Office Market Review Q1 - 2009

RESEARCH KnightFrank.com

Q1 2009

INDIA office market Review

Knight Frank

HIGHLIGHTS ! Current financial crisis in the real estate sector has resulted in a number of major players having to stall or offload stakes in ongoing projects ! Approximately 183 mn.sq.ft. of office space, including SEZs, to be developed in the 7 major cities of the country over 2009-11, which is expected to far exceed the incremental demand for office space of about 122 mn.sq.ft. ! Oversupply expectations are tempered by the fact that developers, cognizant of the flagging market, will strive to align released supply with demand expectations ! Rentals in Mumbai and NCR are expected to decline marginally until between the second half of 2009 and the first half of 2010, following which rates will begin to appreciate

Q1 2009

INDIA Office Market Review

EDITORIAL

significantly impacted the supply side as

correct by up to 49% and 46% respectively

over-leveraged developers are struggling to

from their peak levels. In the NCR, major

finance projects. Consequently, a number of

corrections are expected in Gurgaon and

Figure 1

major players are having to stall or offload

Noida, where on account of rising vacancies,

Distribution of estimated office supply 2009-11

stakes in ongoing projects and put off future

rentals are predicted to correct by up to 63%

projects. In the face of slowing demand,

and 62% respectively from 2007-08 peak

rising vacancy levels and a lack of financing

levels. It is worth pointing out that historical

that has crippled the supply side, the office

rental trends depicted for each city are not

market in India will likely remain subdued for

meant to elicit comparisons between micro-

the foreseeable future.

markets. This is so as even though rentals are depicted on a per sq.ft. basis, the fact that

One of the key symptoms of the ailment afflicting India's office market is declining rentals. In addition to current prices, the subject of future price trends is generating

rates are levied on carpet area in some micromarkets and super built up area in others renders drawing comparisons more complex than simply comparing per sq.ft. rates.

great interest. Knight Frank research is

NCR - 22% Bengaluru - 17% Pune - 15% Chennai - 12% Mumbai - 14% Hyderabad - 12% Kolkata - 8% Source: Knight Frank Research

Rentals in office markets across India declined markedly during the latter half of 2008 as the grip of the global financial crisis intensified. Owing to a severe liquidity crunch, prevailing lease rentals continue to be subjected to downward pressure as distressed occupants seek to negotiate lower rates. In fact, rentals are even being renegotiated during lease tenures, in spite of the fact that underlying lease agreements are registered and contain lock-in clauses. One could argue that the current decline was on the cards considering that towards the end of 2007, rentals had begun to stabilise as excess demand was rapidly eroded by the bull market driven construction boom. Those leasing out office space are increasingly inclined to lower rentals in order to stave off high vacancy levels. From Q4 07 to Q4 08, vacancy levels increased from 2% to 5% and 1% to 5% in the prime business markets of Delhi and Mumbai respectively. The impact of the aforementioned factors has also

02

constantly striving to augment the quality

As alluded to previously, absorption levels

and depth of its analysis, and in the spirit of

are declining around the country. During

this perennial endeavour has formulated a

2008, across the seven locations of Mumbai,

regression model that attempts to predict

NCR, Pune, Hyderabad, Kolkata, Bengaluru

office rentals in the micro-markets of Mumbai

and Chennai, a total of 30.2 mn.sq.ft. was

and NCR over the coming three years.

absorbed out of a total supply of 51.8

The model analyses rental movement from

mn.sq.ft. This is a particularly worrying

the perspective of various macroeconomic

scenario when one considers that the present

factors, demand, supply and market

oversupply scenario is likely to persist for the

sentiments. It is based on determined

foreseeable future. Knight Frank research

relationships between price and explanatory

attempted to quantify this expected

variables such as vacancy rate, net

oversupply by forecasting demand for and

absorption and upcoming supply. In addition

supply of Grade A office space from 2009-

to determining intra market relationships,

2011 across the aforementioned seven

inter market relationships were also

locations. The supply figure includes only

analysed, with the focus being on

those projects where at the very least ground

determining the influence of upcoming

breaking has started and excludes those that

supply in similar markets on the price of a

have simply been announced or are at the

particular market. Our research revealed that

planning stage. The demand figures were

the vacancy rate is the most important

estimated based on a regression model

determining factor behind rental movements.

which established the relationships between national output, national employment, state

As per Knight Frank Research, Mumbai office market rentals have witnessed a sharp price correction in a short period of time, and are now expected to witness a time correction, identified by slow and marginal correction over an extended time period. As per our model, the Lower Parel and Powai micro market rentals are expected to correct by up to 60% and 57% respectively from their 200708 peak levels. Rentals in other Mumbai micro-markets like Andheri Kurla Road and Bandra Kurla Complex (BKC) are expected to

level output and trends in state and city level output and employment. The variations over time and across states/cities have been captured in the model. The demand model has projected the employment for the period 2009-2011, and this figure represents employment in only the financing, insurance, real estate and business services (including IT/ITES) sectors, as these are the sectors assumed to be the prime source of demand for Grade A office space.

KnightFrank.com

The respective employment figures for each

scenario that would boost demand for office

demand in a realistic GDP scenario by 70%,

location are converted to incremental

space. Similarly, future infrastructure

61% and 55% respectively. Given that office

demand for office space using respective

developments will determine the trends in

markets around the country are already

space/employee norms.

real estate markets around the country,

exhibiting signs of oversupply, rentals can at

particularly as improved connectivity and

best be expected to remain stagnant, if not

accessibility to hitherto distant markets will

decline further over the coming three year

spread stock and supply, and consequently

period. Faced by such a scenario, prominent

reduce upward pressure on rentals in

developers might want to explore

currently congested markets. A good example

restructuring ongoing projects and

of this is the Worli-Bandra Sea Link in

diversifying future project types in order to

Mumbai, which when opened will greatly

spread the demand risk posed by the current

benefit the Bandra Kurla Complex micro-

financial climate. In addition to this, a joint

market.

venture is an example of how the supply side

Certain factors, although relevant to future price and demand trends, have not been directly incorporated into our price and demand prediction models as their impact is reflected in the explanatory variables built into both models. For example, the recent decline of India's IT/ITES sector is a major concern for office space demand given the dominance of this sector in various markets

could pull together to counter prevailing

around the country. Our outlook for the

Knight Frank research estimates that from

performance of this sector is reflected by our

2009 to 2011, 183.1 mn.sq.ft. of Grade A office

GDP forecasts, which drive our demand

space will be infused across the seven major

projections and are assumed to be aligned

cities studied. However, as per our demand

with the fortunes of the IT/ITES sector. The

estimation model, this supply is expected to

same logic accounts for the impact of the

far exceed the incremental demand for such

INR/USD exchange rate movement, which

space of 122.4 mn.sq.ft. over the same three

due to the fact that a large number of IT

year period. This demand figure is based on

sector contracts are with US based firms, is a

our realistic forecasts for GDP over the

key determinant of the fortunes of India's

coming three years. The incremental demand

IT/ITES sector. Other relevant factors driving

figures of 136 mn.sq.ft. and 106.9 mn.sq.ft.,

price of and demand for commercial space

which correspond respectively to our

are yet to take effect, and hence their impact

optimistic and conservative GDP forecasts,

on India's office market will be more evident

also indicate that oversupply could be a

with time. For example, the service tax

major concern over the coming years. The

charged on commercial rentals was recently

locations forecasted to be the worst afflicted

revised downward, and following increased

by oversupply are NCR, Pune and Bengaluru,

pressure could be decreased further, a

for which predicted supply exceeds predicted

financial constraints. A major driver of the Indian office market in recent times has been the IT/BPO sector, whose presence is particularly strong in cities like Bengaluru and Hyderabad. Due to the financial turmoil, particularly in the US, business in this sector has been badly hit, as evidenced by the fact that the projected growth of IT/BPO exports has been revised down to 16-17% from earlier estimates of 25-30%. This in turn is adversely impacting the substantial chunk of demand emanating from this sector. However, traditionally IT dominated centres are now witnessing the growth of other business sectors, and this should soften any potential blows dealt by a flagging IT/ITES sector. For example, Hyderabad, which has witnessed a 20% decline in IT Park rates, is also expected to witness growth in other sectors such as

Table 1

City

biotechnology, hardware, pharmaceuticals

Estimated Supply 2009-11 (mn.sq.ft)

Estimated Demand 2009-11 (mn.sq.ft)

and tourism. Similarly, Bengaluru is witnessing a shift from being a predominantly IT/ITES destination to becoming an investment destination for other

Optimistic

Realistic

Conservative

41.1

26.8

24.1

21.0

approvals for 10 SEZs catering to the textile,

Bangalore

30.8

22.1

19.9

17.5

aerospace, manufacturing and R&D sectors.

Pune

27.6

19.1

17.2

15.0

Chennai

21.2

17.2

15.4

13.5

Mumbai

26.0

20.5

18.4

16.1

Hyderabad

21.1

17.0

15.3

13.3

monetary measures do not result in overnight

Kolkata

15.3

13.4

12.0

10.5

changes, and until the impact of recently

183.1

136.0

122.4

106.9

NCR

Total

Source : Knight Frank Research

sectors, as evidenced by the in-principal

In these trying times, all eyes are on the central government's policy initiatives, which it is hoped will stimulate aggregate demand across the economy. However, fiscal and

implemented and future initiatives starts to tell, the office market is likely to remain stagnant.

03

Q1 2009

INDIA Office Market Review

Mumbai

planning authority to oversee the planning

Figure 2

and development of Bandra Kurla Complex

Stock distribution

(BKC) in the Western Suburbs. This

In 1977, the MMRDA appointed a special

development was targeted at arresting the increasing congestion of office space and commercial activities in South Mumbai. Over the past years, this location has emerged as a thriving commercial hub, and along with the contiguous western suburban locations of Khar, Santa Cruz, Andheri, Malad and Goregaon accounts for 44% of office stock across Mumbai. The micro-markets of Andheri , BKC and BKC-Kalina Road are the highest contributors to total office space stock in the Western Suburbs.

