CBRE South Asia Pvt. Ltd, India’s leading real estate consulting firm today announced the findings of its latest India Office Market View – Q3 2019 report. As per the findings of the report, leasing activity rose by more than 30% annually, crossing 47 million sq. ft. during 2019 YTD. Bangalore, followed by Hyderabad, NCR, and Mumbai, accounted for about 80% of the leasing during 2019 YTD. Leasing activity stood at about 15.4 million sq. ft. during Q3 2019, rising by nearly 23% on an annual basis.
Anshuman Magazine, Chairman & CEO, India, South East Asia, Middle East, and Africa, CBRE said, “With office leasing scaling a historic high in 2019, we expect further strengthening of occupier sentiment in the medium to long term; backed by corporates looking to expand or consolidate their operations. Favorable government initiatives, transparency in the real estate sector and the right reforms will improve investor sentiments greatly in the coming quarters. Similar to last year, we expect that occupiers would put in greater efforts to incorporate flexibility in their portfolios due to changes in the business environment.”
SMALL- TO MEDIUM-SIZED TRANSACTIONS (LESS THAN 50,000 SQ. FT.) DOMINATED SPACE TAKE-UP DURING Q3 2019
As in the previous quarters, office space take-up was dominated by small- to medium-sized transactions. Small-sized transactions (less than 10,000 sq. ft.) accounted for more than 40% of the transaction activity in the quarter, while medium-sized transactions (ranging between 10,000 sq. ft. and 50,000 sq. ft.) held a share of 43%. The share of large-sized deals (greater than 100,000 sq. ft.) was about 9%.
Bangalore, followed by Hyderabad, dominated large-sized deal closures, while a few large deals were also reported in NCR and Pune as well. Large-scale deal closures were mostly dominated by tech firms and flexible space operators. Firms belonging to sectors such as research, consulting & analytics, banking, financial services & insurance (BFSI), and engineering & manufacturing also closed large-sized deals.
TECH FIRMS RE-ESTABLISHED THEIR DOMINANCE OVER INDIA’S OFFICE LEASING MARKET IN Q3 2019; FLEXIBLE SPACE OPERATORS WERE ACTIVE AS WELL
Tech corporates, accounting for about a third of the leasing activity, drove office space take-up in the country during Q3 2019, followed by research, consulting & analytics companies (19%) and flexible space operators (15%). The rise in the share of flexible space operators (10% in Q2 2019) was primarily a result of their continued expansion across almost all cities. These operators took up both primary and secondary spaces in mostly core locations across cities. Other sectors such as engineering & manufacturing (7%) and BFSI (7%) also contributed to the increase in leasing activity.
Ram Chandnani, Managing Director, Advisory & Transaction Services, India, CBRE South Asia Pvt. Ltd. said: “This historic high is indicative of the fact that leasing activity in 2019 will now surpass the previous peak of 2018. The share of the tech sector rose from 31% to 40% annually during 2019 YTD, which implies that a rise in technology alternatives, insourcing/job preservation in the US and a global slowdown has not had any specific impact on India’s position as a preferred outsourcing destination for both high-skilled and low-skilled tech services, research, and development.”
RISE IN PRE-LEASING ACTIVITY
Occupiers continued to future-proof their portfolios and hedge against future rental escalations by pre-leasing space across various cities. The pre-leasing activity of almost 5 million sq. ft. largely in Bangalore and Chennai; followed by Hyderabad and Pune. Tech firms and BFSI firms, along with flexible space operators primarily drove quarterly pre-commitment activity.
ABOUT 43 MILLION SQ. FT. OF NEW OFFICE SUPPLY ADDED IN 2019 YTD; ADDITIONS LED BY HYDERABAD, FOLLOWED BY BANGALORE, NCR AND MUMBAI
Supply addition rose by more than 80% in 2019 YTD on an annual basis, with about 43.5 million sq. ft. of development completions reported. Four cities – Hyderabad, Bangalore, NCR, and Mumbai – accounted for almost 80% of this supply addition. Compared to the first three quarters in 2018, the share of SEZs in supply dipped from 40% to 27% during 2019 YTD. We expect this trend to continue over the next couple of quarters, because of the approaching sunset clause on SEZ direct tax benefits. SEZ development completions during 2019 YTD were mainly witnessed in Hyderabad and Bangalore, followed by Pune, NCR, and Chennai.
Supply addition in Q3 2019 also rose by about 6% on a quarterly basis, touching about 15 million sq. ft. More than 70% of this supply was driven by Hyderabad and NCR, followed by Bangalore. Apart from Hyderabad, NCR, and Kochi, all cities reported a dip in development completions on a quarterly basis.
With office leasing activity scaling a historic high, space take-up is likely to pick up in the short term but will stabilize in the medium to long term. The gap between Bangalore and Hyderabad is anticipated to reduce, as Hyderabad’s growth will be driven by robust supply completions and demand led by pre-leased completions.
India’s position as a preferred outsourcing destination will continue to attract corporates from EMEA, the Americas, and APAC. While tech corporates will continue to dominate space take-up; BFSI, engineering & manufacturing and research, consulting & analytics will account for a larger share in leasing on a yearly basis.
Flexible space operators are expected to continue expanding operations, resulting in their share in overall leasing remaining high by end-2019. They are anticipated to target secondary markets in tier I cities along with major micro-markets tier II and tier III cities.
Rental growth expected to continue
As in the previous year, rental growth is expected to taper in Bangalore, Chennai, and Pune. Bangalore is likely to witness a marginal rental growth due to sustained absorption in quality developments. As the much-awaited supply continues to be released in Chennai and Pune, residual spaces along with the higher quality of new space are likely to drive rental growth in the short to medium term.
In Hyderabad, even with rising absorption, the quantum of supply lined up for release is likely to limit rental growth in the medium term; over the short term, the supply-demand mismatch is likely to support rental growth. Strong demand for space in quality developments and planned infrastructure upgrades is likely to fuel marginal rental growth in the core locations of NCR and Mumbai in the short term. SEZ and non-SEZ rental values are likely to converge within the same micro-markets across cities. Overall, rentals are likely to remain firm with an upward bias in active locations.