincomparisontothecompetingmarketsofPBDGurgaonZone-Bthatwouldoffer10%pa.CBDDelhiandSBDDelhiwouldofferaninvestorreturnof10%followedbyPBDGurgaonZone-Cwhichshallprovide8%pa.

ExpresswayandGreaterNoidaisnotmuch;henceoccupiersprefertheformer.RentalsinGreaterNoidanowrangebetweenINR40-50/sq.ft/month.

Inthenextfiveyears,about5.9mn.sq.ft.ofnewsupplyisestimatedtocomeonline,contrastedwithademandof4.3mn.sq.ft.Although,weprojecttheabsorptionlevelstogrow,vacancylevelswillstillremainhighowingtothefuturesupply.Consideringthehighvacancylevels,rentalsarenotexpectedtogrowatafasterpace.Also,availabilityofsimilarofficespacesandamenitiesontheNoida-GreaterNoidaExpresswayatsimilarrentswillhaveabearingontherentals,keepingthemundercheck.Consideringthis,weforeseerentalvalueincreasingfromINR40-50/sq.ft./monthin2012toINR44-55/sq.ft./monthby2017.Similarly,capitalvalueisexpectedtorisefromINR5,000-6,600/sq.ft.

remainhighduetoupcomingsupplyontheexpresswaywhichinturnwouldputfurtherpressureonrentalsacrosstheNoidamicro-markets.Hence,weexpectmoderategrowthinrentalandcapitalvaluefromINR45-55/sq.ft./monthandINR6,000-7,350/sq.ft.toINR51-62/sq.ft./monthandINR7,650-9,350/sq.ft.from2012to2017respectively.Thiswillyieldaninvestorreturnof11%paduring2013-2017.

PBD Greater Noida

GreaterNoidaemergedasanimportanturbancentreduetotheoutgrowthofDelhiandNoida.ConnectivitytothislocationisthroughtheNoida-GreaterNoidaExpressway.TheproposedmetrorailconnectingNoidawithGreaterNoidaisexpectedtoenhancetheconnectivityofsectorsinGreaterNoida.BeinganaffordablemarketGreaterNoidahaswitnesseddemandfromtherelativelyexpensivemarketofNoida.Improvedconnectivityandfavourablegovernmentpolicieshaveledtoaconsistentdemandforresidentialaswellascommercialprojects.GreaterNoidaisaplanneddevelopmentwithindustrialasitsmaineconomicactivitysupportedbytheresidential,commercialandinstitutionaldevelopment.

GreaterNoidaisperceivedtobealowcost

officedestination.Anumberofdevelopershavelaunchedofficeprojectshereonassuredreturnsschemes.ItisprimarilyanIT/ITeSdestination,currentofficestockofGreaterNoidais2.98mn.sq.ft.outofwhich2.18mn.sq.ft.isoccupiedtranslatingintoavacancyof27%.Vacancylevelshavebeenshowinganupwardtrendasabsorptionhasnotcaughtupwiththenewsupply.SincetheNoida-GreaterNoidaExpresswayitselfisunderdevelopmentanddemandforofficespacehasstartedpickinguprecently,shiftingoccupier’sinteresttowardsGreaterNoidahasalongwaytogo.ThedifferentialinrentalsbetweentheNoida-GreaterNoida

Greater Noida emerged as an important urban centre due to the outgrowth of Delhi and Noida. It began as a planned industrial development and has seen well rounded progress.

With very limited availability of land parcels within the Delhi market, no major supply is expected to be added to the Delhi office market.

Figure13NCR’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)


CBD Delhi

SBD Delhi

PBD Gurgaon Zone-A

PBD Gurgaon Zone-B

PBD Gurgaon Zone-C

PBD Noida

PBD Greater Noida

240-260

170-190

85-110

55-70

25-35

45-55

40-50

272-294

188-210

106-137

67-85

28-40

51-62

44-55

30000-35000

20400-22800

13600-17600

9450-12000

4000-5600

6000-7350

5000-6600

37900-41050

25050-27950

19550-25300

13400-17050

5200-7300

7650-9350

6150-7700

10%

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10%

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11%



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Figure12PBD Greater Noida office market analysis


HYDERABAD


Hyderabad is the administrative, financial and economic capital of Andhra Pradesh and the largest contributor to the state’s GDP. This city whose commercial landscape was predominantly made up of engineering based industries and trading companies has seen a dramatic change over the last few decades. With the IT boom, companies like IBM, Perot, Accenture, CA, HP, GE and Convergys set up offices in Hyderabad. This furthered the case for large scale development of infrastructure facilities and rapid growth of contiguous locations surrounding the HITEC City area which is at the centre of the IT boom in Hyderabad.

TheofficespacemarketinHyderabadtodayisdominatedbytheIT/ITeSsectorwhichoccupiesalmost75%ofthestockwhilethemanufacturingandBFSIsectorsoccupy9%and6%respectively.Hyderabadhasalsoseenthepresenceofotherservicesectorcompanieslikeconsultingandmediagrowovertheyearsandtheynowconstitutealmost10%ofthemarket.Extremelyaffordablerentals,ampleavailabilityofqualityrealestateandamassivetalentpoolmakeHyderabadoneofthemostattractivedestinationsfortheIT/ITeSsectorinIndia.

TheeuphoriaoftheIT/ITeSboomhadpromptedaflurryofconstructionactivityin2006and2007,mostofwhichcameonlineamidsttheglobaleconomiccrisisof2008and2009.Thiscausedvacancyratestospikeupto20%in2009.Themarkethasrecoveredsincethenin-spiteofthebackdropoftheTelanganamovementandthevacancyratenowequalsitspre-crisislevelsof14%.Currently,theHyderabadofficemarkethasastockof49.1mn.sq.ft.ofofficespace,6.7mn.sq.ft.ofwhichislyingvacant.

TheIT/ITeSsectorwillcontinuetobethemainstayoftheHyderabadofficemarketwhilethemanufacturingandotherservicesectorsslowlygainonmarketshare.However,absorptionlevelsarenotexpectedtogrowsubstantiallyoverthefiveyearforecastperiodduetoaslowdownintheIT/ITeSsector.TheperceptionofashakypoliticalenvironmentwillalsotendtodeterIT/ITeSsectorcompaniesfromcommittingsubstantialfreshinvestmentsinthemarket.

Further,decreasingvacancyratesandgrowingrentsinrecentyearshaveencourageddeveloperstolaunchanumberofprojectswhichwillcomeonlineover2013and2014.Thetepiddemandscenariocoupledwithnearly10.2mn.sq.ft.ofdeliveriesscheduledoverthenexttwoyearswillseevacancylevelsriseto17%.Havingsaidthat,theimpendingstateelectionsin

HYDERABAD

The office space market in Hyderabad today is dominated by the IT/ITeS sector which occupies almost 75% of the stock while the manufacturing and BFSI sectors occupy 9% and 6% respectively.

The Hyderabad office market has a stock of 49.1 mn.sq.ft. of office space, 6.7 mn.sq.ft. of which is lying vacant.

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Figure1Hyderabad office market analysis


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Figure2New supply & absorption of office space in Hyderabad


Figure3Industry-wise split of Hyderabad’s office space absorption

IT/ITeSOther service sectors

ManufacturingBFSI

75%

10%

9% 6%



2014areexpectedtobringclosuretotheon-goingpoliticalturmoilandconsequentlyboostbusinesssentiment.Thus,demandandsupplydynamicsareexpectedtostabilize2015onwardsandstabilizevacancylevelsat14%by2017.

Thedemandsupplyequationwillhavetobeanalysedfurtherbydelvingdeeperintobusinessdistrictlevelanalysisinordertohaveabetterunderstandingofthecity’sofficemarket.TheHyderabadofficespacemarketcanbeclassifiedintofourbusinessdistricts:CBD&Off-CBD,SBD,PBDEastandPBDWest.

CBD & Off-CBD

TheHyderabadCBDgrewfromcentrallocationslikeBegumpetandAmeerpet,spreadingoutovertheyearstoincludeBanjaraHillsandJubileeHillswhichtodayhavethehighestofficespaceconcentrationsinthismarket.Characterisedbyexcellentconnectivitywithmajorresidentialclusters

andwell-developedphysicalandsocialinfrastructure,theCBD&Off-CBDmarketenjoysoccupancylevelsthataresecondonlytotheSBD.

TheCBD&Off-CBDmarkethasamuchmorediverseoccupierprofilecomparedtotherestofHyderabadwheretheIT/ITeSsectordominatesthecommerciallandscape.Officebuildingsheretypicallyhavesmallerfloorplatesbettersuitedtotheconsulting,bankingandmanufacturingcompaniesthatseektomaintaintheveneerofapremiumfrontoffice.Thatsaid,midandsmallsizedIT/ITeScompaniesstillmakeupthelargestchunkofoccupiersinthismarket.

Currently,theCBD&Off-CBDmarkethasanofficestockofapproximately11.4mn.sq.

The strong recovery posted by the Hyderabad office space market in the aftermath of the economic crisis and the ongoing Telengana issue bears testament to its underlying strength.

Rents have fallen consistently in the CBD & Off-CBD market over the past few years and rental growth will be flat going forward as well since desirability of the CBD as an office location continues to fade over time.

HITEC City

Kondapur

Manikonda

Kukatpally

Gachibowli

Kokapet

Madinaguda

Serilingampally

Uppal

Pocharam

Ameerpet

Somajiguda

Banjara Hills

Jubilee Halls

Begumpet

Nanakramguda

Madhapur

SBDPBDWEST

PBD EAST

CBD & OFF-CBD

Proposed Ring Road

Major Road

Proposed Metro Phase I

Corridor I

Corridor II

Corridor III

MMTS Phase I in use

MMTS Phase II in use

MMTS Phase II proposed

Legend

Business Districts of Hyderabad



CBD & Off-CBD

SBD

PBD West

PBD East

Banjara Hills, Jubilee Hills, Begumpet, Ameerpet, Somajiguda,

Himayat Nagar

HITEC City, Kondapur, Madhapur, Manikonda, Kukatpally

Gachibowli, Kokapet, Madinaguda, Nanakramguda, Serilingampally

Uppal, Pocharam



valuestomarginallyincreasefromINR45-58/sq.ft./monthandINR5,400-6,900/sq.ft.toINR48-62/sq.ft./monthandINR6,450-8,350/sq.ft.from2012to2017respectively.Thiswillyieldaninvestorreturnof10%paduring2013-2017.

SBD

TheestablishmentoftheHITECCityin1998andannouncementoftheITincentivespolicyshortlyafter,sowedtheseedsofanunprecedentedboominofficespacedevelopmentinHyderabad.Thebulkofthisdevelopmenttookplaceinthewestern

locationsofHITECCity,Kondapur,MadhapurandManikonda.Tailor-madetoservetherequirementsoftheIT/ITeSsector,theofficespacestockintheSBDexperiencedprolificgrowthaddingalmost122%or12.7mn.sq.ft.ofofficespaceintheperiodfrom2007to2012.