Development styles range from the traditional format of dedicated stand alone office buildings to mall-cum-office developments ,

CBD & off-CBD - 16% Other South Mumbai Locations - 11% Western Suburbs - 44%

While the Indian economy thrived and the

IT Parks with improved recreational facilities

population increased, lack of space within

and the fast-growing concept of green

Central Suburbs - 5%

the city for large scale developments resulted

buildings.

Navi Mumbai - 19% Thane - 5%

in development spreading to locations like

Source: Knight Frank Research

Powai , Navi Mumbai and Thane. Currently, office developments in these 3 locations house primarily MNCs, BPOs, pharmaceutical

Market Review

companies and IT/ITES companies, all of which require large floor plate size for

The city of Mumbai, which is the financial

operations. In 2005, the Supreme Court

capital of the country, has witnessed

cleared around 50 acres of mill land for sale

extensive office space development in recent

in the heart of Mumbai, and this, coupled

years. According to Indicus Analytics,

with the repeal of the ULCRA, led to the

Mumbai contributed 6.16 % to the Indian GDP

development of this previously defunct mill

during FY 07. However, changes in

land.

demographics and consumer attitudes have altered the profile of real estate development in the city.

Over the last 5-6 years, commercial developments across the aforementioned locations have varied in terms of design and

Prior the 1980's, the majority of commercial

architecture.

activity was concentrated in the CBD and off-CBD locations of Cuffe Parade, Nariman Point, Churchgate, Marine Lines, Ballard Estate, Fort and Fountain. Hence, these locations currently account for 16% of office space stock in Mumbai. Buildings in Ballard Estate, Fort and Fountain largely house government offices, while Nariman Point comprises mainly national as well as international companies and hotel brands.

Reliable Plaza, Navi Mumbai

04

western suburban locations Comprising bandra, Khar, Santa Cruz, Andheri, Malad and goregaon account for 44% of office stock across Mumbai.

As the global economic boom heightened and augmented construction activity over the past 3 years, the IT/ITES sector grew phenomenally in locations like Thane and Navi Mumbai. However, in the past few months, construction as well as leasing activity has been drastically subdued relative to previous years. Many projects that were expected to be completed in 2008 were delayed, and only around 38% of supply that came up across Mumbai in 2008 has been absorbed.

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Figure 3

In total, around 8.33 mn.sq.ft. of office space

Estimated new office supply 2009-11

is expected to be infused into the Island city

30

market by the end of 2011, and 85% of this 26.0

25

Parel. 20.4

20

Area (mn.sq.ft.)

projected space will be concentrated in Lower

In the western suburbs, locations in Bandra, Andheri, Vile Parle and Goregaon are

15

exhibiting the greatest number of upcoming 11.2

projects. Andheri accounts for around 55% of

9.2

10

the total upcoming supply in the western suburbs, with a large portion being infused

5.7

5

along Andheri-Kurla Road. In total, approximately 8.79 mn.sq.ft. of office space 2011

2010

2009

0

Year Supply

Cumulative Supply

is expected to be infused into the western suburban market by the end of 2011. Bank Of India(BKC), Mumbai

Powai and Kanjumarg comprise 22% and 32% respectively of the total supply of 3.54

BKC average rentals declined 40% from peak

mn.sq.ft. that is expected to enter the central

levels observed during Q1 08. Other western

suburban market by the end of 2011. Thane,

suburban locations like Andheri (E) and

largely due to being a preferred destination

Malad experienced reductions of 44% and

Given the increasing dearth of space within

for IT/ITES space as well as dedicated IT

42% respectively from 2008 peak rates. With

Mumbai, newer developments have come up

Parks, is expected to witness an additional

the downturn of the IT/BPO sector, rentals at

in specific locations within various

supply of 1.79 mn.sq.ft. by the end of 2011.

locations like Powai, Thane and Navi

micro-markets. With the freeing up of mill

This expected supply might not materialise

Mumbai, all of which cater mainly to this

land, locations like Lower Parel and Worli are

due to the ongoing economic slump, which

sector, experienced a 32%-46% slide from

witnessing ample construction activity.

has adversely impacted the IT/ITES sector

peak levels of 2008. While Powai rentals

across India. While retail projects are largely

declined most during Q3 08, Thane and Navi

concentrated in Vashi, newer office

Mumbai rentals recorded their respective

developments are mostly situated not only in

maximum declines during Q4 08.

Source: Knight Frank Research

Supply and Development

Figure 4

Distribution of new supply 2009-11

Vashi but also in Turbhe and MIDC. In total around 3.57 mn.sq.ft. will be infused into the Navi Mumbai micro-market by the end of 2011.

Rental Profile Mumbai office market rentals have declined significantly over the past year. Average rentals in Nariman Point have declined by 25% from the 2008 peak rate. Rentals in other CBD and off-CBD locations like Fort, Ballard Estate and Churchgate witnessed a higher drop of 32% from the peak average Island City - 32% Western Suburbs - 34% Central Suburbs - 13% Thane - 7% Navi Mumbai - 14%

rentals witnessed in Q1 08. Worli and Prabhadevi rentals declined 37% from peak rates, while Lower Parel average rentals

BKC average rentals declined 40% from peak levels observed during Q1 08. Other western suburban locations like Andheri (E) and Malad experienced reductions of 44% and 42% respectively from 2008 peak rates.

declined by 47% relative to peak levels.

Source: Knight Frank Research

05

Q1 2009

INDIA Office Market Review

Rental declines across the board can be attributed primarily to the liquidity crunch afflicting developers, who faced with reduced demand were unable to sustain exorbitant rentals. Financial turbulence, as reflected by the fluctuations experienced by the stock market during the latter half of last year, led companies to abort expansion plans and implement cost cutting strategies. Until economic conditions improve and demand picks up, office rentals can be expected to continue to plummet.

Hewitt - Millenium Business Park, Navi Mumbai

Figure 5

Rental trend 450

studied, rental declines can be expected to

emanating from the actions of the market's

persist until anywhere between the second

major players, examples being Omaxe and

half of 2009, and as in the case of Powai, the

350

Indiabulls, who have announced the

second half of 2010.

300

postponement of office projects in Mumbai.

250

Additionally, given the current vacancy levels of around 62% across those projects that

200

were completed in 2008, developers might 150

be hesitant to invest in office development

100

for the foreseeable future, particularly as there is every indication that vacancy levels

50

could rise as absorption continues to decline.

Lower Parel

Malad-Mindspace

forecasted to bottom out at 27% and 41% respectively below 2007-08 peak levels, are more resistant to rental declines, simply due to the fact that fresh supply and vacancies will be limited in such markets.

As discussed in the editorial, Knight Frank research devised a model to forecast rentals in Mumbai and NCR micro-markets for the next three years.

Powai

Navi Mumbai

and Fort/Ballard Estate, where rentals are

Figure 6 Thane

Source: Knight Frank Research

Outlook Over the next three years, while around 26.02 mn.sq.ft. of Grade A office space is expected to be infused across Mumbai, incremental demand for such space, assuming realistic GDP forecasts, is forecasted to be only 18.4 mn.sq.ft, or 71% of anticipated supply. This amounts to a predicted oversupply of 7.5 mn.sq.ft., a figure that is mitigated by the fact that due to financial constraints on the supply and demand sides, restructuring and realignment of projects could be a prominent feature across India's real estate market over the coming months. Currently, there are

while around 26.02 mn.sq.ft. of Grade A office space is expected to be infused across Mumbai, incremental demand for such space, assuming realistic GDP forecasts, is forecasted to be only 18.4 mn.sq.ft.

Projected office demand 2009-11 25 20.5 20

18.4 16.1

15

10

5

0

Scenario Source: Knight Frank Research

Conservative

Andheri (E)

mature and stable markets like Nariman Point

Realistic

Worli-Prabhadevi BKC/CST Road

Mar' 09

Fort/Ballard Estate/Churchgate

The results of the model tell us that relatively

Optimistic

Nariman Point

Dec '08

Sept '08

June' 08

Mar' 08

0

06

As per the model, across the 8 micro-markets

developments in progress. This concern is

Area (mn.sq.ft.)

Rs./sq.ft. per month

400

concerns surrounding the completion of

KnightFrank.com

On the other hand, rentals in relatively more

48% and 44% below 2007-08 peak rates. The

rental predictions for the next three years

volatile markets like Lower Parel, BKC and

complete set of forecasts can be seen in the

have been given at half yearly intervals.

Worli are forecasted to bottom out at 60%,

table below, where for each micro-market,

Table 2

Forecasted Average Rentals (in Rs. /sq.ft. per month)

2009 H1 09

2010

H2 09

H1 10

2011

H2 10

H1 11

H2 11

Peak Average Rental 2007-08

Maximum Forecasted Correction from 2007-08 Peak

Nariman Point

300

299

291

297

303

309

400

27%

Fort/ Ballard Estate

188

163

167

184

203

226

275

41%

Lower Parel

176

161

136

139

155

158

338

60%

Worli

243

238

242

258

263

268

425

44%

BKC

234

230

221

232

253

258

425

48%

Andheri

110

99

104

116

125

128

200

50%

68

63

55

55

55

61

130

58%

113

91

77

73

74

82

170

57%

Malad- Mindspace Powai Source : Knight Frank Research

07

Q1 2009

INDIA Office Market Review

PUNE Figure 7

Stock distribution

CBD locations. IT space accounts for 97% of

Figure 8

Pune's upcoming office supply, which is

Estimated new office supply 2009-11 30

concentrated primarily in suburban and

27.6

peripheral locations of the city. However, as 25

per NASSCOM, India's IT industry is expected to clock relatively lower growth of around

to peripheral office markets due to their

11.6 10

relatively lower rentals as compared to CBD

7.0 5

In spite of the gloom surrounding the IT/ITES

0

government of Maharashtra to develop the

2009

locations.

sector, initiatives undertaken by the

9.0

Year

Mumbai-Pune Knowledge Corridor, which will East - 23% North East - 23% West - 46% Central - 8% Source: Knight Frank Research

Market Review The office market in Pune is largely IT/ITES driven, although other services like banking, financial services and insurance (BFSI) have in recent times become more prominent in the city. Most of the upcoming IT/ITES developments in Pune are concentrated in eastern and western zones, where larger land

create an operational base for companies across the globe, are expected to boost the

2011

At present, IT offices are increasingly shifting

16.0 15

2010

to alter the profile of future supply in Pune.

