Realty reality: IT sector, co-working players driving office space absorption

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New Delhi | Published: August 7, 2019 4:31:51 AM

At the forefront of this demand are southern cities of Bengaluru & Hyderabad, accounting for more than 50% of absorption

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As commercial real estate in the country is evolving, sectors like co-working and IT-ITeS are driving demand for office space with absorption levels expected to hit a record 42 million sq ft this calendar year. At forefront of this demand are the tech-driven cities of Bengaluru and Hyderabad, which alone accounted for more than 50% of absorption during the January-June 2019 period.

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According to latest numbers from JLL, office market continued its strong streak and exhibited a 21% growth y-o-y during H1 2019. Net absorption across top 7 cities touched around 22 million sq ft. “A ramp-up by co-working players (15% of overall leasing) and occupiers in IT/ITeS space (37% of overall leasing) drove the strong growth in demand,” the real estate consultancy added.

JLL India country head and CEO Ramesh Nair said current business scenario offers a favourable expansion environment to occupiers. Moreover, it also offers investors the option to look at maximising their returns through investment into completed properties under REIT.

“REIT listings by Embassy-Blackstone Group company clearly suggests that commercial real estate in the country has matured and evolved in the past decade, post the global financial crisis. However, there is still a dearth of investment-worthy properties in the country. As a result, developers are focusing on increasing the supply of Grade A properties. We expect the momentum to remain robust in the second half of 2019 too,” Nair noted.
The most surprising upswing came from Hyderabad, where net absorption levels surged almost four times compared to corresponding period last year. It rose from 1.5 million sq ft in H1 2018 to 5.8 million sq ft in H1 2019, pushing city’s share to around 27% from 8% during the same period last year. Strong expansion plans of information technology/IT-enabled services (IT/ITeS), banking, financial services and insurance (BFSI) and co-working occupiers amid sturdy business confidence have led to this growth.

While, Bengaluru’s position remained unparalleled with a share of 30% with 6.5 million sq ft of net absorption during H1 2019. However, the share of India silicon city’s in H1 2018 was 37%, indicating that absorption levels were down from last year.

“Hyderabad is seeing a stupendous rise in demand. The net absorption in the city is expected to almost touch the levels of Bengaluru by the end of 2019. Delhi-NCR is anticipated to make a strong comeback during the year, with net annual absorption likely to rise by 22%,” JLL said in the report.

Barring Hyderabad and Kolkata, office absorption levels have declined in the other top 5 cities. Samantak Das, who is chief economist and head of research & REIS at JLL India, explained that net absorption in other cities remained relatively slower as markets continued to witness consolidation, primarily in IT/ITeS domain players and relocation of corporates in a bid to lower costs and enhance efficiencies.

“In most of the larger markets, expansions were mainly seen in back office operations, concentrated in the peripheral submarkets. Additionally, limited supply of Grade A office spaces has been adding to the challenge. However, vacancies across markets have remained in single digit over the past few years. Hence, the outlook remains positive and we expect healthy absorption in future,” he told FE.

The demand for office space in these cities is also leading to a rise in rental incomes. Cities like Bengaluru, Hyderabad and Pune continued to witness single digit vacancies and have resulted in higher rental growth in key office markets. The office markets of Bengaluru, Hyderabad and Pune where vacancies were below 5% have registered a rental growth of 6-7% on a y-o-y basis.

“In rest of the cities, rental growth was below 3% on a y-o-y basis at the end of June 2019. Despite the expected strong augmentation in supply, vacancy levels are expected to witness a marginal dip at the end of 2019 on a y-o-y basis in anticipation of a sturdy increase in demand. Thus, larger firms (mainly IT/ITeS) will have to align their space requirement to pre-lease future space in single-digit vacancy markets such as Bengaluru, Hyderabad and Pune,” JLL said.

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