Commercial boom hits City

With the expansion of the IT industry and an influx of professionals coming to the City, the need for office space has increased. Bindu Gopal Rao gets to the root of this phenomenon...

The IT/ ITeS/ commercial office space is an important aspect that drives the realty market in Bangalore. Considering the large volumes of land parcels available for office spaces, the stakes involved are naturally quite high. Office spaces have been given a boost as per recent reports.

Realty bytes

According to a recent report by Cushman & Wakefield, Bangalore is expected to be the biggest market in the country due to the expansion of IT, ITeS and multinational companies. Bangalore will be second only to Tokyo in the Asia-Pacific region to generate demand for office spaces. Naturally, the sentiment in the commercial real estate industry is upbeat. “Our commercial constructions are on track and will continue to grow and contribute to the office space absorption in Bangalore, which is estimated to see a growth of 16 per cent in 2014 compared with the previous year,” says Bijay Agarwal, MD, Salarpuria Sattva. Bangalore is set to generate a lot of office space in 2014 as compared to 2013.

In fact, Bangalore may top the list according to experts. Satya Prabhakar, founder & CEO, Sulekha.com adds, “On Sulekha Property, searches for commercial property fell in 2013, but it has slowly picked up and we see a healthy 15 to 20 per cent growth in searches going into 2014.” According to Aditya Sikri, CEO–Propcare Mall Management & Commercial Leasing, Bangalore has consistently seen an upward graph when it comes to office spaces because of the IT, ITes and multi-national companies, as it captures over 60 per cent of total transacted space in India. There is expected demand of 8.5 to 9 million square feet this year in the city.

The market is not saturated and has immense potential for substantial growth in the coming years.” Several factors continue to make the city an ideal destination for corporates as well as investors. This includes the presence of a large talent pool, a number of SEZs for IT expansions, development of the peripheral business districts and the metro rail corridor.

“Peripheral districts such as Whitefield and Outer Ring Road continue to attract tenants due to availability of Grade A office space with larger floor plates at attractive rates, and good quality social and recreational infrastructure. Bangalore is expected to witness a healthy demand from IT companies, and this year, we may see new projects and new areas coming up such as planned investment zones around the airport in north Bangalore. However, key challenge will be to match the fast pace of development with the infrastructure growth in these areas,” says Lee Fu Nyap, CEO, Ascendas India Operations.

Latest trend

Now that the global and domestic economies have stabilised, there is more traction with many global players setting up their offices in the city. “We also see multinationals and Indian companies seeking to expand their presence. Areas like Outer Ring Road, Whitefield, OMR Road, Hebbal and route to the International Airport have good infrastructure and fast connectivity, which has upped the demand for office space there,” says Agarwal.

Bangalore’s office space market is evolving by the year, and has reached a stage that it can compete with any market in the world. “Suburban locations are likely to witness more demand and within the realty sector, commercial segment is expected to lead other segments. We expect major demand for office space to come from IT/ITES sector,” says Rajat Goenka, MD, Arge Realty.

He adds, “Another noticeable fact is that while the first half of 2013 saw the decline in demand, the later half not only filled the gap, but ranked the city second only to Tokyo. That itself speaks for resilience of the market here.”

According to Umesh Rao, founder and CEO, Vector Projects (I) Pvt. Ltd, companies are planning to launch new projects due to several enquiries and, many, are also relocating to bigger spaces for better efficiency and prices. Bangalore witnessed 8 million square feet of absorption of commercial office space till date, even though 2013 saw marginal decrease in demand due to economic sentiments. “In the last two years, Bangalore has witnessed a greater commercial space absorption share than other commercial hubs such as Mumbai and Delhi NCR.

Developing peripheral micro realty markets such as the Outer Ring Road, Sarjapur, Whitefield, Bannerghatta Road and north Bangalore have emerged as promising commercial locations. Real estate developers in Bangalore have been proactive and come up with a pragmatic concept of “walk to work”, which is deemed to be the solution to the problems related to commuting to work.