20

Area (mn.sq.ft.)

20% in 2008-09, a scenario that is expected

Supply

Cumulative Supply

Source: Knight Frank Research

growth of the office market in the region. The cornerstone of this long-term project will be a

Of the total supply estimated to hit the

business-friendly and progressive

market in 2008, over 40% got delayed and

environment coupled with world-class

are slated to be operational by end-2009.

facilities and infrastructure. In addition,

Examples of projects that got delayed are

NASSCOM will partner around 100 colleges

Mantri IT Park (450,000 sq.ft.) by Mantri

under Pune University, with the aim of

Group, IT City Info Park Phase II and III

imparting industry skills to students and

(940,000 sq.ft.) by Vascon Weikfield, Matrix

strengthening the prospective resource base

(300,000 sq.ft.) by Vascon and Tech Park

and job opportunities.

(500,000 sq.ft.) by Panchshil Realty. Most of the delayed projects comprise IT projects located in the western part of the city,

parcels are available for campus

Supply and Development

developments. The northern zone, which

During the past 4 years, Pune has witnessed

comprises Pimpri Chinchwad, Chakan and

the addition of around 12.57 mn.sq.ft. to its

This delay in projects can be attributed to the

Talegaon, mainly houses the automobile

office space stock.

fact that in 2008, absorption of office space

examples being Hinjewadi and Bavdhan.

industry. The city's CBD is spread out in

in Pune was only 1.7mn.sq.ft., which was

pockets and comprises locations like Camp,

below the expected levels.

MG Road, Bund Garden Road and Dhole Patil Road, which are considered prime locations for office spaces. Development in peripheral locations like Hinjewadi and Kharadi, located along the primary road network, led to decentralisation of the CBD, thus offering new opportunities to the western and eastern micro-markets. The economic downturn and subsequent decline in growth of the IT/ITES and BFSI sectors have resulted in declining rentals in all micro-markets and higher vacancy rates in

08

Infotech Park, Hinjewadi, Pune

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Pune will witness fresh supply of 27.6 mn.sq.ft. of Grade A office space by the end of 2011, with some projects phased out till 2012. This supply includes six upcoming SEZ projects, which are evenly distributed between the eastern and western zones. The western zone, which features locations like Hinjewadi, Aundh, Baner and Bavdhan, accounts for the highest number of upcoming projects and comprises a total supply of 10.9 mn.sq.ft. till 2011. The main projects in this zone are the Blue Ridge SEZ (2.7 mn.sq.ft.) by Flagship

Magarpatta City, Hadapsar 8, Pune

This supply includes three SEZ projects;

western and eastern zones, a shift of office

Cyber City (4 mn.sq.ft.) by Magarpatta

space development from CBD to SBD

Developers at Hadapsar, EON (3.8 mn.sq.ft.)

locations was almost inevitable. Hinjewadi

by Panchsil Realty at Kharadi and SP Infocity

and Kharadi have emerged as preferred

(4 mn.sq.ft.) by Shapoorji Pallonji at Saswad

destinations for IT/ITES as well as non-IT

Road. The north eastern zone, comprising

companies, primarily due to factors such as

The western office markets and Hinjewadi,

Nagar Road, Airport Road, Kalyani Nagar,

lower rentals, availability of affordable

due to their proximity to the Mumbai-Pune

Yerwada and Viman Nagar, will witness a

residential apartments in the vicinity and

expressway, have the advantage of lesser

total of 5.3 mn.sq.ft. of office space supply by

planned infrastructure. On the SEZ front,

travel time between Pune and Mumbai. Also,

the end of 2011. The main projects

lower rentals and tax exemptions are the

these markets benefit from proactive

constituting this supply are Business Bay

factors attracting IT companies to expand or

infrastructure development by both MIDC and

(1.65 mn.sq.ft.) by Panchsil Realty at Airport

absorb facilities in IT SEZs in peripheral office

PMC. The eastern zone, which includes

Road, Commercezone (2.3 mn.sq.ft.) by K

markets.

locations like Hadapsar, Kharadi and

Raheja at Yerwada and IT City Info Park Phase

Phursungi, will contribute a total of 9.9

II & III (940,000 sq.ft.) at Nagar Road.

Infrastructure at Hinjewadi, I Space (400,000 sq.ft.) by Kolte Patil at Bavdhan, Megaplex (160,000 sq.ft.) by Amar Builders at Baner, DLF Akruti IT Park (5.85 mn.sq.ft.), an SEZ by DLF and Akruti Nirman at Hinjewadi.

mn.sq.ft. to the total office space supply expected in Pune by 2011. Figure 9

Distribution of new supply 2009-11

A number of IT companies which were located in the CBD or other central areas are shifting

The central zone, which only features four

to areas like Hinjewadi and Kharadi, which

ongoing projects, will contribute 0.6

are prime SEZ locations.

mn.sq.ft. of office space supply by the end of 2011. Matrix, which is being built by Vascon at Wakdewadi, is a prominent project that as alluded to previously has been delayed by a year. Another notable construction is Kumar Business Court (75,000 sq.ft.), a non-IT project at Bund Garden Road.

Other companies with large space requirements are also intending to move out of non-IT developments in the city as soon as the lock-in period is over. Due to this trend, higher vacancy rates are being observed in office developments located in the central zone.

Meanwhile, the northern zone, which broadly comprises Pimpri and Chinchwad, features

Rental Profile

two notable projects. Empire Estate, which

North East - 19% Central - 2% East - 36% West - 40% North - 3% Source: Knight Frank Research

will be developed by Sukhwani builders, is

Owing to the current economic slowdown, the

currently being planned, while Devi IT Park

Pune real estate market is witnessing

(900,000 sq.ft.), which will be built by Devi

corrections in rental values. Rates have

Constructions at Pimpri, has been delayed by

dropped during the last three quarters and

a year.

are likely to come down further.

Due to the lack of large land parcels in the CBD and the development of SEZs in the

09

Q1 2009

INDIA Office Market Review

projected oversupply of this space type. From 2009-2011, assuming realistic GDP forecasts, supply of Grade A office space is estimated to exceed incremental demand for the same by 60%. Cognizance of this oversupply scenario should result in fewer projects being announced over the coming months. The current scenario should precipitate a decline of CBD Grade A space rentals by 10-15% over the coming months. Similarly, commercial developments in peripheral areas should witness a 5-10% reduction of rentals. The

EON IT Park, Kharadi

aforementioned demand-supply gap could be In western and eastern peripheral locations of

markets peaked, and Q1 09. During this

mitigated by demand that is expected to

the city, where most large- scale SEZ and IT

period, rentals in the aforementioned three

emanate from the growth of various other

Park developments were undertaken, the

markets declined by 26%, 25% and 13%

employment sectors. If this proves to be the

rentals were lower due to lower land rates

respectively. This correction was primarily

case, declining rental and absorption rates

and tax benefits of such developments.

due to IT firms shifting to peripheral

could stabilise sooner than the current

Hence, contrary to the case in other cities, the

locations, although new supply being added

climate suggests.

price correction in these areas has been lower

to existing office space is increasing

Figure 11

than that in the CBD. The exception to this, as

competition and thereby also forcing down

Projected office demand 2009-11

alluded to previously, is the micro-market of

rentals. Companies seeking to negotiate

Hadapsar, where rentals declined by 22%

lower rentals in order to slash costs also

from Rs.45/sq.ft. per month in Q4 08 to

represent a key factor weighing down rentals

Rs.35/sq.ft. per month in Q1 09.

across all office markets. Locations like

Figure 10

Aundh in the west, Nagar Road and Airport

period and Q1 09, rentals in the

80

aforementioned micro-markets declined markedly by 27%, 20% and 35% respectively.

70

17.2 15.0

15

10

5

30

these locations are mainly IT Parks approved Dec '08

Sept '08 Nagar Road

Hadapsar

Yerwada/Airport Rd.

Aundh

Senapati Bapat Road

Karve Road/Kothrud

by STPI under the IT policy, which is about to elapse, thereby resulting in companies moving to peripheral markets for cost advantages.

Source: Knight Frank Research

Outlook

Meanwhile, central locations like Bund

Rates for office space in Pune can be

Garden Road, Kalyani Nagar and Senapati

expected to decline further not only because

Bapat Road, all of which were previously

of the expected decline of the IT/ITES sector,

preferred by both non-IT and IT companies,

which is forecasted to register below 20%

have witnessed drastic rental declines

growth during 2008-09 as opposed to 30%

between Q3 08, when rentals in each of these

growth during 2007-08, but also due to the

0 Conservative

micro-markets. Also, the developments in Mar' 09

40

June' 08

key source of demand in these

Realistic

slowdown in the IT sector, which has been a

50

Optimistic

60

Kalyani Nagar

10

19.1

These corrections can be attributed to the

Mar' 08

Rs./sq.ft. per month

rentals from Q3 08 peak levels. Between that 90

20

Area (mn.sq.ft.)