TheSBDcontainsapproximately51%ofthetotalofficestockinHyderabadandcurrentlyaddsupto25mn.sq.ft.,22.8mn.sq.ftofwhichisoccupied.Asteepdropintransactionactivityintheaftermathoftheeconomiccrisisof2008coincidedwitharguablythebiggestbuildingboomthattheHyderabadofficemarkethaseverexperienced.ThiscausedtheSBDvacancyratetojumpover20%in2009comparedto14%in2008.However,insubsequentyearslowrentalsandampleavailabilityofqualityofficespacessawtheSBDattractmostoftheoccupierinterestintheHyderabadofficemarket.Thiseffectivelysawvacancylevelsdropto9%in2012andrentallevelsrisefromINR29–33/sq.ft./monthin2007toINR36–42/sq.ft./monthin2012.

ft.withvacancylevelsat15%.Thevacancylevelhasinchedupduetosignificantstockadditionsinrecentyearsandthefactthatthismarkethassteadilylostitsstandingasthemostdesirableandpremiummarketintheeyesofoccupiers.However,buildershavebeenabletokeepvacancylevelsdownbyconsistentlyloweringrentsandstayingviableinthefaceofrisingcompetitionfromafastgrowingSBD.Asaresult,rentalsinthismarkethavesteadilytrendeddownfromINR60–70/sq.ft./monthin2007toINR45–58/sq.ft./monthin2012.

GoingforwardwedonotexpectabsorptionnumberstomaintaintheircurrentlevelsintheCBDandOff-CBDasthecoreoftheHyderabadofficespacemarketmovestowardstheSBDinthewest.

Consequently,rentalgrowthwillbeflatasthedesirabilityofthismarketasanofficelocationcontinuestofadeovertime.However,vacancylevelsareexpectedtosustainatcurrentlevelsasjust0.9mn.sq.ftofincrementalofficespaceisexpectedtocomeonlinetill2017.Weexpectrentalandcapital

The SBD accounts for almost 51% of the total office stock in Hyderabad with the vacancy rate at an extremely low 9%. This is easily the most prominent market in the city.

We do not expect absorption numbers to maintain their current levels in the CBD as the core of the Hyderabad office space market moves towards the SBD in the west.


SBD

2012 2017E

CBD PBD West PBD East

51%

23%

22%

4%

53%

17%

26%

4%


Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

2%

4%

6%

8%

12%

10%

16%

14%

18%

0

4

8

14

12

10

6

2

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

E



Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

5%

10%

15%

20%

25%

0

5

15

25

30

20

10

45

40

35

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

EFigure7SBD office market analysis



ThemarkedpreferenceoftheIT/ITeSsectortowardsofficespacesintheITcorridorcoupledwithasubstantialdevelopmentpipelinewillensurethattheSBDiswellplacedtoclaimthelargestsliceofthetransactionspiegoingforward.Nearly6mn.sq.ft.ofofficespaceisexpectedtocomeonlinein2013and2014followedbyanadditional3mn.sq.ft.in2015.

ThesesubstantialdeliveriescoupledwithrisingcompetitionfromperipherallocationslikeGachibowliandNanakramgudainthewestareexpectedtopushvacancylevelsupto15%duringtheforecastperiod.However,weexpectrentalgrowthtobestronginspiteofrisingvacancylevelsandtheavailabilityoflowerpricedandgoodqualityoptionsintheperipheralwesternlocations.ThisisprimarilyduetotheadvantagethattheSBDenjoysoverthePBDWestintermsofpublictransportconnectivityintheformofregularbusservicesandtheMMTS.Additionally,italsohasamuchbetterdevelopedretailenvironmentwithrecreationaloptionsfortheresidentworkforce.TheseadvantagesareexpectedtoholdtrueovertheforecasthorizonandkeeptheSBDattheforefrontoftheHyderabadofficespacemarket.

CompetitionfromperipheralwesternlocationsandthefactthatrentallevelsarefastapproachingCBD&Off-CBDpricepointswillcausetherentalgrowthratetoslowdownfromthenear6%levelsduringtheprecedingthreeyearsto4.5%duringtheforecastperiod.Hence,weexpectrentalvaluestoreachINR44–52/sq.ft./monthin2017fromthecurrentINR36–42/sq.ft./monthlevels.Similarly,capitalvalueisexpectedtorisefromINR4,320-5,040/sq.ft.in2012toINR5,900-6,900/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe14%pafrom2013-2017.

PBD West

ThecreationoftheFinancialDistrictinGachibowliinthefirsthalfofthepreviousdecadespurredthedevelopmentofanofficespacedestinationfurtherwestoftheITCorridor.AndhraPradeshIndustrialInfrastructureCorporationLimited(APIIC)acceleratedthefileclearanceprocessthatencouragedcompaniestofirstsetupshopinGachibowliwhichisthecentreofdevelopmentinthismarket.Theconstructionofthe162kmlongJawaharlalNehruOuterRingRoadeffectedspeedyconnectivitywiththenewinternationalairportatShamshabadandallowedGachibowliandMadhapurtobeaccessiblefromtheperipheryaswellasthecitycentre.However,connectivityviapublictransportisstillthebiggestfactordifferentiatingthismarketfromtheSBD.

TheFinancialDistrictwasconceivedasacentreforbackofficeoperationsofbankingandfinancecompaniesandiswellpopulatedbybankingmajorssuchasICICIwhichitselfoccupiesalmost4mn.sq.ft.inthislocation.TheIT/ITeSsectorcompanieshavealsotakenupspaceinabigwayduetotheavailabilityofqualityproductssuchasDLFCybercityandWaverock,similartothoseavailableintheSBDatsignificantlylowercosts.

Currently,thePBDWestmarkethasalmost11mn.sq.ft.ofofficespace,8.6mn.sq.ft.ofwhichisoccupied.Thisworksouttoavacancyrateof21%in2012thathastrendedupfrom16%in2008andhitahighofalmost33%in2009.Consistentlargescaledevelopmentoverthepastfiveyearshas

keptconstantpressureonrentalandvacancylevelsalike.2013willalsoseenearly2.9mn.sq.ft.ofofficespacereachcompletionandconsequentlypushvacancyrateshigherto26%asstagnatingabsorptionnumbersareexpectedtolagofficespacecompletionstillthefirsthalfof2014.Rentalgrowthhasbeenfairlystrongsince2007risingfromINR26–28/sq.ft./monthlevelsthen,toINR31–33/sq.ft./monthin2012.

ThePBDWestmarketiswellpositionedtoattractcompanieslookingtoexpandorreducetheiroccupancycostsduetotheampleavailabilityofqualityrealestateatlowercosts.DemandfromIT/ITeSandBFSIsectorcompanieswillcontinuetodrivethedynamicsofthismarketandthespilloverdemandfromtheSBDwillprovideasignificantboostaswell.Weexpectvacancylevelstoreach18%-19%by2017asabsorptionlevelsstabilize,butrentalgrowthwillbelowercomparedtopreviousyearsasthebaseeffecthasplayedoutandthediscountthismarketenjoyedovertheSBDhasdwindledovertheyears.Hence,weexpectrentalvaluestoreachINR37–39/sq.ft./monthfromthecurrentINR31–33/sq.ft./monthlevels.Similarly,capitalvalueisexpectedtorisefromINR3,720–3,960/sq.ft.

The PBD West market is well positioned to attract companies looking to expand or reduce their occupancy costs due to the ample availability of lower priced and good quality real estate compared to the SBD.

Vacancy and absorption levels are expected to remain healthy going forward, however rental growth will be lower compared to previous years as the base effect has played out and the discount this market enjoyed over the SBD has dwindled over the years.

The marked preference of the IT/ITeS sector towards office spaces in the IT corridor coupled with a substantial development pipeline will ensure that the SBD is well placed to claim the largest slice of the transactions pie going forward.

Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

5%

20%

15%

10%

25%

30%

35%

0

10

25

20

15

5

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

E

Figure8PBD West office market analysis



absorptionpieisnotexpectedtoexpandsignificantlyandthattheperipheralwesternmarketswillprovetobeamuchmoreattractiveproposition.Vacancyrateswillcontinuetostayunderpressureandrangebetween34%-36%asweexpectanincrementalabsorptionofonly0.6mn.sq.ft.comparedtonetstockadditionsof0.9mn.sq.ft.duringtheforecastperiod.

However,thesubstantialdiscountthismarketofferscomparedtootherswouldkeeprentallevelsbuoyantandreachINR23–28/sq.ft./monthin2017fromINR21–25/sq.ft./monthlevelsin2012.Similarly,capitalvalueisexpectedtorisefromINR2,520–3,000/sq.ft.in2012toINR3,100–3,700/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe11%paduringtheforecastperiodof2013-2017.

Outlook

SubduedgrowthfromtheIT/ITeSindustrywhichistheprimarydemanddriverinHyderabadwillresultincomparativelyslowerrentalgrowthduringtheforecastperiod.ThesensitivepoliticalscenarioalsoaddsanelementofriskthatdiscouragescorporatesfrommakingfreshinvestmentsalbeitthisfactorisalreadypricedintothemarketconsideringthatitisamongthemostaffordableestablishedIT/ITeSdestinationsinthecountry.Expansionactivityfrom

corporatesalreadyhavingafootprintinHyderabadandforwhomrelocationtoothercitiesisaharderoptiontoexercise,willcontinuetosustainthemarket.However,vacancylevelswilltrendupwardsmarginallyinthefaceofincreasingsupply.

DemandforofficespaceintheHyderabadmarketwillcontinuetobedrivenbyIT/ITeScompaniesandotherservicesectorentitieslikeconsultingandmediacompanieswillgainonmarketshare.TheSBDwillcontinuetoflourishandconsolidateitsstandingasthenewcommercialcoreofHyderabad,seeingbulkoftheactioninthecomingfiveyears.

However,comparablequalityofofficespacecombinedwithlowerrentalsinperipheralwesternlocationslikeGachibowliwillslowrentalgrowthratesgiventhattheabsorptionpieisnotexpectedtogrowsignificantlyintheforecastperiod.

Goingforward,CBD&Off-CBD,PBDEastandPBDWestmarketsareprojectedtoyieldaninvestorreturnof10%,11%and13%parespectivelyfrom2013-2017.WeexpecttheSBDtopostthestrongestrentalgrowthnumbersintheHyderabadofficespacemarketandyieldaninvestorreturnof14%duringtheforecastperiod.

in2012toINR4,900–5,200/sq.ft.by2017.Theeffectiveinvestorreturnisexpectedtobe13%pafrom2013-2017.

PBD East

TheeasternperipheryofHyderabadhasbeenlargelyuntouchedbyofficespacedevelopment,exceptforafewlocationslikeUppal,PocharamandKarmanghatthathavemadesomesignificantadditionstotheHyderabadmarket.ThefactthatoccupiersshowadefinitebiastowardsofficespaceinwesternHyderabadhaseffectivelykeptconstantpressureonrentalandvacancylevelsinthePBDEastmarket.

