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INVESTM
ENT AD
VISORY REPO
RT 2013: India’s Top Business Districts to Invest In
KnightFrank.co.inKnightFrank.co.in
INDIA’S TOPBUSINESS DISTRICTSTO INVEST IN
Research ServicesKnight Frank India research provides development and strategic advisory to a wide range of clients worldwide. We regularly produce detailed and informative research reports which provide valuable insights on the real estate market. Our strength lies in analysing existing trends and predicting future trends in the real estate sector from the data collected through market surveys and interactions with real estate agencies, developers, funds and other stakeholders.
Contacts
Gulam ZiaExecutive Director Advisory, Retail & Hospitality+91 (022) 67450101gulam.zia@in.knightfrank.com
Dr. Samantak DasChief Economist and Director Research & Advisory+91 (022) 67450101samantak.das@in.knightfrank.com
Yashwin Bangera +91 (022) 67450101yashwin.bangera@in.knightfrank.com
Sangeeta Sharma Dutta+91 (080) 40732600sangeeta.sharmadutta@in.knightfrank.com
Vivek Rathi+91 (022) 67450101vivek.rathi@in.knightfrank.com
Hetal Bachkaniwala+91 (022) 67450101hetal.bachkaniwala@in.knightfrank.com
Hitendra Gupta+91 (022) 67450101hitendra.gupta@in.knightfrank.com
Ankita Nimbekar+91 (0124) 4075032ankita.nimbekar@in.knightfrank.com
Kamini Gupte+91 (022) 67450101kamini.gupte@in.knightfrank.com
The Wealth Report 2013 India’s Top Residential Destinations to Invest In
Recent market-leading research publications
COMMERCIALRESEARCH
Knight Frank Research Reports are available at KnightFrank.com/research
INVESTMENTADVISORYREPORT 2013
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%
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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
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CONTENTS
Cover imageSergios/shutterstock
Formoreinformation,pleasecontact:communications@in.knightfrank.com
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
04 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
“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
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 05
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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FY20
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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
Source:KnightFrankResearch
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,
06 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
Source:KnightFrankResearch
Financialregulators:RBI, SEBI,
FMC & AMFI
CommodityExchanges:
MCX, NCDEX
MumbaiStock
Exchanges:BSE, NSE
Depositories:NSDL, CDSL
Figure6Mumbai: The financial capital of India
Source:KnightFrankResearch
Figure7City-wise share of BFSI sector absorption
Mumbai Bengaluru
Delhi-NCRChennai
HyderabadOthers
36%
24%
21%
8%
5% 6%
*OthersincludecitiessuchasKolkata,Pune,AhmedabadandChandigarhSource:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 07
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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Figure12Manufacturing sector revenue growth
Source:CMIE,KnightFrankResearch
Evolution asa commercial
hub
Importanceas a political
hub
Excellentphysical &
socialinfrastructure
Manufacturing
Availabilityof talent
pool
Presence ofbanks &financial
institutions
Excellentinternational& domesticconnectivity
Conducivebusiness
environment
Figure11Factors responsible for attracting office occupiers from the manufacturing sector
Source:KnightFrankResearch
08 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
Source:CMIE,KnightFrankResearch
IT/IT
eS
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ctor
s
LegendLOW HIGH
MumbaiDelhi-NCRBengaluru
HyderabadChennai
Pune
Figure16Most conducive cities in India for office space
Source:KnightFrankResearch
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MumbaiDelhi-NCRBengaluru
HyderabadChennaiKolkata
PuneAhmedabad
KochiMangalore
ChandigarhCoimbatore
Figure15Relative strength of each city in attracting office space occupiers
Source:KnightFrankResearch
BENGALURU
10 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Mn.
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Figure1Bengaluru office market analysis
Source:KnightFrankResearch
Mn.
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Figure2New supply & absorption of office space in Bengaluru
Source:KnightFrankResearch
Figure3Industry-wise split of Bengaluru’s office space absorption
BFSIIT/ITeS
ManufacturingOther service sectors
18%
57%
15%
10%
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 11
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
Source:KnightFrankResearch
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
12 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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%
Source:KnightFrankResearch
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Figure6CBD & Off-CBD office market analysis
Source:KnightFrankResearch
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Figure7SBD office market analysis
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 13
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
Source:KnightFrankResearch
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Figure9PBD South office market analysis
Source:KnightFrankResearch
14 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
Source:KnightFrankResearch
Figure11Bengaluru’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)
Source:KnightFrankResearch
CBD & Off-CBD
SBD
ORR
PBD East
PBD South
70-80
45-65
40-60
30-45
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
16 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
5%
10%
15%
20%
25%
30%
0
20
40
60
70
50
30
10
80
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure1Chennai office market analysis
Source:KnightFrankResearch
Mn.
sq.
ft.