Road have also witnessed a sharp fall in

Rental trend

25

Scenario Source: Knight Frank Research

From 2009-2011, assuming realistic GDP forecasts, supply of Grade A office space is estimated to exceed incremental demand for the same by 60%.

KnightFrank.com

NATIONAL CAPITAL REGION (NCR)

In addition, infrastructure developments like

In addition, due to reduced affordability and

the eight lane expressway connecting

the need to trim costs, the demand for office

Gurgaon and Delhi, the Delhi Metro Rail

space in the NCR, especially in Gurgaon,

project, the Taj Express Highway and the

Noida and Greater Noida, is declining. To

Noida Delhi DND expressway are

counter this, developers are looking at

strengthening the connectivity within NCR.

options such as the provision of better services and customised office spaces, and

Connaught Place, Barakhamba Road, KG Marg, Bikaji Cama Place, Nehru Place and Mohan Co-operative Area form the primary office markets within Delhi. High prices in the

Figure 12

CBD located at Connaught Place, low vacancy

Stock distribution

levels, limited stock and poor quality (Grade B or C) developments in central Delhi have led to the emergence of new office markets in Gurgaon, Noida, Greater Noida and the district centre at Jasola. These locations now enjoy relatively better connectivity due to the presence of express highways and the Delhi

leasing out properties at concessional rates, in order to maintain a steady cash flow during these turbulent times. Parking space in office projects has been a major concern for corporates. To resolve this issue, developers are now introducing multi-level parking systems within office premises. As outlined earlier, mixed-use developments, such as the office cum retail projects observed in micro-markets like Saket, Jasola, Gurgaon and Noida, are proving a favoured option for developers looking to diversify risk.

Metro Rail project. Additionally, the development of large office spaces and SEZs,

Figure 13

along with competitive rentals, has made

Estimated new office supply 2009-11

these regions attractive to corporates looking

50

to set up their operational bases.

45 41.1

The real estate market in the NCR has

owing to the overall global economic slowdown. On the supply side, reduced liquidity and credit flow has impacted developers who are facing rising construction costs.

30

20 15

15.7

14.9 10.4

10

witnessed a considerable rise in 'diversified

5

developments' during the past 3-4 years.

0 2009

Builders are exploring newer formats and

25.3

25

mixed-use developments, both of which are

2011

Market Review

35

in the NCR has witnessed a decline in growth

2010

Source: Knight Frank Research

In the past few months, the real estate market Area (mn.sq.ft.)

Delhi - 27% Gurgaon/ Manesar - 51% Noida - 22%

40

Year

intended to generate greater adaptability to Supply

changing market dynamics. Examples of

Cumulative Supply

Source: Knight Frank Research

newer formats being looked at include group housing projects, townships, independent

Supply and Development

penthouses and villas, built-to-suit office spaces and green buildings. A noticeable rise

NCR is one of the prime office destinations for

in mixed-use retail formats has been

major national and international firms in the

observed in the form of retail-cum-office and

country. The region has office stock of close

retail-cum-hospitality developments. A strong

to 42.72 mn.sq.ft., of which

industrial base, supported by the IT/ITES,

Gurgaon/Manesar constitutes 51%, Noida

Pharmaceutical, Banking and Automobile

constitutes 22% and Delhi constitutes 27%.

sectors, has spurred NCR to become one of the major commercial hubs in India. Corenthum Tower Sec-62, Noida

11

Q1 2009

INDIA Office Market Review

The year 2008 witnessed a fresh supply in the

The major office hubs in Gurgaon are located

NCR of approximately 11.70 mn.sq.ft. of office

on the NH-8, MG Road, Sohna Road, Golf

space, which comprises major developments

Course Road and Gurgaon-Manesar Road.

in Gurgaon, Noida, Greater Noida, Jasola and

Owing to favourable IT SEZ regulations

Saket. By the end of 2011, the NCR market is

currently in place, developments have even

expected to be infused with new office space

been observed in the Dharuhera and

supply of around 41.08 mn.sq.ft. This

Dandahera districts of Haryana.

additional supply is evenly spread, with

Gurgaon/Manesar witnessed a fresh supply

about 14.95 mn.sq.ft. and 10.40 mn.sq.ft.

of office space of around 5.70 mn.sq.ft. over

estimated in 2009 and 2010 respectively, and

the past year, while another 23.82 mn.sq.ft.

the remainder in 2011.

of additional space is expected by the end of 2011.

A large share of supply in the NCR will be in the form of IT parks and IT SEZs in Gurgaon,

Due to the increasing rentals in CBD and SBD

Noida and Greater Noida. Due to the lack of

locations in Delhi and pockets of Gurgaon,

fresh supply in the CBD locations and rising

corporates looking for office space have

demand for office space within Delhi,

shifted their focus to the newer micro-

developers are now exploring newer markets

markets of Noida and Greater Noida. This has

like Dwarka, Saket and Jasola in the suburban

led developers like BPTP, Logix, DLF, Unitech

locations.

and other local developers to come up with Grade-A office properties in these micro-

Figure 14

Distribution of new supply 2009-11

markets. Noida is well connected to Delhi by means of the DND express highway, and the completion of the Delhi Metro project will further improve connectivity. Major office markets in the region include sectors 16, 18, 62 and 63 in Noida, sectors 125, 126, 127 and 135 on the express highway, and the Tech Zone & Knowledge Park III in Greater Noida. About 5.03 mn.sq.ft. was added to the stock of office space in Noida and Greater Noida during the year 2008. These micro-markets are estimated to witness a supply infusion of another 16.28 mn.sq.ft. by the end of 2011.

Noida - 13% Greater Noida - 27% Delhi - 2%

landscape and a lack of financing, a major portion of expected supply has been phased out, a scenario that could adversely impact supply expectations. Some of the prominent office developments in the region include IT SEZ projects by Unitech and Ansal API, as well as the Kessel I-Valley IT Park in the Tech Zone. Besides these, a number of office projects by local developers like the Agni Group, Assotech and Stellar Group are located in Sector 62. As the global economic slowdown taking effect, the robust real estate market in the NCR has taken a hit. Due to cautious sentiments, demand as well as absorption levels in the NCR office market have declined. Of the 11.70 mn.sq.ft. of supply which came 6.37 mn.sq.ft., was absorbed.

Manesar - 12% Source: Knight Frank Research

The government's initiative to improve connectivity to Gurgaon by way of the express highway on NH-8 has helped to establish Gurgaon as a strong business destination in the NCR. This micro-market exhibits varied office space options ranging from multi-tenanted stand-alone structures to

12

However, due to the present economic

up in the NCR market during 2008, a total of

Gurgaon - 46%

campus developments.

due to the present economic landscape and lack of financing, a major portion of expected supply has been phased out, a scenario that could adversely impact supply expectations.

DLF IT PARK Sec-62, Noida

KnightFrank.com

Given the amount of supply in the pipeline, the future for the NCR's office market carries a serious risk of oversupply unless demand issues are addressed.

Rental Profile A major supply infusion in the NCR market in the past couple of years has had an adverse effect on office space rentals. The major share of this fresh supply is concentrated in Gurgaon and Noida. The poor performance of

Vertex, Gurgaon

the IT/ITES, Automobile and Financial sectors as a result of the global economic recession

Connaught Place commands an average

Micro-markets like Gurgaon and Noida have

has led a number of companies to cancel

rental of Rs.338/sq.ft. per month for premium

witnessed a correction in rental values by

their expansion plans, hence limiting the

office properties, and Rs.200/sq.ft. per

about 30-34% since Q1 08. Average rentals

demand for office space in Gurgaon and

month for Grade-B properties. Connaught

for Gurgaon have declined from a peak of

Noida. Properties in these locations also

Place office rentals, which peaked in Q1 08,

Rs.115/sq.ft. per month in Q2 08 to

commanded location premiums, especially

have declined by 13% as of the end of

Rs.74/sq.ft. per month in Q1 09.

after the construction of the Gurgaon Express

Q1 09. Rentals in SBD office locations like

Highway and Noida DND Expressway.

Nehru Place are currently in the range of

However, as absorption in the year 2008 was

Rs.140-288/sq.ft. per month, witnessing a

low, rentals in these micro-markets have

15% decrease while rentals in Mohan

witnessed a decline. Contrary to the above,

Co-Operative and Okhla Industrial Area are an

locations like Connaught Place, Nehru Place

average of Rs.68/sq.ft. per month and

and Mohan Co-operative Area in Delhi have

Rs.59/sq.ft. per month respectively. SBD

witnessed limited variation in rental values in

locations in the NCR saw a correction in rental

recent months.

values in the range of 10-36%.

Noida witnessed a similar trend, with average rentals falling from Rs.83/sq.ft.per month in Q1 08 to Rs.58/sq.ft. per month in Q1 09. This is due to a decline in demand for office space as well as the large quantum of fresh supply infusion in these areas. Rentals in Gurgaon and Noida vary across sectors as well as with usage. While non-IT space commands higher rentals, IT rentals are relatively lower.

Figure 15

Rental trend 350 300

Rs./sq.ft. per month

250 200 150 100 50

Mar' 09

Dec '08

Sept '08

June' 08

Mar' 08

0

Connaught Place

Nehru Place

Okhla Industrial Area

Mohan Co-operative

Gurgaon

Bhikaji Cama Place

Noida

Due to the increasing rentals in CBD and SBD locations in Delhi and pockets of Gurgaon, corporates looking for office space have shifted their focus to the newer micro-markets of Noida and Greater Noida.

