Bengaluru’s Commercial Real Estate Likely to Remain Robust Over Next Three Years; However, May Lose Some office Market Share to Fast Growing Hyderabad in Future

Gurgaon, March 07, 2018: Bengaluru, one of the fastest-growing and top-performing office markets, is expected to retain its pivotal position of a ‘Technology Hub’ in the country owing to its large talent pool. However, Colliers expects the city’s office market dynamics to change over time in terms of location preferences, workspace design and occupier profile. As per Colliers Research, the fast-growing neighbour, Hyderabad can no longer be ignored and Bengaluru may lose some market share in office leasing. However, this is only likely to happen, if Hyderabad maintains the momentum of new supply additions over the next three years. In the past three years, Hyderabad has jumped from sixth to third position by gross absorption among the top seven Indian cities. In 2017, with 5.8 million sq. ft. (0.5 million sq m) of gross absorption, Hyderabad accounted for 13% of the total office absorption, exceeding Mumbai, the financial capital of India.

“Over the past two decades, Bengaluru has seen huge urbanisation and increasing presence of technology groups and Global In-House companies (GICs). Consequently, the city’s office built space has increased by more than 100%, in the past decade. At present, the city accounts for about 25% 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.

The top five trends that have the potential to alter the Bengaluru office market dynamics are:

1. Bengaluru to retain no. 1 position, but Hyderabad cannot be ignored:

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, we think 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.

2. Location dynamics likely to change as demand set to outstrip supply:

We expect the location dynamics within Bengaluru to change over time. Currently, the Outer Ring Road (ORR) is the preferred micromarket in Bengaluru, with an average share of 45% 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% and 9% 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% 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, we cannot rule out the possibility of a shift of occupier interest towards other neighbouring markets. 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.

“Considering Bengaluru’s reputation as ‘Silicon Valley of India’, new entrants should choose Bengaluru for their front office requirements. The general opinion of occupiers is that Bengaluru cannot be replaced by any other city in India as a source of talent. Thus, occupiers with specific talent pool requirements also should continue expanding in Bengaluru. However, looking at the rising rents and the supply crunch in Bengaluru, cost cautious occupiers should start exploring Hyderabad for their backend operations,” says Surabhi Arora, Senior Associate Director, Research at Colliers International India.

3. 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% 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. We expect, increasing trend of relocation and consolidation to continue in short to medium term.

4. 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.

5. 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. We expect this trend 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.

Regardless of the changes in office market dynamics, Bengaluru’s commercial real estate is likely to remain robust over the next three years. Colliers Research recommends streamlining of policies, collaborative efforts to create infrastructure and redesigning of building for future as long-term strategies to the government, occupiers and developers to ensure that Bengaluru maintains momentum over the long term.

PTI