The availability of huge land parcels, reasonably planned development, affordable prices, proximity to the IT/ITeS hubs and social infrastructure built around these micro markets are the key factors driving demand in these areas. In addition to this, an increased interest is being seen in the north Bangalore micro-market owing to the development of the industrial areas and few Special Economic Zones (SEZ) and proximity to the international airport.

Doing the math

Prices are framed attractively at the moment, but these spaces are slated to get costlier soon. Many companies are quoting their prices even before the construction is complete so that they get what they are looking for price wise. Bangalore has one of the highest footfalls of business travellers in the country driven by the booming IT/ITes sector. “It also has one of the most resilient real estate markets that offer commercial space at much more competitive rates than Delhi, Mumbai or Gurgaon.

We expect the Yashwanthpur area to be the most sought after for rented office spaces, as the prices here are reasonable,” says Goenka. The rents in the office market have been fairly stable in 2013-2014. The dip in the recession and an improved exchange rate with the dollar has helped the industry tide over the gloomy economic scenario that existed globally.

“Subsequently, the IT/ITes sector is looking to capitalise on the favourable situation and expand their offices. This has augured well for the local market. The central business areas — Whitefield and Outer Ring Road — have expectedly surpassed the other localities in terms of overall growth,” says Prabhakar.

Moreover, Sikri says, “The year is expected to witness an increase in net absorption over 30 per cent over 2013. The cities to record majority of the net absorption will be similar to 2013, with Bangalore leading the pack.” Over all, occupier demand in Bangalore has softened in 2013. “However, the year witnessed approximately 8.7 million square feet of commercial office space absorption, which is 9 to 10 per cent lesser than last year. Considering the economic slowdown this year, this quantum of commercial real estate absorption is reasonable,” he adds.

Nevertheless, Bangalore office market was the largest contributor to the pan-India office space absorption, a share of approximately 27 per cent of the total area leased (ie 31 million square feet) in 2013. The rentals across most of the micro markets have remained stable. “Outer Ring Road, Whitefield, Electronic City and Banerghatta Road rental values appreciated by 6 to 8 per cent on Y-o-Y basis. Going forward, rental values in ORR stretch is expected to witness marginal increase due to consistent occupier’s interest especially from the IT/ITeS industry,” says Yogesh Bheemaiah, director office services, Colliers International.

Demand vs supply

Bangalore is an ever evolving city with vibrant business environment, especially for IT and bio-technology sector. There is never any excess supply of office spaces. If there is an excess any given year, it is absorbed the next year. C.N Govindaraju, president, CREDAI, Bangalore says, “The companies are focusing on relocating and consolidating operations to one or two locations in a city rather than operating from multiple locations.”

The oversupply situation in 2013 due to less absorption is slated to reduce during 2014. Bangalore’s vacancy level is less than the national average vacancy level. “The office space absorption in Bangalore had, in fact, decreased in 2013 compared to 2012. Therefore, the supply this year will be favourably met by the demand. The expansion of office space will serve to benefit the demand and complement it, rather than resulting in a situation where the supply overruns it,” says Prabhakar.

Bheemaiah adds, “We expect the supply from a number of launched commercial projects to be ready by 2015. This year is expected to have relatively higher percentage of SEZ supply available for leasing. The Akrama-Sakrama Scheme (regularisation of unauthorised constructions) in Karnataka was approved in 2013 by the state assembly. However, no cut-off date has been fixed for regularising unauthorised constructions. The scheme seeks to regularise up to 50 per cent violation of setback norms and permissible floor area ratio in residential buildings and up to 25 per cent in non-residential buildings.”

A lot of global players have recently forayed into the Indian realty sector, the latest being the hospitalist major Carlson Rezidor. This is encouraging considering it will bring in the necessary capital from abroad to the cash-strapped sector. Hence, this is a period of consolidation for the market in the country. Favourable legislations and enthusiasm from the government will serve to enhance the sale-ability of the sector.