Outlook The real estate market in India is witnessing a temporary slowdown owing to a mix of global economic and financial factors. Reduced affordability on the demand side and a high cost of borrowing on the supply side are the biggest contributors to this slowdown. The negative growth rate of other asset classes in the equity and financial markets has served to further exacerbate the current slump. The impact of this slowdown is increasingly evident in the NCR's real estate market, especially in the office space segment. Due to the poor performance of the IT/ITES, Automobile and Exports industries, and negative market sentiments, many companies are deferring their expansions plans and reducing operating costs.

Source: Knight Frank Research

13

Q1 2009

INDIA Office Market Review

Figure 16

Such a scenario will severely impact the

Projected office demand 2009-11

feasibility of many announced office projects, and could force developers to further phase

30

out or even entirely defer projects. Unitech,

26.8 25

24.1

one of the elite developers in the office space market, has already issued a “stop work”

Area (mn.sq.ft.)

21.0 20

order on two of its IT-SEZ projects in Noida and Gurgaon. Such measures can be

15

expected to persist as long as demand and supply continue to be hampered by a lack of

10

affordability and financing respectively. 5

As discussed in the editorial, Knight Frank research devised a model to forecast rentals in Mumbai and NCR micro-markets for the

Conservative

Realistic

Optimistic

0

next three years.

The most prominent declines are anticipated in Gurgaon and Noida, where rentals, by the time they bottom out in the first half of 2010, will have deviated by 63% and 62% respectively from 2007-08 peak levels.

Scenario

As per the model, the four NCR markets

Source: Knight Frank Research

The aforementioned factors have resulted in

studied, namely Connaught Place, Bikaji

lower demand for office space in the NCR

Cama Place/Nehru Place, Gurgaon and Noida,

market. As was the case across much of the

all will witness further rental declines from

country, absorption of space during the year

what has been currently witnessed. The most

2008 fell short of expectations.

prominent declines are anticipated in Gurgaon and Noida, where rentals, by the

Consequently, various micro markets across

time they bottom out in the first half of 2010,

the NCR witnessed a correction of rental

will have deviated by 63% and 62%

values, hence shrinking the margins for the

respectively from 2007-08 peak levels. The

developers. For the years 2009-11, a further

complete set of forecasts can be seen in the

correction in rentals is expected, as Knight

table below, where for each micro-market,

Frank research estimates that during this

rental predictions for the next three years

period, assuming realistic GDP forecasts,

have been given at half yearly intervals.

planned supply will exceed incremental demand for Grade A space by a staggering Augusta, Gurgaon

70%.

Table 3

Forecasted Average Rentals (in Rs. /sq.ft. per month)

2009

2010

2011

H1 09

H2 09

H1 10

H2 10

H1 11

H2 11

Connaught Place

224

213

217

238

263

268

340

37%

Secondary Business Locations *

133

136

139

142

151

161

242

45%

Gurgaon

51

44

44

45

48

54

120

63%

Noida

44

39

34

35

41

42

90

62%

Source : Knight Frank Research *Secondary Business Locations comprise of Bikaji Cama Place and Nehru Place

14

Maximum Forecasted Correction from 2007-08 Peak

Peak Average Rental 2007-08

KnightFrank.com

KOLKATA

The growing IT profile of the city and the consequent generation of real estate opportunities have led prominent real estate

Figure 17

developers to take up significant land

Stock distribution

holdings in the suburban locations. The Eastern Metropolitan Bypass is being increasingly viewed as the Central Avenue of modern Kolkata, while Rajarhat is being promoted as an IT hub in the east of Kolkata. The city has also been attracting a number of real estate investors, both foreign and Indian, and developers with financial muscle. Major developers such as DLF and Unitech already have operational projects in the city. While the city witnessed remarkable

CBD & off-CBD - 32% Salt Lake - 60% Rajarhat - 8% Source: Knight Frank Research

Market Review

HSBC, Salt Lake Sector II

developments in the office sector from 2004 to mid-2008, the consequences of several

Supply and Development

factors, such as the global economic turmoil

The Kolkata office market witnessed a

and the pulling out of Tata Nano's project

paradigm shift with the opening up of Salt

from Singur, have taken their toll on Kolkata's

Lake Sector V, a new business district in the

office market.

suburbs that is dedicated to the development of the city's IT sector. A number of IT majors,

Kolkata, the capital of West Bengal and the economic hub of Eastern India, is being acknowledged as one of the fastest growing

Figure 18

such as Cognizant and Tata Consultancy

Estimated new office supply 2009-11

Services, took up land in the region for their campus developments. This initiative added

IT destinations in the country. In recent years,

18

the city has emerged as an attractive

16

destination for many big names in the IT

to Kolkata's office market approximately 6.8 15.3

sector, including Tata Consultancy Services,

Kolkata has traditionally been the seat of

10 8

advent of new age companies, the city's

2

office market consisted of government

0

at Dalhousie, the CBD of the city. Besides

5.1

4.2

2009

administration for the state. Before the

4

buildings constructed during the British era

6.0

6

Year

these government office blocks, the CBD also houses a number of regional bank

2011

Wipro BPO.

10.2

2010

Computer Associates, Siemens, IBM and

60% of Kolkata's office space stock.

12

Area (mn.sq.ft.)

Cognizant Technologies, PWC, ITC Infotech,

mn.sq.ft. of space from 2005 till end-2008. At present, Salt Lake Sector V comprises almost

14

Supply

Cumulative Supply

headquarters and insurance companies.

Source: Knight Frank Research

Gradually, the office market has expanded to

The skepticism prevailing over India's real

AJC Bose Road, considered to be the off-CBD

estate sector has led to the stalling of several

of the city.

key projects in the city.

During 2008, Kolkata's office market witnessed the infusion of approximately 4.03 mn.sq.ft. of fresh space, which fell short by almost 30% of the estimated supply that was slated to enter the market during this period.

15

Q1 2009

INDIA Office Market Review

During 2008, Kolkata's office market witnessed the infusion of approximately 4.03 mn.sq.ft. of fresh space, which fell short by almost 30% of the estimated supply that was slated to enter the market during this period. This can be attributed primarily to the economic recession, which has adversely impacted developers' liquidity and financing options. The total space absorbed during the year was around 1.8 mn.sq.ft., which was the result of pre-commitments made while various projects were underway.

DLF IT Park, Rajarhat

Figure 19

Distribution of new supply 2009-11

amount, due to the fact that construction of

Omega, being developed by TCG Real Estate,

various IT SEZs has been phased out,

is underway. The first phase was completed

approximately 11 mn.sq.ft. is anticipated to

in 2008 and includes TCS and Cognizant as

come up in 2010 and 2011.

its major tenants. The second tower of Globsyn Towers, a joint venture project

Salt lake Sector V - 23% off-CBD - 1% EM Bypass - 2% Rajarhat - 74% Source: Knight Frank Research

While Salt Lake Sector V has recently assumed prominence in Kolkata's office

Around 97% of upcoming supply in Kolkata is concentrated in suburban and peripheral locations of the city. Rajarhat comprises approximately 74% of upcoming supply.

market, the newly developed Rajarhat area is estimated to soon dominate office stock in the city. This can be attributed primarily to the development of a number of SEZ projects in this micro-market. Leading national developers like DLF and Unitech have set up large scale IT SEZs, part of which have already been absorbed. DLF IT Park, which comprises IBM and Genpact as its major tenants, was the first IT facility to come up in Rajarhat. However, due to the economic

between Globsyn and Intelligent Infrastructure, is also under construction and is expected to be completed in 2009. Overall, Salt Lake Sector V is expected to witness the infusion of around 3.5 mn.sq.ft. of fresh supply by the end of 2011. The status of Bantala IT Park is uncertain, as is the case with most IT projects whose progress has been hampered by the real estate slump. However, owing to its fast paced construction, a part of the Cognizant campus at Bantala became operational in the last quarter of 2008, and the complete project is scheduled to be concluded in 2009.

Rental Profile Around 97% of upcoming supply in Kolkata is concentrated in suburban and peripheral locations of the city. Rajarhat comprises approximately 74% of upcoming supply. Key office projects in this micro-market include those by DLF, Unitech, Bengal Ambuja, Shapoorji Pallonji and PS Group. A few non-IT office projects are in progress on EM Bypass and Topsia.

Over the past year, Kolkata's suburban office markets witnessed a significant correction in rental values. While other micro-markets in the city saw rentals decline in the range of 810% from the peak values in June '08 to March '09, Salt Lake Sector V witnessed a steep rental decline of 33% during the same period. This marked rental depreciation is due to the fact that the large of quantum of IT

downturn, work has been stalled in most of

The Godrej Waterside project, a 1.8 mn.sq.ft.

developments in the region have been

these projects. Due to the large quantum of

property, is amongst the major upcoming

crippled by the IT sector slowdown.

deferred supply, around 15.3 mn.sq.ft. of new

development in Salt Lake Sector V.

office space is in the pipeline and is expected

Meanwhile, second phase development of

to be completed by the end of 2011. Of this

16

KnightFrank.com

Figure 20

Outlook

Rental trend

Figure 21

Projected office demand 2009-11

Given the present economic condition, the

120

16

real estate market in Kolkata has almost come to a standstill, with most projects being

14

stalled or deferred to a future period.

12

Significantly, no projects are known to have

80

been completely withdrawn from the market 60

as currently, developers are favouring the re-scheduling of the projects' completion

40

13.4 12.0 10.5

Area (mn.sq.ft.)

10 8 6

periods. As per realistic GDP forecasts, the

end of 2011. This, when compared to the Mar' 09

Dec '08

Sept '08

June' 08

Mar' 08

0

supply of approximately 15.3 mn.sq.ft. in the pipeline for the same period, indicates that prices will not fluctuate considerably during

Dalhousie

Camac Street

Park Street

Salt Lake

the coming 3 years as demand and supply will remain more or less on par.