MindspacebyKRahejaCorporationwasthefirstnoteworthypropertytobecomeoperationalatPocharamby2009withapproximately0.75mn.sq.ft.ofofficespace.PredominantlydrivenbyIT/ITeSsectorcompanies,italsohassmallandmid-sizeconsultingcompaniesamongitsoccupierbase.

Currently,thePBDEastmarkethasjustabout1.8mn.sq.ft.ofofficespacewithvacancylevelsatanextremelyhigh34%.Asmostoftheoperationalstockcameonlineduringthestressedtimesof2008and2009,thismarkethasbeenplaguedbyconsistentlyhighvacancyrates.Consequently,thisalsoensuredthatthePBDEastmarkethastheleastrentals.TherentallevelstodayrangebetweenINR21–25/sq.ft./month,upfromINR13–21/sq.ft./monthin2008.

Goingforward,weexpectthePBDEastmarkettofindfewertakersgiventhatthe

The sensitive political scenario adds an element of risk that discourages corporates from making fresh investments albeit this factor is already priced into the market considering that it is among the most affordable established IT/ITeS destinations in the country.

The PBD East market has just about 1.8 mn.sq.ft. of office space with vacancy levels at an extremely high 34%. It easily offers the lowest rentals in Hyderabad.

Mn.

sq.

ft.

Occupied stockStock

Vacancy (RHS)

0%

10%

5%

30%

35%

25%

20%

15%

40%

0

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0.5

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2009

2010

2011

2012

2013

E20

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2015

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16E

2017

E



Figure10Hyderabad’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)


CBD & Off-CBD

SBD

PBD West

PBD East

45-58

36-42

31-33

21-25

48-62

44-52

37-39

23-28

5400-6960

4320-5040

3720-3960

2520-3000

6450-8350

5900-6900

4900-5200

3100-3700

10%

14%

13%

11%



MUMBAI


The distinction of being the financial capital of the country puts Mumbai at the forefront of the economic landscape, not only of India but also Asia. This distinction also makes Mumbai an important city from the global economic perspective. Besides, being the state capital, the city also serves as the headquarters for the political and administrative machinery of the state government of Maharashtra.

Mumbai’sofficemarketisdrivenbycompaniesfromtheBanking,FinancialService,Insurance(BFSI),IT/ITeSandotherservicesector.Besides,itisthebaseforcorporateheadquartersofIndianaswellasmultinationalcompanies.Thisineffectensuresthatthecityhasawell-diversifiedmixofcorporateofficeoccupiers.Thereareseveralreasonsforsuchavibrantofficespacemarkethere.Availabilityoftalent,conducivebusinessenvironment,internationalairconnectivityandqualityofficedevelopmentsaresomeofthefactorsthathaveaidedthecommercialofficemarketinthecity.However,therearespecificreasonsthathavecreatedafabricofthefinancialindustryinMumbai.Forinstance,thepresenceofprominentstock&commodityexchanges,regulatorsandheadquartersofseveralbankshashelpedinmakingMumbaithemostpreferredlocationforoccupiersfromtheBFSIsector.

Whilethecityhasawell-diversifiedofficeoccupierbase,theBFSIandIT/ITeSsectorstogethercontributetomorethanhalfoftheofficedemand.TheBFSIsectorcontributesto26%ofthedemandemanatingfromthe

Mumbaiofficemarket.At25%marketshare,IT/ITeSisthesecondlargestoccupiergroup.Thisisfollowedbythemanufacturingsectoraccountingfor19%oftheofficeabsorptionprimarilyforthepurposeofcorporateheadquartersofthecompanies.Servicesectorcompaniesfromindustrieslikemedia,consulting,transport,etc.dominatetheremaining30%demand.

IntermsofthestateofMumbaiofficemarket,theperiodsincetheglobalfinancialcrisisin2008-2009hasbeenturbulent.Thisperiodwitnessedahighquantumofnewprojectcompletionscoincidingwithweakglobalanddomesticeconomicconditions.Thecasualtywasthecommercialrealestatemarketwhichhasadirectbearingonthe

MUMBAI

With new project completions to the tune of 35.4 mn.sq.ft. and absorption of 33.7 mn.sq.ft. during 2013-2017, vacancy rate in Mumbai will recede from 23.2% to 18.2%.

Availability of talent, conducive business environment, international air connectivity and quality office developments are some of the factors that have aided the commercial office market in the city. However, there are specific reasons that have created a fabric of the financial industry in Mumbai.

Mn.

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Vacancy (RHS)

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100

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2008

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Figure1Mumbai office market analysis


Mn.

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0

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4

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E

2014

E

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E

2016

E

2017

E

Figure2New supply & absorption of office space in Mumbai


Figure3Industry-wise split of Mumbai’s office space absorption

BFSIIT/ITeS

ManufacturingOther service sectors

26%

25% 19%

30%



corporateprofitabilityandemploymentoutlook.Whiletheofficestockhasmorethandoubledbetween2008and2012from47.4mn.sq.ft.to95.1mn.sq.ft.onaccountofstrongprojectcompletions,demandremainsbleak.Thishasresultedinhighvacancyinofficebuildings.Vacancyrosesharplyfrom4.3%in2008to23.2%in2012.Officerentalsdeclinedby10-40%duringthisperiod.

Asperourforecasthorizon(2013-2017),theoverallmarketscenarioinMumbaiislikelytoimprove.Deceleratingsupplymomentumcoupledwithimproveddemandwillresultinlowervacancyintheofficemarket.Withnewprojectcompletionstothetuneof35.4

Proposed International Airport

FortNariman Point

Cuffe Parade

Ballard Estate

Mahalaxmi

WorliPrabhadevi

Dadar

Lower Parel

BKCBandra (E)

Kalina

Andheri

Jogeshwari

Goregoan

Malad

Chembur

Kurla

Ghatkopar

Powai

Bhandup

Vikhroli

Kanjurmarg

Thane

Airoli

Rabale

Ghansoli

Vashi

Belapur

CBD & OFF-CBD

CENTRAL MUMBAI

BKC & OFF-BKC

SBD WEST

PBD

PBD

SBD CENTRAL

Major Roads

Railway Line


Under Construction Monorail

Under Construction Railway

Legend

Business Districts of Mumbai



CBD & Off-CBD

Bandra Kurla Complex &

Off-Bandra Kurla Complex

(BKC & Off-BKC)

Central Mumbai

SBD West

SBD Central

PBD

Nariman Point, Cuffe Parade, Ballard Estate, Fort, Mahalaxmi, Worli

BKC, Bandra (East), Kalina, Kalanagar

Parel, Lower Parel, Dadar, Prabhadevi

Andheri, Jogeshwari, Goregoan, Malad

Kurla, Ghatkopar, Vikhroli, Kanjurmarg, Powai, Bhandup, Chembur

Thane, Airoli, Vashi, Ghansoli, Rabale, Belapur



andtradehubofthecity.However,onaccountofthegrowthofcommerceintheeconomyandlackoflandavailabilityinthiszone,officespacedevelopmentpost2000beganoutsidethisbusinessdistrict.Heightenedeconomicactivityduring2004-2007generatedsignificantdemandforofficespace.SpacewaslimitedintheCBD&Off-CBDregion.With14.4mn.sq.ft.ofstockin2008andavacancyrateofjustabout1.9%,rentalsmovedupfromINR100-150/sq.ft./monthin2004toINR350-420/sq.ft./month,thehighestinthedecade.However,theglobalfinancialcrisisof2008-09andtheresultantslowdowninbusinessadversely

impacteddemandforofficespace.AtthesametimecompetingmarketslikeBKC&Off-BKC&CentralMumbaiwitnessedstrongprojectcompletionsofqualitybuildingsofferingbetteramenitiesandlargefloorplates,whichattractedoccupiers.Asaresult,by2012vacancyshotupto15%ofthetotalstockof14.9mn.sq.ft.inthisbusinessdistrict.

BKC&Off-BKC,thesecondbusinessdistrictintheset,comprisestheBandraKurlaComplex(BKC)andOff-BKClocationslikeBandra(East),KalinaandKalanagar.Thebusinessdistrictemergedwhenapre-emptionoftheshortageofofficespaceinCBDresultedinaseriousthoughtprocesstodevelopaplannedcommercialhubwithinthecity.ThisthoughtprocessresultedinthecreationoftheBandraKurlaComplex(BKC)forthepurposeofofficespacedevelopment.SinceBKCwasaplanneddevelopmentregionwithlandbelongingtotheMumbaiMetropolitanRegionDevelopmentAuthority(MMRDA),landcouldbeprocuredonlyfromtheauthoritythroughanauction.InitiallyonlyafewcorporateswerewillingtomovehereonaccountofitsremotenessfromtheactionofthecommercialcentreofNarimanPoint.However,theinitialapprehensionofoccupiersfadedbyearly2000whensomecorporateslikeICICIBankandNationalStockExchange(NSE)starteddevelopingtheirofficebuildingsonlandpurchasedfromtheMMRDA.By2007officebuildingsconstituting4.06mn.sq.ft.wereoperationalinBKC&Off-BKC.Themarkethadavacancyofjust1.5%.However,intheensuingfiveyears(2008-2012)newsupplyof6.3mn.sq.ft.wasaddedtothemarketincomparisontoanabsorptionof4.6mn.sq.ft.Asaconsequence,thevacancyratespiralledto16.8%.

ThethirdbusinessdistrictinthesetisCentral

mn.sq.ft.andabsorptionof33.7mn.sq.ft.duringourforecasthorizon,vacancyratewillrecedefrom23.2%to18.2%.

AdetailedassessmentoftheMumbaiofficemarketcanbecarriedoutbydividingthemarketsinaccordancewiththeircharacteristics.Assuchthecity’sofficemarketcanbeclassifiedintosixbusinessdistrictsviz.CBD&Off-CBD,BandraKurlaComplex&Off-BandraKurlaComplex,CentralMumbai,SBDCentral,SBDWestandPBD.

CBD & Off-CBD, BKC & Off-BKC, Central Mumbai

Thesearethreebusinessdistrictsthathavetobeassessedwithreferencetoeachother.Theneedforsuchcrossreferenceanalysisemanatesfromthewaymarketdynamicsareshapingupatpresentandwillunfoldintheforeseeablefuture.Ananalysisofmarketcharacteristicsandoccupieranalysiswillreinforcetheneedforsuchcrossexamination.

ThefirstbusinessdistrictofCBD&Off-CBDcompriseslocationslikeNarimanPoint,Fort,CuffeParadeandWorli.Theoriginofbusinessinthecountry’sfinancialcapitalcanbetracedtothisbusinessdistrictwhereofficespacedevelopmentbeganasearlyas1970s.Untilthelate1990s,thisbusinessdistrictaccountedformorethan90%oftheofficestockinthecity.Thebusinessdistrictwastheonlymeaningfullocationinthecityfromanoccupier’sperspectivemainlyonaccountofavailabilityofofficespaceaswellasitsindomitablestatusasthecommercial

Until the late 1990s, CBD & Off-CBD accounted for more than 90% of the office stock in the city. The business district was the only meaningful location in the city from an occupier’s perspective mainly on account of availability of office space as well as its indomitable status as the commercial and trade hub of the city.


