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Bengaluru may lose market share in office leasing to Hyderabad: Report

Issues facing Bengaluru’s office market include unplanned urbanisation, pressure on infrastructure, rising rents and supply crunch

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Bengaluru, one of the fastest-growing and top-performing office markets, may lose some of its market share in office leasing to its neighbour Hyderabad due to key concerns such as unplanned urbanisation, pressure on infrastructure, rising rents and supply crunch, says a report by Colliers Research.

Hyderabad may get a major chunk of office leasing share if it maintains the momentum of new supply additions over the next three years. In the past three years, Hyderabad has jumped from sixth to the third position by gross absorption among the top seven Indian cities. In 2017, with 5.8 million sq ft (0.5 million sqm) of gross absorption, Hyderabad accounted for 13 percent of the total office absorption, exceeding Mumbai, the financial capital of India, it said.

“Over the past two decades, Bengaluru has seen huge urbanisation and the increasing presence of technology groups and Global In-House companies (GICs). Consequently, the city's office built space has increased by more than 100 per cent, in the past decade. At present, the city accounts for about 25 per cent of India's total Grade A office inventory. However, this remarkable growth has come at the cost of unplanned urbanisation and created massive pressure on existing infrastructure. Although, Bengaluru's office market landscape is studded with the presence of major technology companies and start-ups, the rising rents, supply crunch, technology disruption, the emergence of flexible office space and infrastructure will remain key concerns in coming years” says Ritesh Sachdev, Senior Executive Director, Occupier Services at Colliers International India.

Bengaluru has maintained its leadership position by taking a lion's share of about one-third of total India gross office absorption over the past five years. In 2017, Bengaluru's demand for Grade A office space reached 15.3 million sq ft (1.4 million sq m), accounting for 36% of India's office transaction volume. Bengaluru will remain the preferred office market due to its large talent pool. However, looking at the growth pattern of Hyderabad, Bengaluru may lose some of its share to its fast-emerging neighbour. As per Colliers research, the factors working in favour of Hyderabad include cheaper rents, occupier-friendly state government policies and robust supply pipeline.

Location dynamics likely to change as demand set to outstrip supply

The location dynamics within Bengaluru are expected to change over time. Currently, the Outer Ring Road (ORR) is the preferred micromarket in Bengaluru, with an average share of 45 per cent of total leasing volume over the past three years. The Secondary Business District (SBD) and Central Business District (CBD) are the second most popular locations, with average shares of 12 per cent and 9 per cent respectively. By 2020, the new supply of 27.5 million sq ft (2.5 million sq m) is likely to get added in Bengaluru's Grade A inventory. The epicentre of the upcoming supply is Whitefield with around 36 per cent share, followed by ORR (26%), North (12%). The rest of the supply is shared equally by all other micromarkets.

As per Colliers Research, the upcoming demand is likely to outstrip the forthcoming supply in most of the popular locations, such as ORR, CBD, SBD and Electronic City. This may spur occupiers to shift to other micromarkets with surplus supply, such as Whitefield and North Bengaluru. Considering the past trends, Bengaluru will require about 35-40 million sq ft (3.2-3.7 million sq m) of new space to sustain the upcoming demand. However, the supply pipeline is projected at 27.5 million sq ft (2.5 million sq m).

Therefore, the possibility of a shift of occupier interest towards other neighbouring markets cannot be ruled out. Also, occupiers may have the option to choose among Chennai, Hyderabad and nearby Tier II cities such as Coimbatore, Vijayawada and Kochi. As per Colliers International, Hyderabad is likely to be the preferred option among occupiers due to the uncertain political environment in Chennai and talent pool crunch in Tier II cities.

More consolidation and relocation likely in the short-to-medium term

Over the last three years, while expansion has remained the primary driver of Bengaluru's high office space absorption, the share of relocation in overall demand has been increasing at a fast pace. Since 2015, the share of new entrants has also declined consistently. As per Colliers Research, an average of 76 per cent of the total leasing transactions recorded over the past three years represented expansions, primarily by technology and BFSI occupiers. However, companies were also consolidating and relocating in order to be more efficient and cost-effective. There has been a surge in relocation moves as a proportion of transactions from 4% (2015) to 21% (2017), over the past three years due to factors such as high rents, supply crunch and quest for space efficiency.  The increasing trend of relocation and consolidation to continue in short to medium term.

Flexible office space likely to grow faster than anticipated

Bengaluru, the home to start-up companies related to the Internet of Things (IoT) in India, is the pioneer of flexible working space in the country. As per Colliers Research, the trend started picking up in 2017 with multinational corporations (MNCs), such as Amazon, Microsoft and Ernst & Young, occupying large areas of office space in flexible working centres in Bengaluru. Factors such as low capital and operational expenditure, minimum lock-in period, opportunity to network and collaborate, scope for expansion and flexibility will further fuel the growth of flexible working operators in Bengaluru in coming years. Moreover, flexible workspace sites are mostly strategically located in CBD and SBD areas that have established road, metro rail and social infrastructure.

Change in the profile of occupiers

Micro-level analysis of occupier composition in the past three years suggests that IT-ITeS occupiers continue dominating the office leasing landscape in Bengaluru, changes are happening in the profile of other occupiers. Over 2017, there has been an increase in the share of e-commerce and Fintech companies within IT-ITeS and BFSI sectors, respectively. The share of logistics and manufacturing also increased in 2017. This trend is expected to continue and drive the change in occupier composition in the medium-term driven by various government policies such as Make in India, Skill India, GST and Digital India, the report added.
First Published on Mar 6, 2018 12:30 pm
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