2 0 Conservative

space demand of around 12 mn.sq.ft. by the

4

Realistic

city is expected to witness cumulative office

20

Optimistic

Rs./sq.ft. per month

100

Scenario Source: Knight Frank Research

Source: Knight Frank Research

Thus, the cooling down of construction in the On the other hand, the CBD at Dalhousie

Kolkata office market may prove to be a

managed to maintain constant rental rates till

blessing in disguise, as otherwise,

the third quarter of 2008, before witnessing a

oversupply might have resulted. In the

rental decline of around 8% in December '08.

forthcoming years, the city is likely to see

Currently, average rentals in this

equitable demand for IT and non-IT space,

micro-market are in the range of

contrary to previous years when IT space

Rs.55-65/sq.ft. per month. The reason behind

dominated demand.

the relative rental stability in this micromarket is the dearth of new office supply as

Rental values in the micro-markets of Salt

well as the increased demand for corporate

Lake Sector V and Rajarhat could witness

office space in the region. Meanwhile, the

further declines on account of the large

rentals in commercial locations like Camac

quantum of fresh supply in the pipeline in

Street and Park Street have declined

these regions. However, it is expected that as

approximately 10% from 2008 peak levels.

the economy recovers, and with the

Going forward, the city is likely to see equitable demand for IT and non-IT space, contrary to previous years when IT space dominated demand.

infrastructure development in place, rentals in these key office micro-markets will prove resistant to drastic declines.

Millenium Towers, Salt Lake Sector V

17

Q1 2009

INDIA Office Market Review

BEngalUrU Figure 22

Stock distribution

On a brighter note, a number of SEZs are

projected to enhance the contribution of the

being planned in sectors like biotechnology,

manufacturing sector to the state's GDP from

health sciences, research and development,

approximately 15% to 20% in the next five

textiles and aerospace. This will help

years. The new state SEZ policy offers various

eliminate Bengaluru's dependence upon a

tax exemptions from state and local bodies,

single sector. In 2008, the city witnessed a

examples being exemptions on sales tax

predominant supply of SEZ projects in the IT

based levies, VAT, entry tax and special entry

corridor located in the South East quadrant

tax. The aforementioned progressive steps

along the Outer Ring Road. The concept of

undertaken by the government will help to

green buildings is also gaining importance in

strengthen the region's economy.

city, with the Ministry of New and Renewable Energy (MNRE) planning to launch Griha, a

Figure 23

green building rating system which would

Estimated new office supply 2009-11

enable the government to give tax incentives

35

to developers. The Tata Xlyem project at

30.8 30

Whitefield was given a LEED gold rating,

off-CBD - 1% Source: Knight Frank Research

(IGBC) has granted a precertification platinum rating to the Vrindavan Tech Village SEZ project at Outer Ring Road. The state government has focused its sights

25

Area (mn.sq.ft.)

East - 37% North - 13% South - 49%

27.9

while the Indian Green Building Council

20 15

14.2

13.7

10

on improving the infrastructure of the city.

Bengaluru, which comprises over 2,000 IT

elevated road to Electronic City and the NICE

companies and one third of the country's IT

corridor. It recently announced the new

population, continues to be at the forefront of

Industrial Policy for 2009-14 that placed

India's IT sector. During Q1 FY 09, the city

emphasis on employment-linked incentives

witnessed new developments while the new

for micro, small and medium industries,

international airport became operational and

stamp duty exemption up to 100% and

the new state government took charge of

farmer-friendly land acquisition rules that are

office. Although the new airport was

3.0

0 2011

pace of construction of the Metro project, the

5

2010

Measures are being taken to increase the

2009

Market Review

Year Supply

Cumulative Supply

Source: Knight Frank Research

Supply and Development At present, Bengaluru has an office stock of

projected to augment the inflow of foreign

around 41 mn.sq.ft., excluding unorganised

companies and new opportunities, the global

office space in the CBD of the city. During

financial turmoil has had a severe impact on

2008, the city witnessed the infusion of 6.55

the development of the city.

mn.sq.ft. of Grade A, non-SEZ office space, of

Bengaluru's economy is primarily dependent

which around 4 mn.sq.ft. was absorbed.

on the IT/ITES sector, which has fuelled

However, the east quadrant of the city

growth in the city's office, residential, retail

continued to exhibit oversupply, as

and hospitality sectors. The city accounted

evidenced by the fact that 4 mn.sq.ft. of office

for 33% of India's IT exports (USD 32 billion)

space in the region has been unoccupied for

in 2006-07. However in 2007-08, software

the last two years. Delays in project

exports registered a growth of only 11% as

completion resulted in a spill-over of about

compared to 30% in 2006-07, reflecting the

2.54 mn.sq.ft. of office space to 2009. Due to

depressing impact of the economic slowdown

a decline in demand induced by the global

on India.

economic slump, prominent developers in the city have put on hold projects with a potential Prestige Nebula, Bengaluru

18

built-up area of 4 mn.sq.ft.

KnightFrank.com

New office supply (non-SEZ space) of 6.63

enter the market by 2010, with an additional

region a major office hub, with related

mn.sq.ft. is expected to enter the Bengaluru

supply of 3 mn.sq.ft. expected by the end of

developments in the residential and the retail

office market in 2009. The CBD will witness a

2011.

sector. Large land parcels in the north are yet

supply of around 0.37 mn.sq.ft., which includes major projects like the Redwood Centre at Residency Road and Vaswani Centropolis at Langford Road. Figure 24

Distribution of new supply 2009-11

to be developed, leading to speculation in Bengaluru has got approvals for 35 SEZs, of which 23 belong to the IT/ITES sector and 3 to

the market about the future growth of this sector.

the IT and electronic hardware sector. 12 IT/ITES SEZs have been notified, of which 8 are already operational. 10 IT/ITES SEZs have

Rental Profile

obtained formal approval, while another 3

In the CBD, rentals were as high as

have received in-principle approval. Of the

Rs.100/sq.ft. per month in Mar'08. However,

total 26 IT/ITES SEZs, 17 are non-captive and

the ongoing slump has adversely impacted

9 are captive SEZs. Major SEZs operational

demand, resulting in a 25% fall in rental

since 2007 include the Manyata Tech Park in

values up to Mar '09. Rental values in

North Bengaluru, Vrindavan Tech Village,

Koramangala remained stagnant, while

Cessna Business Park and Adarsh Tech Park

rentals in Indiranagar dipped by 10% because

at Sarjapur Outer Ring Road. Biocon SEZ at

of the ongoing metro work and related traffic

Hosur Road is the only biotech SEZ

congestion in this location. From the peak of

operational in the city.

2008, the peripheral locations of Whitefield and Sarjapur Outer Ring Road witnessed a fall

Office space supply emanating from IT/ITES CBD - 1% East - 47% West - 4% North - 9% South - 39% Source: Knight Frank Research

The only Grade A office project in Bengaluru West is the Brigade North Star, which constitutes 1 mn.sq.ft. In the south of Bengaluru, office space supply of approximately 0.78 mn.sq.ft. is expected in 2009, with key projects under construction being the Global Technology Park at Sarjapur

SEZs will total 28 mn.sq.ft. by the end of 2011. During 2008, Bengaluru witnessed a supply of about 10 mn.sq.ft of SEZ space, of which 7.6 mn.sq.ft. was pre-committed in the previous year. At present, IT/ITES SEZ space

in rentals of 12% due to the oversupply situation. The elevated highway project at Hosur Road has been delayed, and has led to office space lying unoccupied for the last two years, thereby resulting in a decline in rental values of 24% from Mar '08 Mar'09.

of approximately 7.6 mn.sq.ft. is under construction and is scheduled for completion

Currently, the CBD continues to demand

in 2009. SEZ developers have decided to

rentals in the range of Rs.70-80/sq.ft. per

develop remaining land parcels only on a

month, which is relatively higher than other

built-to-suit basis, and this will account for a

micro-markets in the city. Off-CBD locations

built-up area of approximately 9 mn.sq.ft.

like Lalbagh Road, Indiranagar and

over the next 2 years.

Koramangala exhibit rental values of Rs.50-65/sq.ft. per month. In Whitefield and

Outer Ring Road, SJR Equinox at Electronic

Bengaluru's south-east quadrant will account

City and Salarpuria Symphony at Hosur Road.

for around 13 mn.sq.ft. of office space supply

New office space supply of 4.8 mn.sq.ft. will

over the next 2-3 years. This will render the

Hosur Road, which have higher vacancy rates, rentals range from Rs.25-30/sq.ft. per month. IT/ITES SEZs across the city quoted rental values in the range of Rs.40-48/sq.ft. per month. High rental values in Grade A office spaces are pressurising companies to reduce the leased area within the same premises. Further, several companies have shifted their office premises to Grade-B or Grade-C office developments that offer lower rentals. Old office buildings located in CBD and Off-CBD locations are being leased as they offer smaller spaces with fewer amenities,

Vrindavan Tech Village-SEZ, Bengaluru

resulting in lower maintenance costs.

19

Q1 2009

INDIA Office Market Review

Figure 25

anticipated decline in demand affected by

Figure 26

Rental trend

the flagging IT/ITES sector.

Projected office demand 2009-11

120

25

The anticipated supply in the city during

22.1

2009-11 is comparatively lesser than previous

100

plans and reducing costs to counter the 60

financial crisis. It is thus that Knight Frank research estimates that from 2009-11,

40

Area (mn.sq.ft.)

15

10

assuming realistic GDP forecast, supply will exceed incremental demand for Grade A

5

space by 55%. Prominent developers, who are

Koramangala

Cunnigham Road

OuterRing Road

Mar' 09

Residency Road Indira Nagar

Banerghatta Road

Electronic City Source: Knight Frank Research

Despite falling rentals, office projects in peripheral locations like Whitefield and Hosur Road have failed to attract tenants because companies are not willing to commit to space in such turbulent economic times. Existing tenants are demanding lower rentals upon the renewal of lease agreements. Another option being explored by some companies is sub leasing of their office space for a period

leasing existing properties as quickly as is possible.