BKC & Off-BKC

2012 2017E

CBD & Off-CBD Central Mumbai PBD SBD Central SBD West

11%

16%

9%

17% 12%

35%

11%

12%

9%

20% 15%

33%


Mn.

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ft.

Occupied stockStock

Vacancy (RHS)

0%

2%

4%

6%

8%

12%

10%

16%

14%

18%

10

13

16

15

14

12

11

2008

2009

2010

2011

2012

2013

E20

14E

2015

E20

16E

2017

E




MumbaiwithmarketslikeParel,LowerParelandDadar.Locatedcentrallywithinthecity,thisregion,untilthelate1990s,washometoseveraldefuncttextilemillsbesidestheoldresidentialdevelopments.However,withmilllandmakingwayforswankyrealestatedevelopment,theregionwitnessedamassivetransformationduringthelastdecade.SeverallandparcelsbelongingtoprivatetextilemillsaswellasthegovernmentownedNationalTextileCorporation(NTC)weresoldanddevelopedintoluxurymalls,5starhotelsandpremiumresidentialrealestate.Asaresult,year2001onwards,qualityofficespacedevelopmentsstartedcomingupintheregion.By2008,stockinthemarketreached1.7mn.sq.ft.evenasrentalsspiralledtoINR270-300/sq.ft./monthfromameagre

INR60-70/sq.ft./monthin2004.Whilealowvacancyrateof3.6%explainssomeportionoftheincrease,asignificantportionwouldbeattributedtothetransformationoftheregionthatbeganofferingswankyofficepropertieswiththebestamenities.

Ananalysisofoccupierdemandforthelastfouryears(2009-2012)indicatesthatthesethreebusinessdistrictsaredrivenbytheBFSIindustry,whichcontributesalmosthalfoftheofficedemand.32%iscontributedbycompaniesfromadiversifiedsetofindustries.Companiesfromthemanufacturingsectorcontribute15%,withtheIT/ITeSsectoraccountingforjust5%.Now,evenwithinthesectoralbreakupofdemandadetailedanalysisprovidesfurtherinsights.Posttheglobalfinancialcrisis,corporateshavetemperedbusinessexpectationandadoptedanapproachofcautiousoptimism.Costoptimization,anattributeacquiredforthelongterm,willbeapplicabletoallheadsofthecostsheetincludingrealestatecost.Asaresult,ingeneral,theprimarydecisiononofficeoccupationwillbedrivenbytheassociatedrealestatecost.Thischangeinmindsetisnowevidentthroughtheoccupier’sdecisiontotakeupofficespace,whichdistinguishesbetweenfrontofficeandbackoffice.Thismindsethasresultedintherelocationofbusinessfunctionsthatareeithernotclientfacingorback-endinnaturelikeadministrative,customersupportandprocessingtolocationslikeSBDCentralandSBDWestwithrelativelylowerrentals.Onlythefrontofficethathousesthemiddle

andseniormanagementoftheorganizationandinvolvesclientfacingrolesisjustifiedinstayinginthepremiummarketsofCBD&Off-CBD,BKC&Off-BKCandCentralMumbai.

Thesemarketscommandapremiumbecauseoftheprofileofoccupiersthattakeupofficespacehere.TheseoccupiersaretypicallyfrontofficesofmultinationalbanksandfinancialinstitutionsincaseoftheBFSIsector.Incaseofthemanufacturingsectoritisthecorporateheadquartersofestablisheddomesticaswellasinternationalcompanies.Additionallyoccupiersfromconsultingandmediaaswellasforeignconsulateshaveevincedastronginteresttostayinthisterritory.

Goingforward(2013-2017),theCBD&Off-CBDmarketwillwitnessamarginalriseinvacancy.Whilelackoflandavailabilitywillrestrictnewsupplyto0.3mn.sq.ft.,amutedabsorptiongrowthonaccountofoldconstructionandrelativelyhigherrentalofINR210-280/sq.ft./monthincomparisontothecompetingmarketofCentralMumbai,

CBD & Off-CBD, BKC & Off-BKC and Central Mumbai command a premium because of the profile of occupiers that take up office space here. These occupiers are typically front offices of multinational banks and financial institutions in case of the BFSI sector. In case of the manufacturing sector it is the corporate headquarters of established domestic as well as international companies.

In the foreseeable future, we expect the lines between the three business districts to blur. The entire region comprising current classification of CBD & Off-CBD, BKC & Off-BKC and Central Mumbai will emerge as one CBD for the city.

Located centrally within the city, Central Mumbai, until the late 1990s, was home to several defunct textile mills besides the old residential developments. However, with mill land making way for swanky real estate development, the region witnessed a massive transformation during the last decade.

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Figure7BKC & Off-BKC office market analysis


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Figure8Central Mumbai office market analysis


forecastedtoincreasefrom16.8%in2012to22.9%in2015andrecedeto17.5%by2017.Consideringthesefactorsinourforecasthorizon(2013-2017),weestimaterentalinthismarkettoincreasefromINR200-330/sq.ft./monthtoINR249-411/sq.ft./monthandcapitalvaluestoincreasefromINR24,000-35,000/sq.ft.toINR33,200-47,800/sq.ft.Thisrentalandcapitalvaluemovementshalltranslateintoaninvestorreturnof14%pa.

IncaseofCentralMumbai,strongprojectcompletionstothemagnitudeof6.9mn.sq.ft.,overthelastfiveyears(2008-2012)resultedinanincreaseinvacancyratefrom3.6%to21.5%.Withthischangeinthemarketscenario,rentalsalsowitnessedadeclineof40-50%.Atpresent,CentralMumbaiiswitnessingdevelopmentofqualityofficebuildingswiththebestamenitiesandhasevincedastronginterestfromoccupiers.Intheforeseeablefuture,onthebasisoftheofficemarketdynamicsdiscussedabove,weexpectthelinesbetweenthethreebusinessdistrictstoblur.TheentireregioncomprisingcurrentclassificationofCBD&Off-CBD,BKC&Off-BKCandCentralMumbaiwillemergeasoneCBDforthecity.By2017,thisNewCBDwillhaveastockof41.7mn.sq.ft.Asaresult,demandfromtherelevantoccupiergroupwithinthisterritorywouldfirstflowinthemarketswhichoffercomparativelylowerrentalsandbetterqualitybuildings.Atpresent,witharentalofINR140-190/sq.ft./month,officebuildingsinCentralMumbaiofferabetterpropositiontooccupiersincomparisontothoseinCBD&Off-CBDandBKC&Off-BKC.Duringourforecasthorizon(2013-2017),CentralMumbaiwouldwitnessanabsorptionof3.3mn.sq.ft.incomparisontoprojectcompletionsof2.8mn.sq.ft.

resultinginadeclineinvacancyratefrom21.5%to11.9%.WeforecastrentsinCentralMumbaitoincreasefromINR140-190/sq.ft./monthtoINR206-279/sq.ft./monthandcapitalvaluetoincreasefromINR16,800-22,800/sq.ft.toINR27,400-37,200/sq.ft.Thisshalltranslateintoaninvestorreturnof19%paduring2013-2017.

SBD West

SBDWestconsistsofmarketslikeVileParle,Andheri,Jogeshwari,MaladandGoregaon.CommercialofficespacedevelopmentinSBDWestinitiallybeganduring2001-2005withofficeprojectsinMaladprimarilyfocusedontheIT/ITeSindustryevenasAndheriwasalreadyanestablishedofficemarketduetothepresenceoftheinternationalairport.Connectivityonaccountofthewesternexpresswayandsuburbantrainnetworkwasalreadyinplacetolendanofficemarketpropositiontothisbusinessdistrict.Post2005,asofficedemandinthecitybegantoincrease,aflurryofofficedevelopmentsbeganalongthewesternexpresswayinlocationslikeAndheri,GoregaonandJogeshwari.Theunder-constructionmetrorailnetworkofVersova-Andheri-GhatkoparalsoincreasedtheappealonaccountofanticipatedimprovementintheconnectivityoftheofficemarketofAndheri.Besidesthe

willleadtoamarginalriseinvacancylevelfromthecurrentlevelof15%to16.6%.Hence,duringthenextfiveyears(2013-2017),rentalintheCBD&Off-CBDisforecastedtoincreasefromINR210-280/sq.ft./monthtoINR243-325/sq.ft./monthandcapitalvalueswillincreasefromINR25,200-33,600/sq.ft.toINR32,500-43,300/sq.ft.Theinvestorreturnwouldbe12%paduringthisperiod.

IntermsofthedemandsupplyequationintheBKC&Off-BKCduring2013-2017,weforecastnewprojectcompletionsof4.7mn.sq.ft.withabsorptionat3.8mn.sq.ft.Ofthesupplypipeline,asignificantportionof73%willbereadyforoccupationin2014&2015alone.Besides,alotofexistingofficebuildingsthatcouldexploretotakethebenefitofincreasedFSIof4,MMRDAalsohasasubstantiallandbankinBKCwhichshallbereleasedatregulartimeperiodsasandwhenthemarketisabletoabsorbit.ThevacancyrateinBKC&Off-BKCisthus


The BFSI and IT/ITeS industries together contribute about a third of office demand in SBD West. Mid-size manufacturing sector companies drive a quarter of the office demand here.

Going forward, factors like affordable office rentals and improving East-West connectivity in the city will attract cost conscious occupiers to SBD West. We estimate new project completions to the tune of 9.6 mn.sq.ft. during the next five years. In comparison, our forecast for absorption is 10.9 mn.sq.ft.

In case of Central Mumbai, strong project completions, to the magnitude of 6.9 mn.sq.ft., over the last five years (2008-2012) resulted in an increase in vacancy rate from 3.6% to 21.5%. With this change in the market scenario, rentals also witnessed a decline of 40-50%.

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BKC & Off-BKC CBD & Off-CBD Central Mumbai

Figure9Share of the three markets in the office stock of the envisaged new CBD


IT/ITeSindustrythathadapresenceintheregion,alargenumberofoccupiersfromtheBFSIindustrystartedrelocatingtheirback-endsupportfunctionstothisbusinessdistrictbecauseoftheattractionoflowerrentals.

TheBFSIandIT/ITeSindustriestogethercontributeaboutathirdofofficedemandinSBDWest.Mid-sizemanufacturingsectorcompaniesdriveaquarteroftheofficedemandhere.Onthebackofheightenedconstructionactivityonofficeprojects,thestockinthebusinessdistrictmorethandoubledfrom15.4mn.sq.ft.in2008to33mn.sq.ft.in2012resultinginasharpincreaseinvacancylevel.From6.8%in2008,thevacancyinthemarkethasincreasedto26.4%atpresent.Takingcognizanceofthesupplyledslumpintheregionsomeunder-constructionprojectshaveeitherbeendeferredorconvertedforalternativedevelopment.