AbsorptionNew supply
0
4
8
10
6
2
2008
2009
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
2017
E
Figure2New supply & absorption of office space in Chennai
Source:KnightFrankResearch
Figure3Industry-wise split of Chennai’s office space absorption
IT/ITeSManufacturing
Other service sectorsBFSI Others
56%
20%
11%
10%
3%
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 17
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
Figure4Business district classification
Source:KnightFrankResearch
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
Business District Micro-markets
18 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Figure5Business district-wise split of stock
CBD & Off-CBD
2012 2017E
SBD SBD OMR PBD OMR & GST PBD Ambattur
18%
17%
26%
32%
7% 13%
16%
25%
36%
10%
Source:KnightFrankResearch
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
Figure6CBD & Off-CBD office market analysis
Source:KnightFrankResearch
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
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 19
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
Source:KnightFrankResearch
20 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
4
6
7
5
3
1
8
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure10PBD Ambattur office market analysis
Source:KnightFrankResearch
Figure11Chennai’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)
Source:KnightFrankResearch
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%
Business District Rental Value2012 2017E 2012 2017E
Capital Value Investor Returnper Annum
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
Source:KnightFrankResearch
NCR
22 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
ft.
Occupied stockStock
Vacancy (RHS)
0%
4%
8%
12%
16%
20% 22%
18%
14%
10%
6%
2% 0
60
100
140
160
120
80
40
20
180
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure1NCR office market analysis
Source:KnightFrankResearch
Mn.
sq.
ft.
AbsorptionNew supply
0
4
10
8
14
12
6
2
2008
2009
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
2017
E
Figure2New supply & absorption of office space in NCR
Source:KnightFrankResearch
Figure3Industry-wise split of NCR’s office space absorption
IT/ITeSManufacturing
Other service sectorsBFSI
42%
22%
21%
15%
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 23
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
Under Construction Metro
Legend
Business Districts of NCR
Figure4Business district classification
Source:KnightFrankResearch
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
Business District Micro-markets
24 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Figure5Business district-wise split of stock
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%
Source:KnightFrankResearch
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
1%
2%
3%
4%
5%
6%
7%
0
2
4
8
6
5
7
3
1
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure6CBD Delhi office market analysis
Source:KnightFrankResearch
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
2%
4%
16%
12%
14%
8%
10%
18%
20%
02
6
1012
8
4
20181614
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure7SBD Delhi office market analysis
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 25
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.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
5%
20%
15%
10%
25%
30%
0
10
25
35
30
20
15
5
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure8PBD Gurgaon Zone-A office market analysis
Source:KnightFrankResearch
26 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
10%
5%
25%
20%
15%
30%
0
10
20
25
30
35
40
45
15
5
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure9PBD Gurgaon Zone-B office market analysis
Source:KnightFrankResearch
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
10%
40%
30%
20%
60%
50%
0
2
4
5
3
1
6
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure10PBD Gurgaon Zone-C office market analysis
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 27
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.
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
10%
30%
20%
40%
0
25
20
15
40
35
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10
520
0820
0920
1020
1120
1220
13E
2014
E20
15E
2016
E20
17E
Figure11PBD Noida office market analysis
Source:KnightFrankResearch
28 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.)
Source:KnightFrankResearch
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%
10%
11%
10%
8%
11%
11%
Business District Rental Value2012 2017E 2012 2017E
Capital Value Investor Returnper Annum
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
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15%
5%
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35%
0
765
1098
34
12
2008
2009
2010
2011
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14E
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E20
16E
2017
E
Figure12PBD Greater Noida office market analysis
Source:KnightFrankResearch
HYDERABAD
30 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Mn.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
5%
20%
25%
15%
10%
0
30
60
40
20
10
80
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure1Hyderabad office market analysis
Source:KnightFrankResearch
Mn.
sq.
ft.
AbsorptionNew supply
0
3
6
5
8
7
4
2
1
2008
2009
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
2017
E
Figure2New supply & absorption of office space in Hyderabad
Source:KnightFrankResearch
Figure3Industry-wise split of Hyderabad’s office space absorption
IT/ITeSOther service sectors
ManufacturingBFSI
75%
10%
9% 6%
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 31
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
Figure4Business district classification
Source:KnightFrankResearch
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
Business District Micro-markets
32 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Figure5Business district-wise split of stock
SBD
2012 2017E
CBD PBD West PBD East
51%
23%
22%
4%
53%
17%
26%
4%
Source:KnightFrankResearch
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
Figure6CBD & Off-CBD office market analysis
Source:KnightFrankResearch
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
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 33
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
Source:KnightFrankResearch
34 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
1.0
2.0
2.5
3.0
1.5
0.5
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure9PBD East office market analysis
Source:KnightFrankResearch
Figure10Hyderabad’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)
Source:KnightFrankResearch
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%
Business District Rental Value2012 2017E 2012 2017E
Capital Value Investor Returnper Annum
MUMBAI
36 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
sq.
ft.