Scenario

Knight Frank research estimates that from 2009-11, assuming realistic GDP forecasts, estimated supply will exceed incremental demand for Grade A space by 55%.

of two years, the idea being that market conditions should improve within this time

Projects planned for the next two years have

frame.

now been deferred, and land parcels acquired by developers in the south-east and

Outlook

Conservative

Whitefield

Dec '08

Sept '08

June' 08

Mar' 08 M.G.Road

0

focused on completing current projects and

Realistic

wary of a further decline in the market, are

0

Optimistic

Rs./sq.ft. per month

17.5

to companies postponing their expansion

80

20

north of the city are now being offered for only built-to-suit options.

The office market in Bengaluru is anticipated to continue to be downbeat owing to the

In spite of the above, except for nominal

current economic slowdown. The demand for

decreases in certain micro markets, rental

IT/ITES space, a prime source of demand for

values across the city are likely to remain

office space in Bengaluru, is likely to

stagnant for the foreseeable future. Rentals

decrease in the future as the IT/ITES sector

may further decrease in the Whitefield region

across India toils under the weight of the

as this region has been exhibiting oversupply

global crisis. However, upcoming sectors like

since the last couple of years. As previously

health, research and development and

alluded to, the city is gradually witnessing a

biotechnology are projected to drive the

shift from being an IT/ITES destination to an

demand for office space in Bengaluru in the

investment destination for other sectors as

coming years, and could offset the

well.

20

19.9

20

years and absorption levels may be lower due

Source: Knight Frank Research

This is evidenced by the fact that Bengaluru has in-principal approvals for 10 SEZs planned in sectors like textiles, aerospace, manufacturing and R&D. This diversification is expected to augment employment in the city and could prove a big boost in the current economic climate. Although they are currently not in popular demand, the future of IT/ITES SEZs will depend on the government's decision to extend the STPI scheme for two more years.

KnightFrank.com

hyderabad

of 29 major radial roads connecting the ORR,

The global economic crisis has led to a

and a Mass Rapid Transport System (MRTS) to

slowdown in India's IT/ITES sector, thereby

Figure 27

facilitate public transportation in congested

adversely impacting office space demand in

Stock distribution

areas within the city. The initiative to expand

Hyderabad, where office markets have relied

infrastructure has also resulted in

heavily on this sector. While several

developments like the knowledge corridor,

corporates are trimming employment and

which extends from the ISB to the proposed

holding back expansion plans, they are also

outer ring road, the financial district in

actively renegotiating lease terms. In order to

Gachibowli, residential cluster developments

attract customers, developers are coming up

and several SEZs along the Outer Ring Road.

with new product mixes and additional

Most real estate developments in these areas

facilities, while remaining ready to negotiate

are in the form of integrated township's

lease rentals and provide discounted rates.

comprising residential, retail, office and hospitality components.

Figure 28

Estimated new office supply 2009-11 The government's decision to promote

in that region. The development of the new international airport, Fab City and Hardware Park at Shamshabad, coupled with the state

The real estate market in Hyderabad has

government's promotion of SEZs over an area

undergone tremendous change in the recent

of 20,000 acres between Shamshabad and

past. Rapidly improving infrastructure

Ibrahimpatnam, indicates that the western

facilities and proactive government policies

and south-western parts of the city are

and incentives like tax benefits, subsidies,

expected to be major development centres

easing of conversion of land use and flexible

over the next 3-5 years. Land prices in the

floor space index (FSI) norms have stimulated

vicinity of these regions have increased

growth in the city's economy. Besides, in

considerably as a result of ongoing

recent years, the economy of Hyderabad has

developments. On the infrastructure front,

burgeoned. The service industry, which

following the Satyam Computers scam, the

comprises almost 75% of the city's total work

MRTS project by the Maytas-led consortium is

force, has proved a key growth driver. Apart

facing an uncertain future and is unlikely to

from the IT/ITES sector, other major sectors

take off any time soon.

21.1 20

14.3

15

10

9.4 6.8

5.0

5

0 2011

Market Review

large contiguous land parcels were available

2010

Source: Knight Frank Research

25

western part of the city. This was possible as

2009

CBD & off-CBD - 2%

in the development of Cyberabad in the

Area (mn.sq.ft.)

Distant Peripheral - 38% Peripheral - 56% Suburban - 4%

30

Hyderabad as the next IT destination resulted

Year Supply

Cumulative Supply

Source: Knight Frank Research

like biotechnology, pharmaceutical and medical tourism also have a strong presence in the city. In the past few years, with the pace of growth in the city, developers and investors alike found Hyderabad an attractive market to invest in. With the expansion of the city limits, the government has proposed an Outer Ring Road (ORR) with the objective to decongest the city and to improve connectivity and reduce travel time. Other infrastructure initiatives include construction DLF Cyber City, Hyderabad

21

Q1 2009

INDIA Office Market Review

The relatively low supply during 2008 can be

Figure 30

attributed to liquidity problems faced by

Rental trend

developers as well as several projects being

80

postponed. Examples of this are the Mantri

70

SEZ, estimated to comprise 1.5 mn.sq.ft., 60

which has been delayed, and Lanco, which

Bachupally are progressing slower than expected. Prominent developments which came up during 2008 include Raheja

20 10 0

Mindspace at Madhapur and Pocharam, DLF SEZ at Gachibowli and L&T Hitech City II at

Supply and Development Hyderabad's office market is primarily

Banjara Hills

Madhapur.

Madhapur

Mar' 09

Nanakramguda and the Maytas SEZ at

30

Dec '08

Techpark at Gachibowli, Technova at

40

Sept '08

like Arena Town Centre by Asetz Group,

June' 08

but has been deferred to 2009. Other projects

50

Mar' 08

was expected to add 0.75 mn.sq.ft. by Q3 08

Rs./sq.ft. per month

only 6.6 mn.sq.ft. out of a planned total of 17.88 mn.sq.ft. entered the city's market in 2008. Further, only 3.8 mn.sq.ft. of the total supply was absorbed during 2008.

Jubilee Hills Raj Bhavan Road

Begumpet Somajiguda

Himayat Nagar

Approximately 9.37 mn.sq.ft. of Grade A and

Source: Knight Frank Research

concentrated in the western region, although

Grade B office supply, including BTS space, is

supply is coming up in other parts as well.

estimated to enter the Hyderabad office

Approximately 38 mn.sq.ft. of office space

market by the end of 2009, followed by 4.95

entered the city's office market from 2005 to

mn.sq.ft. in 2010 and 6.76 mn. sq.ft. in 2011.

2008. However, only 6.6 mn.sq.ft. out of a

The majority of this supply is coming up in

Despite the shift of the airport from

planned total of 17.88 mn.sq.ft. entered the

sub-urban, peripheral and distant peripheral

Begumpet to Shamshabad, the former

city's market in 2008. Further, only 3.8

locations where large land parcels with lower

continues to remain the preferred location for

mn.sq.ft. of the total 6.6 mn.sq.ft. to hit the

prices are available. The major development

Grade-A and Grade-B office space. Rental

market was absorbed during 2008. No

in the CBD is by Cache properties, and

values in CBD and off-CBD locations have

notable transactions were witnessed over the

comprises 275,000 sq.ft.

dropped from Rs.70/sq.ft. per month in Q1 08

last year.

Rental Profile

to between Rs.50-60/sq.ft. per month in Office spaces in STPI are facing strong

Q1 09.

competition with the entry of SEZ projects in Hyderabad. Out of the total 37 SEZs, 28 are Figure 29

IT/ITES and the rest belong to manufacturing,

Distribution of new supply 2009-11

semi conductors, gems and jewellery, biotechnology, aviation and airport based multi-product types. 10 of them are captive SEZs while the rest are non-captive. 12 IT/ITES SEZs have been notified, of which 4 are already operational. While 13 IT/ITES SEZs have obtained formal approval, 1 has received in-principle approval. This surge in SEZ projects has resulted in oversupply, as evidenced by the fact that only 60% of the 1 mn.sq.ft. which entered the market in the form of SEZs has been absorbed. Further, the

Peripheral - 50% Distant Peripheral - 47% Suburban - 3% Source: Knight Frank Research

22

extension of the STPI's sunset clause from 2009 to March 31, 2010 will have a bearing on the absorption of SEZ office space. Silicon Towers, Madhapur

KnightFrank.com

The decline in rentals in the CBD has affected off-CBD locations like Himayatnagar, leading to a fall in rentals in this micro-market by around 22% from peak rentals as of Q1 09. Sub-urban locations like Banjara Hills and Jubilee Hills, even with high vacancy levels, had exhibited relatively stable rentals over the last two quarters of 2008, although in Banjara Hills, during Q1 09, rentals declined by 14% from Rs.70/sq.ft. per month to Rs.60/sq.ft. per month. Peripheral locations like Madhapur and

Midtown, Banjara Hills

Kondapur, where the IT/ITES sector has a prominent presence, have witnessed declining rentals. Madhapur has seen a significant fall in rentals by about 20% between Q3 08, when peak rentals were last observed, and Q1 09. This can be attributed primarily to the global economic slump and a surge in office space supply. Rentals have remained stable in distant peripheral locations like Pocharam, Raidurga and Shamshabad, and are expected to remain at the current level of Rs.25/sq.ft. per month. However, despite low rentals, these micromarkets have failed to attract companies due to the oversupply of office space in Gachibowli, and the lack of quality social infrastructure.