Goingforward,factorslikeaffordableofficerentalsandimprovingEast-WestconnectivityinthecitywillattractcostconsciousoccupierstoSBDWest.Weestimatenewprojectcompletionstothetuneof9.6mn.sq.ft.duringthenextfiveyears.Incomparison,ourforecastforabsorptionis10.9mn.sq.ft.Thevacancyrateinthebusinessdistrictwilldeclineduringourforecasthorizon,andcomedownfromthecurrentlevelof26.4%to17.3%in2017.WhilethebusinessdistrictcommandsrelativelylowerrentalsatINR80-130/sq.ft./month,thepropositionofaffordablerealestatecostwillcontinue

tobethecriticalfactorforofficeoccupiersinthismarket.Incaseofsignificantrentalgrowth,occupierswillbeopentomovetoSBDCentral.Takingnoteofthesefactors,weforecastrentalvaluesinthisbusinessdistricttoincreasefromINR80-130/sq.ft./monthtoINR102-166/sq.ft./monthduring2013-2017.ThecapitalvaluesareestimatedtoincreasefromINR9,600-15,600/sq.ft.toINR13,600-22,100/sq.ft.Thiswouldtranslateintoaninvestorreturnof15%duringtheforecasthorizon.

SBD Central

SBDCentralincludesofficemarketslikeKurla,Chembur,Vikhroli,Kanjurmarg,BhandupandPowai.Thebusinessdistrictgainedprominencewhenheightenedeconomicactivityinthecountryduring2005-2007increaseddemandforofficespaceinthecityandrentalsintheestablishedofficemarketsincreasedsignificantly.Asanopportunistmove,severalindustriallandparcelsintheregionpavedthewayforcommercialdevelopmentandheightenedofficeprojectdevelopmentsbeganhere.Withconnectivitytoestablishedofficemarketsalreadyinplaceandrelativelylowerrentals,SBDCentralemergedasanofficemarket.

TheBFSIandIT/ITeSindustriestogethercontributelessthanathirdofofficespacedemandhere.Companiesfromthemanufacturingsectorcompriseathirdoftheofficeoccupierdemand.Currently,thestockinSBDCentralstandsat11.6mn.sq.ft.with12%oftheofficespaceremainingvacant.TheofficespaceinthezonecommandsarentalofINR70-120/sq.ft./month.Withaprofileofofficeoccupiersthataresensitivetohighrentals,officeprojectsinSBDCentralhavenotwitnessedanyincreaseinofficerentalsevenasoccupancylevelimproved

during2009-2012.

Wereckonnewprojectcompletionsof8.4mn.sq.ft.andanabsorptionof6.5mn.sq.ft.overthenextfiveyears.Asignificantquantumofofficeprojectsareunderwayintheregionandwillbereadyforoccupationby2015,increasingthevacancyrateto22.8%.Thisshallsubsideto16.7%bytheendof2017onthebackofrelativelybetterdemandconditionsandrecedingsupplypipelineduring2016&2017.Asaresultofthevacancylevelthatisexpectedtoremainhighattheendofthenextfiveyearsincomparisontothepresentandprofileofcostconsciousoccupiersthatisnotgoingtowitnessanynoteworthyshift,rentalsinSBDCentralareforecastedtomoderatelyincreasefromINR70-120/sq.ft./monthtoINR85-146/sq.ft./monthduring2013-2017.CapitalvaluelevelisforecastedtoincreasefromthecurrentINR8,400-14,400/sq.ft.toINR11,400–19,500/sq.ft.Thisshalltranslateintoaninvestorreturnof13%paduringourforecasthorizon.

PBD

PBDcomprisestheofficemarketsofNaviMumbaiandThane.AttractingoccupiersmainlyfromtheIT/ITeSsector,thisbusinessdistricthasemergedasanInformationTechnologyhubofthecity.However,thegenesisofthisgrowthinofficemarketliesinthedevelopmentoftheMillenniumBusinessParkinMahape.PromotedbytheMaharashtraIndustrialDevelopmentCorporation(MIDC),this2mn.sq.ft.ITparklaidthefoundationforthegrowthoftheIT


As a result of the vacancy level that is expected to remain high at the end of the next five years in comparison to the present and profile of cost conscious occupiers that is not going to witness any noteworthy shift, rentals in SBD Central are forecasted to increase moderately.

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Figure10SBD West office market analysis


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Figure11SBD Central office market analysis



industryinNaviMumbai.Inthelastdecade,theemergenceofNaviMumbai,thesatellitecityofMumbai,ledtoofficedevelopmentsmainlyinlocationslikeAiroli,Vashi,Mahape,TurbheandBelapur.Similarly,regionsinThanelikeWagleEstateandGhodbunderRoadhaveemergedasanextensionofthisITbelt.

Thereareseveralreasonsforthisgrowth,themostprominentonebeingtheavailabilityoflargelandparcelsthatpavedthewayfordevelopmentofgoodqualitybuildingsofferinglargefloorplatesandaffordablerentals.Theregionhasalsowitnessedaccelerateddevelopmentofphysicalandsocialinfrastructureduringthelast5-7years.

Atpresent,theofficestockinPBDstandsat16.6mn.sq.ft.Asmuchas80%ofthissupplyhascomeupduringthelastfive

years,whichalsowitnessedareversalinfortunesoftheIndianIT/ITeSindustry.Asaresult,thevacancylevelsshotupfrom7.9%in2008to36.8%in2012.Consequentlyduringthisperiod,rentalsinthisbusinessdistrictdeclinedby10-30%.Atpresent,officerentalsinthePBDstandatINR50-80/sq.ft./monthThenextfiveyears(2013-2017),wouldwitnessanabsorptionof9.1mn.sq.ft.incomparisontoanestimatedsupplyof9.5mn.sq.ft.

Goingforward(2013-2017),theIT/ITeSindustrywillcontinuetoremainthelargestdemanddriveroftheofficemarketinthePBD.Whileweestimatedemandtoimproveinthenextfiveyearsincomparisontothelastfiveyears,newprojectcompletionswillremainsteady.ThehighvacancysituationinofficeprojectsinthePBDwillprevailfortwomoreyearsfollowingwhichitwillrecedeto25%by2017.

RelativelylowerrentalscomparedtootherpartsofthecitywillcontinuetobethebiggestattractionofthePBDforthiscostconsciousdriverindustry.WhilethisbusinessdistrictoffersthelowestrentalsinMumbai,

amidstthebackdropofincreasingrealestatecosts,theIT/ITeSindustrydoesnotjustlimittoanintra-citycomparisonbutalsoaninter-citycomparisonforoccupyingofficespace.Thiscriticalfactorcoupledwithrobustofficespacesupplywillensureacheckonanysignificantriseinrentalsfromthecurrentlevels.Asaresultofthismarketdynamicsoverthenextfiveyears(2013-2017)theofficerentsinthisbusinessdistrictareforecastedtoincreasefromthecurrentlevelofINR40-70/sq.ft./monthtoINR46-81/sq.ft./monthandcapitalvalueshallincreasefromINR4,800-8,400/sq.ft.toINR6,200-10,800/sq.ft.Theresultantinvestorreturnwouldbe12%paoverthistimehorizon.

Outlook

Duringourforecasthorizon(2013-2017),theMumbaiofficemarketwouldwitnessimprovingfortunesonthebackofahealthierdemand-supplyequation.TheBFSIsectorwillcontinuetobethesinglelargestoccupiergroup.ThefactorsthathavecontributedtoMumbai’sascentasthefinancialcapitalofthecountrywillensurethatthecorporatesfromthissectorpreferthecityoverothers.However,rentalgrowthwillbedependentondifferentbusinessdistrictleveldynamics.

Duringourforecastperiod,officeinvestmentinCentralMumbaiwouldprovideaninvestorreturnof19%paincomparisontothecompetingmarketsofBKC&Off-BKCandCBD&Off-CBDthatwouldoffer14%paand12%parespectively.SBDWestandSBDCentralwouldoffer15%paand13%parespectivelyfollowedbyPBDwhichshallprovide12%pa.

IT/ITeS industry will continue to remain the largest demand driver of the office market in the PBD. While we estimate demand to improve in the next five years in comparison to the last five years, new project completions will remain steady.

At present, the office stock in PBD stands at 16.6 mn.sq.ft. As much as 80% of this supply has come up during the last five years, which also witnessed a reversal in fortunes of the Indian IT/ITeS industry. As a result, the vacancy levels shot up from 7.9% in 2008 to 36.8% in 2012.

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Figure12PBD office market analysis


Figure13Mumbai’s office market outlook for the next 5 years(RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)


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PUNE


Pune city is one of the leading software exporters in India. The pace at which the IT/ITeS industry grew in the city led to a flurry of construction activity in the office space market over the past decade. The manufacturing sector, primarily driven by the auto & auto ancillary and engineering industries, remained at the forefront of office space absorption in the city for many years till the IT/ITeS boom fuelled the need for quality office space in a large quantum. The growing demand from this sector led to the emergence of suburban and peripheral business districts where availability of large tracts of land helped in the development of office space.

Currently,theIT/ITeSandmanufacturingsectorsaccountfor75%and12%ofthetotaloccupiedofficespacerespectively.Apartfromthesetwosectors,thereisconsistentdemandforspacefromawiderangeofserviceindustrieslikeBFSI,consulting,telecomandinfrastructurewhichtogetheraccountfor11%ofthetotaloccupiedspace.However,goingforwardtheshareoftheIT/ITeSsectorisboundtoincreasefurtherasPuneemergesasthepreferreddestinationforthisindustry.Lowrentals,betterqualityofficespace,availabilityofaskilledtalentpoolandaconducivebusinessenvironmentaresomeofthefactorsthatwillcontinuetoattractIT/ITeScompaniestoPune.

Currently,thetotalofficespacestockinPuneis43.1mn.sq.ftofwhich34.2mn.sq.ft.isoccupiedresultinginavacancylevelof21%.Thevacancylevelshavebeendecliningconsistentlysince2009,whentheypeakedat28%duetothehugeinfluxofnewsupplyduring2008and2009.Morethan16mn.sq.ft.ofincrementalofficespaceenteredthemarketduringthesetwoyears.However,2010onwardsthevacancylevelsstarteddecliningasthequantumofnewsupplyenteringthemarketrecededsignificantlyandabsorptionremainedsteady.Theimpactofthiswasreflectedintherentalmovementwhichwitnessedsteadyappreciationinthelastthreeyearsinmostofthebusinessdistricts.

