IT drives growth

Whitefield and Outer Ring Road in the Peripheral Business District (PBD) of the City emerged as some of the most sought-after office locations in Bangalore in 2010, recording a large number of transactions by the IT/ITeS sector.

These locations are expected to further consolidate their position as favourable IT destinations, according to the ‘Office Market Report On Bangalore’ released by Knight Frank.

While Whitefield had a total of 26 transactions during 2010, amounting to around 1.53 mn.sq.ft of office space, Outer Ring Road had 38 transactions to the tune of about 2.26 mn sq ft. In Q1 2011, transactions were observed to have taken place in SBD locations like Koramangala, JP Road and Old Airport Road while PBD locations like Whitefield, Electronic City, Outer Ring Road and Hosur Road saw a major share of the transactions as well. The CBD witnessed minimal office space take up during the quarter.
IT/ITES industries trigger growth

Bangalore is one of the key office markets in the south and Whitefield towards the southern part of India. Locations like MG Road and Residency Road form the Central Business District (CBD) of the city while other key office markets include Koramangala, Outer Ring Road, Bannerghatta Road and Airport Road.

The office market in Bangalore has evolved primarily due to the growth of the IT/ITES sector in the city. While a number of industries like manufacturing and automobile have their stake in the economy of the city, it is the IT/ITES sector that has predominantly been the driving force.

Electronic City in the south and Whitefield towards the east are the two prime IT/ITES office markets. Besides these locations, a number of prominent IT projects have come up on the Outer Ring Road as well. Bangalore also has a considerable number of firms in the biotechnology sphere.

These varied industries have driven the demand for office space in the city. The office market of the city had to face adverse conditions during the year 2009 owing to the economic slowdown. The negative impact of the global recession led to dampening office space demand which in the sector, in particular, affected the overall office market scenario.

While the past two years saw constricted demand for office space in the city, the last few quarters have seen demand trickling back into the market, thereby lending a positive outlook to the office sector in Bangalore. With the economy gaining more confidence, a number of multinational companies have begun to reconsider their expansion plans in the city, which had been put on hold in the past year.

Leasing activity in Bangalore has been rising gradually, with the IT/ITeS sector seeking out new office space to either initiate or to expand their business operations in the region.

Out of the total office space taken up in 2010, around 47% was absorbed in H1 2010 (Jan-Jun) which consisted of over 174 lease transactions. The average rental across office micro-markets during H1 2010 stood at Rs. 53/sq ft per month. As compared to H1 2010, the second half of the year witnessed a higher number of transactions.

Approximately 5.80 mn sq ft of fresh office space was absorbed in Bangalore during this period. This comprised approximately 188 lease transactions. The average rental during H2 2010 remained the same as H1 2010 and stood at Rs 53/sq ft per month, whereas capital values for key sale transactions were observed at Rs 8,760/sq.ft. Meanwhile, the first three months of 2011 saw around 0.32 mn.sq.ft. of office space being leased out at an average rate of Rs 48/sq ft per month.

The lower rentals, however, do not reflect decline in rental trend. This development is mainly due to the fact that more transactions took place in the peripheral office locations where the rentals are much lower than the prime office locations.

In H1 2010, the average area transacted per deal was observed at 29,439 sq ft, whereas in H2 2010 it was observed at 30,829 sq ft, thereby reflecting a larger transacted size and higher number of transactions in H2 2010. Meanwhile, the average area transacted per deal in Q1 2011 was around 14,416 sq ft, depicting the fact that fewer large-sized transactions took place during the period.

Sectoral analysis

Bangalore office market is primarily dominated by the IT/ITeS sector. In 2010, out of the total 10.92 mn sq f. absorbed, about 68% was absorbed by the IT/ITeS sector, totalling to more than 245 transactions.

In H1 2010, this sector with about 111 transactions was responsible for 61% of the total area transacted. This amounted to approximately 3.14 mn sq ft and constituted of companies like the Oracle, Accenture, Mu Sigma and Via Technologies with transaction size in the range of 39,000 sq ft to 250,000 sq ft

The share of the IT/ITeS sector in office space absorption went up considerably in H2 2010 and was recorded at being approximately 74% of the total transacted area. Key transactions were led by companies such as Sapient, Wellsfargo, L&T Infotech, TCS, Honeywell Software and Siemens.

Amongst the other major industries to have taken up office space in Bangalore, the emerging sectors of telecommunication and education led the way and absorbed space to the tune of 9% each of the total space leased out in H1 2010, which subsequently diminished to two per cent and 0.3 per cent respectively in the second half of the year. The consulting sector contributed bout six per cent of the total space absorbed in H12010, which increased to a significant 12 per cent in H2 2010.

Deloitte India’s 56,891 sq.ft of office space was one of the largest consulting transaction witnessed during H1 2010, while another consulting firm Ernst & Young took up around 30,500 sq.ft in H2 2010.

Other sectors like BFSI, consumer durables and healthcare together contributed about 6% in H1 2010 and 7% in H2 2010 towards office space absorption.

In Q1 2011, the IT/ITeS sector was responsible for around 56% of the total office space absorbed, followed a long way off by the BFSI and healthcare sector which contributed about 11% and 10% respectively. Some of the prominent companies which took up space during this quarter include Nova Nordisk, Schindler Electric and iMint with areas in the range of 20,300-55,071 sq.ft.

Geographic analysis

The Central Business District (CBD) and the neighbouring areas of Bangalore witnessed a number of transactions, representing varied industries. Around 46 transactions took place in the CBD and Off-CBD locations in 2010, amounting to approximately 0.63 mn sq ft of office space.

The Suburban Business Districts (SBD) and the Peripheral Business Districts (PBD) have been the focus of Grade-A office development in Bangalore in the recent past.

Due to availability of quality office spaces, with large floor plates and state-of-the-art amenities, a sizeable share of office space transactions has been observed in these regions year on year.

The SBD of Koramangala saw the highest take up of fresh office space in H2 2010, to the tune of around 240,230 sq ft and accounting for approximately 39 transactions.

Outlook

The year 2010 has witnessed substantial momentum in office market demand. While demand from IT/ITeS sector has been regaining ground post recession, the year 2010 also witnessed demand brought about from several other quarters, particularly the BFSI, consulting and healthcare and sectors. Due to growing demand for office space by these varied sectors, the market is expected to strengthen further in 2011.

Marginal appreciation

Besides, with an improving economic environment and growing consumer confidence, the demand for office space is expected to increase, thereby leading the rental values across micro-markets to witness a marginal appreciation during the next one year.

As IT/ITeS continues to be the key driver for Bangalore's office market, the micro-markets in the SBD and PBD, where most of these companies are located, are expected to dominate the market in terms of share in office absorption.