Occupied stockStock
Vacancy (RHS)
0%
5%
20%
30%
25%
15%
10%
0
60
100
80
40
20
140
120
2008
2009
2010
2011
2012
2013
E20
14E
2015
E20
16E
2017
E
Figure1Mumbai office market analysis
Source:KnightFrankResearch
Mn.
sq.
ft.
AbsorptionNew supply
0
6
16
10
12
14
8
4
2
2008
2009
2010
2011
2012
2013
E
2014
E
2015
E
2016
E
2017
E
Figure2New supply & absorption of office space in Mumbai
Source:KnightFrankResearch
Figure3Industry-wise split of Mumbai’s office space absorption
BFSIIT/ITeS
ManufacturingOther service sectors
26%
25% 19%
30%
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 37
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 Metro
Under Construction Monorail
Under Construction Railway
Legend
Business Districts of Mumbai
Figure4Business district classification
Source:KnightFrankResearch
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
Business District Micro-markets
38 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Figure5Business district-wise split of stock
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%
Source:KnightFrankResearch
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Figure6CBD & Off-CBD office market analysis
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 39
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
Source:KnightFrankResearch
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Figure8Central Mumbai office market analysis
Source:KnightFrankResearch
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
40 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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%.
0%
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100%
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2007
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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
Source:KnightFrankResearch
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
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 41
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
Source:KnightFrankResearch
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Figure11SBD Central office market analysis
Source:KnightFrankResearch
42 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
Source:KnightFrankResearch
Figure13Mumbai’s office market outlook for the next 5 years(RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)
Source:KnightFrankResearch
BKC & Off-BKC
CBD & Off-CBD
Central Mumbai
PBD
SBD Central
SBD West
200-330
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40-70
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Business District Rental Value2012 2017E 2012 2017E
Capital Value Investor Returnper Annum
PUNE
44 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
PUNE
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Figure1Pune office market analysis
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Figure2New supply & absorption of office space in Pune
Source:KnightFrankResearch
Figure3Industry-wise split of Pune’s office space absorption
IT/ITeSManufacturing
Other service sectorsOthers
75%
12%
11% 2%
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 45
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
Hinjewadi
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SBD WEST
PBD WEST
Major Roads
Railway Line
Proposed Metro Corridor I
Proposed Metro Corridor II
Legend
Business Districts of Pune
Figure4Business district classification
Source:KnightFrankResearch
CBD & Off-CBD
SBD East
PBD East
SBD West
PBD West
SBD North & South
Bund Garden Road, S B Road, Camp, Deccan, Pune Station Road
Kalyani Nagar, Airport Road, Yerwada, Nagar Road, Vishrantwadi
Hadapasar, Kharadi, Phursungi, Wanowrie
Wakdewadi, Aundh, Baner, Kothrud, University Road
Hinjewadi, Bavdhan, Wakad, Balewadi
Pimpri, Chinchwad, Bhosari, Bibvewadi, Satara Road
Business District Micro-markets
Mn.
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EFigure6CBD & Off-CBD office market analysis
Source:KnightFrankResearch
46 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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.
Figure5Business district-wise split of stock
CBD & Off-CBD
2012 2017E
SBD East SBD West SBD North & South PBD East PBD West
12%
21%
16% 7%
22%
22% 8%
18%
10%
4%
26%
34%
Source:KnightFrankResearch
Mn.
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Figure7SBD East office market analysis
Source:KnightFrankResearch
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 47
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
Mn.
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Figure8PBD East office market analysis
Source:KnightFrankResearch
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Figure9SBD West office market analysis
Source:KnightFrankResearch
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
n. s
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Figure10PBD West office market analysis
Source:KnightFrankResearch
Mn.
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Figure11SBD North & South office market analysis
Source:KnightFrankResearch
Figure12Pune’s office market outlook for the next 5 years (RentalValue:INR/sq.ft./month,CapitalValue:INR/sq.ft.)
Source:KnightFrankResearch
CBD & Off-CBD
SBD East
PBD East
SBD West
PBD West
SBD North & South
60-70
40-50
32-45
40-53
32-42
30-40
65-75
50-62
37-53
44-59
38-50
32-43
7200-8400
4800-6000
3840-5400
4800-6360
3840-5040
3600-4800
8600-10100
6650-8300
5000-7000
5900-7800
5050-6650
4300-5750
9%
14%
12%
10%
12%
9%
Business District Rental Value2012 2017E 2012 2017E
Capital Value Investor Returnper Annum
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)
50 | INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN
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
INDIA’S TOP BUSINESS DISTRICTS TO INVEST IN | 51
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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