Goingforward,theIT/ITeSsectorwillcontinuetodrivedemandforofficespaceinPunefollowedbythemanufacturingandotherservicesectors.Weestimateanincrementalabsorptionof20.8mn.sq.ft.overthenextfiveyears.Thesteadyincreaseinrentsoverthelastfewyearsrenewedtheinterestofdeveloperstowardsofficespaceandasaresult,constructionactivitiesofvariousprojectscommencedduring2010and2011.Manyoftheseprojectsaresettocomeonlineduring2013&2014whichwillleadtoariseinvacancylevelsandsubsequentlyputdownwardpressureonrents.However,post2013weexpectvacancylevelstograduallydeclineandstabilizeat19%by2017.Consistentyear-on-yeargrowthindemandforofficespaceintherangeof8%-14%overthenextfiveyearsalongwithamarginallylowergrowthinnewsupplyduringthesameperiodwillhelpthePunemarketinachievingthisvacancylevel.

Thedemandsupplyequationwillhavetobeanalysedfurtherbydelvingdeeperintobusinessdistrictlevelanalysisinordertohaveabetterunderstandingofthecity’sofficemarket.ThePuneofficespacemarketcanbeclassifiedintosixbusinessdistricts:CBD&Off-CBD,SBDEast,SBDWest,SBDNorth&South,PBDEastandPBDWest.

CBD & OFF-CBD

TheCBD&Off-CBDmarketsofPuneconsistofmicro-marketswhichareperceivedtobethemostsoughtafterbytenantsduetotheirstrategiclocationwithinthecity,excellentconnectivitytoprimeresidential

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Figure1Pune office market analysis


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Figure3Industry-wise split of Pune’s office space absorption


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areasandthepresenceofdevelopedphysical&socialinfrastructure.Historically,BundGardenRoad,Camp,PuneStationRoadandDeccanwereconsideredtobetheprimeofficelocationswithSBRoademergingasanadditiontothisinrecentyears.

Thismarketisprimarilydominatedbyoccupiersfromthemanufacturing,consultingandBFSIsectorswithverylittlepresenceofIT/ITeSoccupiers.Sincethequantumofspacerequiredisconsiderablysmallandconnectivitywithvariouspartsofthecityisveryessentialfortheseoccupiers,theyprefer

tobelocatedintheCBD&Off-CBDareasdespitehighrentalshere.

ThetotalstockinCBD&Off-CBDasof2012standsat5.3mn.sq.ft.,ofwhich4.4mn.sq.ft.isoccupiedresultinginavacancylevelof17%.Aflurryofconstructionactivityduring2005and2006ledtoalargenumberofprojectsenteringthemarketduring2007and2008whichexertedimmensepressureonvacancylevelsandrentsduringthatperiod.In2009,rentalvalueintheselocationsbottomedoutintherangeofINR50-55/sq.ft./monthfromthepeakofINR70-75/

sq.ft./monthduring2007-08.Withsteadyabsorptionandtheabsenceofanysignificantnewsupplypost2010,vacancylevelshaveremainedstableinrecentyears.Thishas

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Wakdewadi, Aundh, Baner, Kothrud, University Road

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Pimpri, Chinchwad, Bhosari, Bibvewadi, Satara Road


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EFigure6CBD & Off-CBD office market analysis



ConnectivitytoPuneairport,easyaccesstothecitycentreandpresenceofexcellentphysicalandsocialinfrastructureaidedintherapiddevelopmentofEastPuneoverthelastdecade.Micro-marketssuchasKalyaniNagar,Yerwada,AirportRoadandNagarRoademergedasthemostsoughtafterofficelocationsbyoccupiers,especiallytheIT/ITeSsector.Currently,itisprimarilyoccupiedbysmall&mid-sizedIT/ITeS,manufacturingandBFSIcompanies.Additionally,companiesfromvariousservicesectorindustriessuchasConsulting,TelecomandInfrastructurealsooccupyasignificantportionhere.However,asteadyriseinrentalsalongwithcompetitionfromcheaperPBDlocationshavereducedtheattractivenessofthismarketinrecentyears.

CurrentlythetotalofficespacestockinSBDEastis9.3mn.sq.ft.withavacancylevelof16%.Steadyabsorptionoverthelastfouryearshasbroughtdownthevacancylevelfrom23%in2009toitscurrentlevel.ThishashelpedtherentalsinmovingfromINR35-40/sq.ft./monthrangein2009toINR40-50/sq.ft./monthin2012.

EastPunewillcontinuetowitnessrapiddevelopmentintermsofinfrastructureandconnectivitytherebyreducingthealreadythinlinebetweentheCBDandSBDEast.WiththepaucityofgoodqualityofficespaceintheCBD&Off-CBDareas,SBDEastwillemergeasthepreferreddestinationforoccupierslookingforofficespaceinprimelocations.Demandfromsmall&mid-sizedIT/ITeS,manufacturingandotherservicesectoroccupierswillcontinuetodrivethe

marketinthecomingyears.Weestimateincrementalabsorptionof2.2mn.sq.ft.duringthe2013-2017period.However,thereissignificantnewsupplylinedupinthismarketwithvariousprojectsonNagarRoadandVimanNagarsettoenterinthecomingyears.Atotalof2.3mn.sq.ft.ofnewsupplyisexpectedtocomeonlinein2013and2014whichwillpushthevacancylevelsabove23%.Post2014,themarketwillstabilizeintermsofvacancywhichisexpectedtorecedeto17%asonly0.4mn.sq.ft.ofnewsupplywillbeaddedduring2015,2016and2017.

ThedifferencebetweentherentalvalueoftheSBDandCBDmarketswillgraduallynarrowdowninthecomingyearsasthecharacteristicsthataredividingthesemarketsaredisappearingfastwiththepreferenceofoccupiersshiftingtowardstheformer.ThisisexpectedtoincreasethecurrentrentalvaluefromINR40-50/sq.ft./monthtoINR50-62/sq.ft./monthby2017inSBDEast.CapitalvalueisforecastedtoincreasefromINR4,800-6,000/sq.ft.toINR6,650-8,300/sq.ft.duringthesameperiod.Weexpectaninvestmentreturnof14%pafrom2013-2017.

PBD East

RisingrentallevelsandstrongdemandforofficespaceinEastPuneledtotheemergenceofPBDEastmarketwhichconsistsoflocationssuchasHadapsar,Kharadi,WanowrieandPhrusungi.MagarpattaCityinHadapsar,EonFreeZoneinKharadiandSPInfocityinPhursungiarethemajorcommercialprojectsinthismarketthatprimarilycatertotherequirementsof

helpedrentalvaluestomoveupintherangeofINR60-70/sq.ft./monthduring2012.

Goingforward,weexpectabsorptionlevelstoremainsubduedwithlessthan100,000sq.ft.ofaverageannualabsorptionforthenextfiveyears.Rentalgrowthisexpectedtoremainmuteddespitenosignificantnewsupplyenteringthemarket.CompetitionfromSBDmarketsintermsofqualityofspaceandcheaperrentswillbetheprimaryreasonsforsuchatrend.Additionally,thecharacteristicsthataredividingtheCBDandSBDmarketsaredisappearingfast,resultinginfewertenantswillingtopayapremiumforofficespacehere.ThiswilleventuallynarrowdownthedifferenceinrentbetweentheCBDandSBDmarkets.WeexpecttherentalvaluestoincreasefromINR60-70/sq.ft./monthin2012toINR65-75/sq.ft./monthby2017.CapitalvalueisforecastedtoincreasefromINR7,200-8,400/sq.ft.toINR8,600-10,100/sq.ft.duringthesameperiod.Thiswillyield

9%painvestorreturnoverthenextfiveyears. SBD East

The characteristics that are dividing the CBD and SBD markets are disappearing fast, resulting in fewer tenants willing to pay a premium for office space in CBD & Off-CBD.


CBD & Off-CBD

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Figure7SBD East office market analysis



IT/ITeSoccupiers.ApartfromlargeIT/ITeSplayers,numeroussmall&mid-sizedIT/ITeScompaniesalsohavetheirpresencehere.Sincetheselocationsalreadyhavewellestablishedresidentialmarkets,occupiersfinditconvenienttolocatehere.

Thetotalofficestockasof2012inPBDEastis9.6mn.sq.ft.withavacancylevelof21%.Vacancylevelshavedroppedconsiderablysince2009fromthepeaklevelof39%asstrongdemandduring2010-2012fromtheIT/ITeSsectorhelpedinabsorbingmostoftheincrementalsupplythatenteredthemarketduring2008&2009.However,theconstantsupplyofnewofficespacehaslimitedthegrowthinrentalvaluefromINR28-43/sq.ft./monthin2009toINR32-45/sq.ft./monthin2012whichislowerthanthegrowthwitnessedinotherbusinessdistrictsduringthesameperiod.

Risingrentalvaluesandnon-availabilityoflargevacantspaceinSBDEastmarketwillcontinuetodrivedemandforofficespaceinPBDEast.Additionally,theadvantageofbeingincloseproximitytoaffordableresidentialmarketsandtheairportwillcontinuetoattractoccupier’sinterestespeciallyfromtheIT/ITeSsector.

Weforecastanincrementalabsorptionof6.7mn.sq.ft.inthecomingfiveyears.However,availabilityoflargetractsofvacantlandwillensureconsistentsupplyofnewofficespaceinthecomingyearstherebylimitingthescopeforrentalappreciation.Weexpect7.7mn.sq.ft.ofincrementalofficespacetocomeonline.Furthermore,competitionfrom

PBDWestwillensurerestrictedgrowthinrentalvaluesastherewillalwaysbeathreatofoccupiersmovingthere.WeexpectrentalvaluestoincreasefromINR32-45/sq.ft./monthin2012toINR37-53/sq.ft./monthby2017.CapitalvaluewillincreasefromINR3,840-5,400/sq.ft.toINR5,000-7,000/sq.ft.duringthesameperiod.Theeffectiveinvestorreturnwillbe12%pafrom2013-2017.

SBD West

SimilartoSBDEast,SBDWestiswellconnectedwiththecitycentreandhasexcellentphysical&socialinfrastructurethathashelpeditattractavastnumberofoccupiersoverthelasttenyears.However,distancefromtheairportandtherailwaystationhaslimitedthepotentialofthismarketascomparedtoSBDEast.Wakdewadi,AundhandBaneraresomeoftheprominentofficelocationshere,withWakdewadihavingthelargestconcentration.IT/ITeSandmanufacturingsectorsarethemajoroccupierswithlittlepresenceofBFSIandotherservicesectors.

Asof2012,thetotalofficespacestockstoodat6.7mn.sq.ft.withavacancylevelof17%.StrongdemandfromtheIT/ITeSsectorduring2003-2007ledtothelaunchofalargenumberofprojectswhichcameonlineduring2008,2009and2010.Morethan1.9mn.sq.ft.ofincrementalspacewasaddedduringthesethreeyearswhichledtovacancylevelsincreasingto20%in2010fromlessthan12%in2008.However,withnosubstantialnewsupplybeingaddedsince2010alongwith

steadyyear-on-yearabsorption,thevacancylevelshavefallenmarginallyinthepreviousyear.ThishasaidedrentalsinmovingupfromINR35-45/sq.ft./monthin2009toINR40-53/sq.ft./monthin2012.

DemandforofficespaceinSBDWestisexpectedtoremainsubduedinthecomingfiveyearsasthepreferenceofIT/ITeSoccupiershasshiftedtowardsHinjewadiinPBDWestascomparedtothismarket.Lowrentalvalues,rapiddevelopmentofvariousintegratedtownshipprojectsandeasyconnectivitywiththeMumbai-PuneExpresswayaresomeofthereasonsforthechangingpreferenceofoccupiers.Evendemandfromnon-IT/ITeSsectorswillbemutedasoccupiersfrommanufacturingandotherservicesectorspreferSBDEastduetoitsenhancedconnectivitywiththecitycentreandtheairport.Weestimate0.6mn.sq.ft.and1.1mn.sq.ft.ofincrementaldemandandnewsupplyoverthecomingfiveyearsrespectively.Suchatrendwillkeepthevacancylevelsabove22%,therebylimitingtheupsidepotentialinrentalgrowth.WeforeseerentalvalueandcapitalvaluetorisefromINR40-53/sq.ft./monthtoINR44-59/sq.ft./monthandINR4,800-6,360/sq.ft.toINR5,900-7,800/sq.ft.from2012to2017respectively.Thiswillyielda10%painvestorreturnfrom2013-2017.

PBD West

ThesettingupoftheRajivGandhiInfotechParkbytheMaharashtragovernmentatHinjewadisowedtheseedsofPBDWestmarketwithIT/ITeSgiantssuchasTCS,InfosysandWiprodevelopingtheirglobaldeliverycentreshere.ThiswasfollowedbythedevelopmentofvariousIT/ITeSSEZsandnumerousstandaloneofficebuildingswithlargefloorplatesandbest-in-classamenities.Lowrentals,easyaccessibilitytotheMumbai-PuneExpresswayanddevelopmentofvariousintegratedtownshipprojectsattractedalargenumberofIT/ITeSoccupierstowardsthismarket.Currently,PBDWestisprimarilyoccupiedbylarge&mid-sizedIT/ITeSoccupierswiththemarginalpresenceofothersectors.

CurrentlyPBDWesthasatotalofficespacestockof9.4mn.sq.ft.withavacancylevelof22%.Thisstockdoesnotincludethevariouscaptivecampusespresenthereandaccountsonlyforthoseprojectswhichareavailableforlease.StrongdemandfromtheIT/ITeSsectorduringthelastthreeyearshasbroughtdownthevacancylevelsto22%in2012fromtheirpeaklevelsof31%in2009.Thisensureda

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Figure9SBD West office market analysis


Realestatedevelopmentinthesemarkets,despitetheirproximitytothecitycentre,hasbeenrestrictedmainlytoresidential.WhiletherearealargenumberofindustrialunitslocatedinthePimpri-ChinchwadregionofSBDNorth,ithasachievedlimitedsuccessinattractingofficespaceoccupiers.Similarly,theSBDSouthmarkethasbeenunsuccessfulinattractingoccupiersandhasprimarilyremainedaresidentialmarket.Pimpri-Chinchwad,Bhosari,BibvewadiandSataraRoadaresomeofthemicro-marketsofSBDNorth&South.Small&mid-sizedmanufacturers,tradersandotherservicesectorcompaniesarethemajoroccupiersofofficespaceherewithmarginalpresenceoftheIT/ITeSsector.

ThetotalstockinSBDNorth&Southstandsat2.8mn.sq.ft.withavacancylevelof21%.ConstructionofICC-DeviGauravTechnologyParkinPimpriduring2009-10hasbeenthelargestadditionofofficespaceinthismarketandhasresultedinthevacancy

levelsrisingbeyond20%during2010.RentalgrowthhasremainedsubduedinthelastfouryearsandcontinuestoremainintherangeofINR30-40/sq.ft./month.

ThecontinuedpreferenceofoccupierstowardsEast&WestPunealongwithanabundantsupplyofvacantofficespacetherewillfurtherrestrictthegrowthofSBDNorth&Southmarket.AbsenceofdemandfromtheIT/ITeSandmanufacturingsectorleaveslittlescopeforrentalappreciationgoingforward.Hence,despiteadropinvacancylevelfrom21%in2012to17%in2017,rentalgrowthwillremainsubdued.WeforeseerentalvalueincreasingfromINR30-40/sq.ft./monthtoINR32-43/sq.ft./monthby2017.SimilarlyweexpectamutedgrowthincapitalvaluefromINR3,600-4,800/sq.ft.toINR4,300-5,750/sq.ft.overthenextfiveyears.Theinvestorreturnfrom2013-2017willbe9%paforSBDNorth&South.

Outlook

RentalandcapitalvaluegrowthacrossbusinessdistrictsisexpectedtoremainmutedasabundantincrementalsupplyandsubdueddemandfromtheIT/ITeSsectorwillkeepthevacancylevelshighinthecomingfiveyears.SincePune’sofficemarketisprimarilydrivenbytheIT/ITeSsector,anyslowdowninthissectorwilladverselyimpactdemandespeciallyinthePBDmarkets.DemandforofficespaceintheCBDandSBDmarketswillcontinuetobedrivenbysmall&mid-sizedIT/ITeScompanies,manufacturingandotherservicesectors.However,thediminishinglinebetweentheCBDandSBDisexpectedtonarrowdownthedifferenceinrentalvaluebetweenthesemarkets.WeexpectSBDEasttoaccruethemaximumbenefitofsuchatrend,therebyensuringthehighestrentalandcapitalvaluegrowthhereascomparedtoothersbusinessdistrictsofPune.Goingforward,wehaveestimatedinvestorreturnsintherangeof9%-14%pafrom2013-2017.

riseinrentalvaluesfromINR24-35/sq.ft./monthin2009toINR32-42/sq.ft./monthin2012.

Goingforward,weexpectHinjewaditoemergeasthemostsoughtafterofficespacedestinationinPunefortheIT/ITeSsectorandabsorptionwillcontinuetogrowstronglyhere.Thewalk-to-workconceptandaffordableresidentialpriceswhichtheintegratedtownshipprojectsinHinjewadioffer,willcontinuetoattractoccupierslookingforlargeofficespaces.Incrementalabsorptionfrom2013to2017isexpectedtobe10.8mn.sq.ft.However,wedonotforeseeanysubstantialincreaseinrentalvalueinthecomingfiveyearsasthereissufficientvacantlandavailablewithinthebusinessdistrictwhichcantakecareofthesupplyforthenext10-15years.Morethan12.7mn.sq.ft.ofnewsupplyisestimatedtoenterPBDWestby2017.Assoonasrentsstartrising,developerswillcommenceconstructionofnewprojectsensuringaconstantsupplyofnewspace.Thiswillrestricttheupsideinrentsdespiterobustdemand.

WeforecastrentalvaluetoincreasefromINR32-42/sq.ft./monthin2012toINR38-50/sq.ft./monthby2017.CapitalvalueisexpectedtorisefromINR3,840-5,040/sq.ft.toINR5,050-6,650/sq.ft.duringthesameperiod.Thiswillyielda12%painvestorreturnfrom2013-2017.

SBD North & South

Pune’sofficemarketislargelyconcentratedintheeast&westwithveryfewofficebuildingslocatedinthenorth&south.

48 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST INM

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Figure10PBD West office market analysis


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Figure11SBD North & South office market analysis


Figure12Pune’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)


CBD & Off-CBD

SBD East

PBD East

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PBD West

SBD North & South

60-70

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3840-5040

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6650-8300

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5900-7800

5050-6650

4300-5750

9%

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12%

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9%



Approach &METHODOLOGY

istheofficehublocatedinthesuburbanpartofacity.AcitycanhavemultipleSBDsdependingonthelocationandcharacteristicsofthesebusinessdistricts.

PBD: APeripheralBusinessDistrict(PBD)istheofficehublocatedintheperipheralareasofacity.AcitycanhavemultiplePBDsdependingonthelocationandcharacteristicsofthesebusinessdistricts.

Availability of talent pool: Availabilityoftalentpoolistheaccessibilitytoatalentpoolcomprisingbusinessgraduates,engineers,under-graduates,experiencedpersonnelandothers.

Physical & social infrastructure: Physicalinfrastructureismeasuredbythequantumofroads,carryingcapacityofmassrapidtransportsystems,availabilityofpowerandefficientsewerage&sanitationmanagementamongothers.Socialinfrastructureincludeshospitals,retailspace,educationalinstitutes,communityservicesandrecreationaloptionsamongothers.

Favourable state government policies: Favourablestategovernmentpoliciesarethosepoliciesthatencourageindustriestosetuptheirbaseinthestatesuchastaxincentives,stampdutyexemption,higherFloorSpaceIndex(FSI),subsidiestocertainsectors,promotionofSEZsandothersuchmeasures.

International & domestic connectivity: International&domesticconnectivityisconnectivitybyrailandairtovariousdomesticandinternationallocations.Itismeasuredbythenumberofdestinationsandfrequencyofdepartingtrainsandflights.

Conducive business environment: Easeofdoingbusiness,stablepolicyenvironment,minimalpoliticalandbureaucraticinterference,stablelaw&orderscenario,flexiblelabourlawsandothersuchmeasuresfacilitateaconducivebusinessenvironment.

Importance as a political hub: Importanceasapoliticalhubistherelativeimportance

Important Terms Used in The Report

Investor return: Investorreturnistheinternalrateofreturnofthevariouscashflowsgeneratedbyinvestinginapre-leasedofficeproperty.Thisincludestherecurringrentalincomeandcapitalgainsovertheinvestmenthorizon.

Rental value: Rentalvalueisthevalueusedtorepresentmajorityoftheleasetransactionsinaparticularbusinessdistrict.Sincerentalvaluevariesevenwithinabusinessdistrictdependinguponvariousfactorssuchastheageofthebuilding,amenities,floorplateandend-userestrictionsamongothers,wehavepresenteditinarangeforthepurposeofthisstudy.

Capital value: Capitalvalueistheaveragepriceatwhichofficepropertiesinaparticularbusinessdistrictaretransacted.Incasenorecenttransactionhastakenplace,itiscalculatedasanimpliedvaluebasedonthecurrentrentalvalueandtheprevailingcapitalisationrate.

Capitalisation rate: Annualearningsofanasset(rentalvalue)dividedbytheassetprice(capitalvalue)givesthecapitalisationrate.Sincecapitalvalueitselfisderivedfromcapitalisationrate,itiscalculatedindependentlybasedontheriskfreerateoftheeconomyandriskpremiumoftheasset.

Risk-free rate: Theongoingyieldona10yearGovernmentofIndiabondisconsideredastherisk-freerate.Currentlyitstandsat8%.

Risk premium:Thereturninexcessoftherisk-freerateofreturnthataninvestmentisexpectedtoyieldisknownasriskpremium.Anasset’sriskpremiumisaformofcompensationforinvestorswhobeartheextrarisk,comparedtothatofarisk-freeasset,inagiveninvestment.Forofficespaceinvestment,itprimarilycapturesoccupancyriskandcreditriskoftenants.

Stock: Stockisthetotaluniverseofready

buildingsincludingnewsupplythatisavailableforoccupationorisalreadyoccupiedbytenants.Under-constructionandnewlyconstructedspacenotyetavailableforoccupationareexcluded.

Occupied stock: Occupiedstockisthetotalamountofspacethatisoccupied.

Vacancy: Thedifferencebetweenstockandoccupiedstockisvacantstock.Vacantstockasapercentageofstockisvacancy.

New supply: Newlyconstructedbuildingsthatareavailableforoccupationduringaparticularperiodareconsideredasnewsupply.Under-constructionandnewlyconstructedspacesnotyetavailableforoccupationareexcluded.

Absorption: Absorptionistheamountofspacetransactedbyoccupierswheretheyhaveeitherstartedoperationsorfit-outsduringaparticularperiod.Pre-commitmentsareexcluded.

Pre-commitment: Atransactionundertakenforanofficespacethatiscurrentlynotreadyforoccupationorfit-outsisconsideredasapre-commitment.Thiscouldbeeitherbecausethepropertyisstillunder-constructionortheleaseofanexistingoccupanthasnotyetexpired.

Pre-leased property: Apre-leasedpropertyisapropertythathasbeenfullyleasedandoccupiedbytenants.Thisdoesnotincludepre-commitmentswheretherentalincomehasnotyetaccrued.

Business district: Abusinessdistrictisacommercialhubwithmultipleofficebuildingsspreadacrossvariouslocationsthatsharesimilarcharacteristicsintermsofrent,tenantprofile,infrastructureandconnectivity.

CBD: ACentralBusinessDistrict(CBD)isusuallythemostsoughtafterofficelocationwithinacityduetoitscentrallocationandpresenceofestablishedphysical&socialinfrastructure.

SBD: ASuburbanBusinessDistrict(SBD)


ofacityintermsofthelocationofmajordecisionmakingauthoritiessuchasservingministers,politicalleaders,government&administrativeauthoritiesandbureaucrats.

Evolution as a commercial hub: Evolutionofacommercialhubofacityoveralongperiodoftime(50-100years)asabusinesshubintermsoftrade&commerceandeconomicactivities.

Presence of banks & financial institutions: Presenceofbanks&financialinstitutionsisthenumberofbankandfinancialinstitutionsoperatingoutofacity.Thisisaproxyindicatorformeasuringthequantumofacity’scurrenteconomicactivity.

Office space affordability: Officespaceaffordabilityistherelativecostofoccupyingofficespaceinvariousbusinessdistrictsofacity.Higherthecost,lowertheaffordability.

IT/ITeS sector:IT/ITeSsectorconstitutestheinformationtechnologyandinformationtechnologyenabledservicesindustry.

Manufacturing sector: Anycompanyinvolvedintheprocessofmanufacturingiscoveredunderthiscategoryeg.automobile,pharmaceuticals,petroleum,cementandsteelamongothers.

BFSI sector:BFSIsectoristhebanking,financialservicesandinsurancesector.Financialservicesincludestockbroking,commoditybroking,mutualfunds,privateequityandinvestmentbankingamongothers.

Other service sectors: OtherservicesincludealltypesofserviceswhicharenotapartoftheIT/ITeSandBFSIsectors.Someofthemajorsub-sectorsofotherservicesectorsareconsulting,telecom,transport,mediaandinfrastructure.

Methodology

Forecasting of revenue of driver industries

Demandforofficespaceisdependentupontherequirementofoccupiers,whetheritisforanewoffice,expansionofexistingofficeorrelocation.Requirementisinturndrivenbythegrowthinrevenueoftheseoccupiers.Forthepurposeofthisstudy,wehaveclassifiedoccupiersintofourbroadindustriesnamelyIT/ITeS,manufacturing,BFSIandotherservicesectorsbasedonthepastabsorptiontrendofofficespaceinIndia.Theseindustriesarereferredtoasthedriverindustries.Revenuegrowthforthesedriverindustrieshasbeenforecastedforthe2013-2017periodusingeconometricforecasting

modelswithinputfactorssuchasIndiaGDPandworldGDP.

Selection of most conducive cities

Factorslikedepthofacity’sofficemarketandcomparativestrengthinrelationtoothercitieswereconsideredtoidentifythemostconducivecities.Withreferencetothedepthofofficemarket,citieswithaverageannualabsorptionofmorethan2mn.sq.ft.havebeenconsidered.Further,thecomparativestrengthofacity’sofficemarketisprimarilydictatedbythepreferenceofoccupiersinselectingitoverothercities.Thispreferenceisdrivenbyasetoffactorssuchasavailabilityoftalentpool,qualityinfrastructure,domestic&internationalconnectivityandfavourablegovernmentpoliciesamongothers.Thestrengthofthesefactorsdeterminestheconducivenessofacityinattractingoccupiersandtherebyensuresconsistentdemandforofficespace.Ourviewisthatitisthesecitiesthatwillwitnessthemaximumtractioninofficespacedemandinthecomingfiveyearsandhenceprovidethebestinvestmentoptionsinapre-leasedproperty.

Forthepurposeofthisexercise,KnightFrankresearchteamhadseveralroundsofdiscussionswithmajorstakeholderssuchasoccupiers,developers,consultantsandindustryexpertsonthefollowingparameters:

Basedontheaboveanalysis,sixcitiesfiguredinthelistofthemostconducivecitiesinthecountry.Webelievethesecitieswillcontinuetoprovidetheenablingfactorsthatarerequiredforoccupyingindustriestothriveincomingyears.

City level demand and supply forecast of office space

Demandforofficespaceinacityisdependentontherequirementofspacebytheoccupyingordriverindustries.Driverindustriesforeachoftheselectedcitieswereidentifiedbystudyingtheirhistoricabsorptiontrend.Demandprojectionsforthenextfiveyearshavebeenmadebasedontherelationshipestablishedthrougharegressionmodelbetweenaparticularcity’shistoricdemandandrevenuegrowthoftherespectivedriverindustries.Wehaveassumedthatthisrelationshipwillholdgoodinthefuture.Inotherwords,whiledemandforcitieslikePunehasbeenforecastedonthebasisofdriverindustrieslikeIT/ITeSandmanufacturing,forMumbaiithasbeendoneonBFSI,manufacturing,IT/ITeSandotherservicesectors.

Supplyornewsupplyconstitutesnewlyconstructedbuildingswhichareavailableforoccupation.Under-constructionandnewlyconstructedspacenotyetavailableforoccupationarenotincludedinnewsupply.Thishasbeenestimatedatthebusinessdistrictlevelforeachcityandthissummationhasbeenconsideredasthenewsupplyforthecity.

Business district level demand and supply forecast of office space

Demandatbusinessdistrictlevelhasbeenestimatedafteranalysingthehistoricalshareofeachbusinessdistrictinthetotalabsorptionnumberofthecity.Thissharehasthenbeencalibratedforfuturedemandprojectionsatthebusinessdistrictlevel.Thiscalibrationhasbeendoneafterconsideringtheestimatednewsupply,currentvacancylevel,driverindustries’performanceandexistingtenantprofileforeachbusinessdistrict.Afterthis,citylevelforecasteddemandhasbeendistributedamongbusinessdistrictsbasedontheirestimatedshareoverthenextfiveyears.

Newsupplyforthefirstthreeyearsoftheforecastperiodhasbeenestimatedbasedonthedeliveryscheduleoftheexistingunder-constructionprojects.Fortheremainingtwoyears,factorssuchastheavailabilityofvacantland,expectedincrementaldemand,vacancythresholdofrespectivebusinessdistricts,marketsurveyandinteractionwithdevelopershavebeenconsideredforestimatingthesame.

Rental value forecast

Rentalvalueinabusinessdistrictisafactor

Availability of talent pool

Physical & social infrastructure

Favourable state government policies

International & domestic connectivity

Conducive business environment

Importance as a political hub

Evolution as a commercial hub

Presence of banks & financial institutions

Office space affordability

Factors responsible for attracting office occupiers


ofvariousindependentvariablessuchasdemand,supply,currentrent,tenantprofile,outlookonrevenuegrowthofdriverindustries,rentalvalueofcompetingbusinessdistrictsandinfrastructuredevelopmentamongothers.However,demandandsupplyareconsideredtobethemostcriticalfactorsindeterminingtherentalvalue.Sincevacancylevelsrepresentthedynamicsofdemandandsupply,wehaveformulatedaneconometricmodelusinghistoricvacancynumberstoestablishitsrelationshipwithrentalvalue.Thishasbeencombinedwithourunderstandingoftheabovementionedfactorsalongwithadetailedmarketsurveyforforecastingrentalvaluefrom2013-2017.

Capital value forecast

Capitalvalueforeachbusinessdistricthasbeenestimatedonthebasisoftheforecastedrentalvalueandtheprevailingcapitalisation

rateattheendoftheforecastperiod.Followingassumptionshavebeenmadeforthisestimation:

Capitalisationrate=Compressionof100basispoints(bps)by2017 Riskfreerate=Willdropby100basispoints(bps)from8%in2012to7%by2017 Riskpremium=Expectedtoremainconstantoverthenextfiveyears

Calculation of investor return

Investorreturnorinternalrateofreturnhasbeencalculatedonthebasisoftherecurringrentalincomeandcapitalgainduring2013-2017.Rentalincomeisnetofpropertytaxwhichhasbeencalculatedafterconsideringtheprevailingpropertytaxofeachbusinessdistrict.Additionally,interestoutgoonthedebtamounthasalsobeenconsidered.Forcalculatingcapitalgains,impactofstamp

dutyhasbeenanalysed.However,incometaxonrentalsandcapitalgainstaxhasnotbeenconsideredasthecalculationisonapre-taxbasis.

Assumptions:

Investmentperiod:5years Debtequityratio:1:1 Interestcost:13%pa Propertytax:Calculatedseparatelyforeachbusinessdistrict Stampduty:Calculatedseparatelyforeachcity Income&capitalgainstax:Notconsidered.

InvestorReturn

Rent

Demand Rent

Growthof DriverIndustries

RiskFreeRate RiskPremiumDomesticFactors

GlobalFactors

Supply CapRate

Developers Demand&Supply

Relationship withDemand&

Supply

Capitalvalue

Figure1Investor return framework

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The Wealth Report 2013 India’s Top Residential Destinations to Invest In

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INVESTMENTADVISORYREPORT 2013

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INDIA’S TOP TO INVEST INrai.net.in/KnightFrank_Commercial_Investment Report 2013.pdf · India’s Top Business Districts to Invest In KnightFrank.co.in KnightFrank.co.in INDIA’S