As the Hyderabad office market is primarily

for at least the next couple of quarters, the

IT/ITES driven, the global economic slump

current scenario, should it persist, could

and the subsequent decline of this sector

precipitate a more serious decline in the

across India has adversely affected demand

city's office market. Faced with such a

for office space, leading to the renegotiation

scenario, developers could, over a period of

of lease rates. This is evidenced by rates in

time, explore shifting from conventional

the peripheral IT Parks, which have already

buildings to green buildings, as the latter

witnessed a decline by 20%. Bearing this in

would reduce maintenance costs.

following a conservative approach to counter diminishing demand. Several Hyderabad projects in the pipeline have been in progress are completed on schedule, Knight Frank research estimates that from supply of Grade A office space will exceed

Projected office demand 2009-11 17.0

incremental demand for the same by 38%. Realising that such a scenario could further depress the city's ailing market, the state

16

15.3

14

government has proposed to tackle the 13.3

oversupply situation by restricting the

12

allotment of land only to companies which

10

are Fortune 500 listed, and proposing to make an investment of at least Rs.500 million

8

in the city to generate employment for a 6

workforce of 1500 people. Such measures, coupled with the diversification of the city's

2

office market to increasingly encompass the

0

financial, biotechnology, hardware, Realistic

Conservative

4

Optimistic

is anticipated across the city's micro markets

mind, most developers and investors are

2009-11, assuming realistic GDP forecasts,

Figure 31

Area (mn.sq.ft.)

Although no exaggerated variation in rentals

postponed. Despite this, assuming projects

competing markets like Madhapur and

18

Outlook

Foreseeing an oversupply situation, the state govt has proposed to restrict land allotment only to Fortune 500 companies, and proposing to make investment of minimum Rs.500 million to generate employment for 1500 people.

pharmaceutical and tourism sectors, could somewhat mitigate the forecasted oversupply over the coming three years.

Scenario Source: Knight Frank Research

23

Q1 2009

INDIA Office Market Review

Chennai

Over the last year, owing to the

On a positive note, Chennai has always

aforementioned factors, Chennai's office

featured a strong manufacturing sector due

market has witnessed a significant price

to its comparatively better infrastructure

Figure 32

correction, which is unsurprising given the

provisions. Locations within the city are well

Stock distribution

financial pressure on developers, who are

connected, and the development of the MRTS

being forced to stall ongoing developments

connecting Rajiv Gandhi Salai to Velachery,

due to prevailing market conditions. The IT

coupled with the Bypass Road connecting

sector, which has been the hub of office

Ambattur to Mount Poonamallee Road, will

space development in the city, has been

facilitate connectivity between south-western

adversely hit. For example, prominent office

locations and the rest of the city.

locations like GST Road and Ambattur currently exhibit developments whose completion has fallen behind schedule. As

Figure 33

Estimated new office supply 2009-11 25

part of their strategy to counter vacancy, developers in the city are trying to attract

21.2

non-IT companies into absorbing space

considered relatively stable when compared to those of the other Tier I cities in the country. Over the past couple of years, as a

9.4

10 7.0

4.8

5

0 2011

The Chennai property market has been

Absorption of office space over the past year has been dismal, thereby exerting pressure on cash-strapped developers.

16.4 15

2010

Market Review

companies.

2009

Source: Knight Frank Research

which was anticipated to cater to IT Area (mn.sq.ft.)

CBD - 22% South - 62% West - 16%

20

Year Supply

Cumulative Supply

Source: Knight Frank Research

consequence of the rise of the IT/ITES industry, the demand for office space had

As outlined earlier, these non-IT companies,

witnessed significant growth and has fuelled

predominantly located in the CBD, are now

office space development in the city. The

considering relocating their back-end

current financial slump across the country

operations to peripheral locations.

has had a strong adverse effect on the companies shifting to the city has fallen below expectations, with major corporates stalling their expansion plans. Absorption of office space over the past year has been dismal, thereby exerting pressure on cashstrapped developers. Highly-leveraged prominent developers are seeking faster turnaround of inventory in order to service their liabilities. In the non-IT sector, financial constraints have forced companies to consider shifting their back-end operations from the CBD to suburban and peripheral

24

From 2005, when the Chennai office market took off, until 2008, 25.14 mn.sq.ft. of office space has been infused into the city's office market.

Chennai office market. The number of IT

locations.

Supply and Development

E-gate-appaswamy, Chennai

KnightFrank.com

Approximately 4.1 mn.sq.ft. of space was absorbed over the past year, a figure that represents a marked dip from the expected absorption of 9 mn.sq.ft. Out of the total supply estimated for 2008, about 3.5 mn.sq.ft. has spilt over to 2009. Projects which were scheduled to have been completed last year have been delayed, and projects which are ready for occupation have witnessed limited interest. This can be attributed primarily to a decrease in office space demand as a consequence of the

RMZ Millenia Business Park, Chennai

economic slowdown, the adverse effect of which is evidenced by the fact that no new

The suburban office locations, which include

Estancia, located at Maraimalai Nagar and

projects have been announced in the first

Guindy, Kilpauk, Adayar, Anna Nagar and

promoted by Arun Excello and L&T.

quarter of 2009.

Mount Ponamallee Road, are expected to

Figure 34

Distribution of new supply 2009-11

contribute about 4.1 mn.sq.ft. to the expected supply of 21.2 mn.sq.ft. in Chennai by 2011. A major development comprising this upcoming supply is the DLF IT Park, to be situated at Manapakkam. Other prominent

The last few years have seen an increase in the development IT/ITES SEZs in the city. Mahindra World City, at Chengalpet, is one of the first multi-product SEZs to become operational in India. DLF IT Park, at

developments include the long delayed Bridgetown IT Park by Robin Estates and the recently completed Jayant Tech Park at Nandambakkam. Over the past few years, locations like Guindy and Mount Poonamallee Road have emerged as important office destinations due to their relative proximity to developed parts of the city. CBD - 13% South - 61% West - 26% Source: Knight Frank Research

The majority of upcoming supply in the city will be concentrated in peripheral locations. Prime markets in such locations include GST Road, comprising Tambaram, Vandalur,

In Chennai, the key office space locations in

Maraimalai Nagar, Rajiv Gandhi Salai,

the CBD and off-CBD comprise Anna Salai,

comprising Thoraipakkam, Perungudi,

Nungambakkam, Egmore, Kilpauk, RK Salai

Sozhlinganallur, Navallur, Siruseri, Egatur,

and T Nagar. These micro-markets will

Karapakkam and Velachery. About 2.83

witness a supply of approximately 0.8

mn.sq.ft. of office space is expected to come

mn.sq.ft. in 2008. Projects which were

up in these regions by the end of 2009. A

completed over the past year are witnessing

large amount of the new office space supply

high vacancy, a scenario that was

will comprise SEZs, which are mostly located

unimaginable a couple of years back.

in the aforementioned peripheral locations.

Prominent developments which are being

Prominent developments in progress include

made available include Navin's Presedium, at

Mahindra World City, located at Chengalpet

Amjinkarai, The Exotica, constructed by

and promoted by Mahindra Lifespace, ETA

Chaitanya Developers at Venkatnarayana

Technopark, being developed at Rajiv Gandhi

Road, and Seshachalam Centre, constructed

Salai by Dubai based developers, and

by Ceebros at Teynampet.

Projects which were completed over the past year are witnessing high vacancy, a scenario that was unimaginable a couple of years back. Manapakkam, is another prominent SEZ, and houses IT corporations like IBM. Despite the impressive initial response and a favourable investment atmosphere, the market downfall has slowed the development of the aforementioned SEZs. Close to 47 mn.sq.ft. of SEZ space has been planned in the city, and if this planning comes to fruition, over-supply might result in the Chennai office market. However, given the current market scenario, the development of these projects is expected to take longer than originally envisaged.

25

Q1 2009

INDIA Office Market Review

Figure 35

The lease values quoted for non-IT spaces

Rental trend

range from Rs.70-Rs.80/sq.ft. per month,

90

while rates for IT spaces are being quoted

80

between Rs.60-70/sq.ft. per month.

Rs./sq.ft. per month

70

Rental values in the city are declining

60

considerably on account of the economic

50

downturn. Since March last year, rentals in

40

micro-markets towards the west and central locations have declined by 7-15%, and

30

locations towards the south, for example

20

Rajiv Gandhi Salai, have witnessed declining

10

rentals to the tune of almost 33%. The southern micro-markets of the city developed

Nungambakkam High Road Anna Nagar

Mount Road

Mar' 09

Dec '08

Sept '08

June' 08

Mar' 08

0

Rajiv Gandhi Salai Guindy

Seruseri

Source: Knight Frank Research

Rental Profile The rental values across major office segments in Chennai have dipped over the past year. Locations like Rajiv Gandhi Salai, which is the major office market for the

in recent years and emerged as prime office destinations in the city. However, the overestimation of demand in these markets resulted in the development of a large quantum of office space quoting high rental values.

Micro-markets like Rajiv Gandhi Salai, Ambattur Industrial Estate, Tambaram and Vandalur, all of which are prime contributors to office space in the city, are witnessing reduced demand. High vacancy rates in these locations are indicative of the current market sentiment.

As a result, these micro-markets have witnessed steeply declining rentals as compared to other relatively more stable micro-markets.

Outlook The paucity of newly announced office projects suggests that the current office

IT/ITES sector, has seen rental values

With market conditions deteriorating, office

market scenario in Chennai is not expected to

declining from Rs.45/sq.ft. per month a year

rates are likely to come down further. IT and

improve in the near future.

back to a current range of Rs.25-30/sq.ft. per

ITES rentals are now about 50% of peak

month Locations in the CBD, which includes

levels, and no major new projects have been

both IT as well as non-IT spaces, exhibit

commenced in the last few months. Given the

varying rates depending on the space type.

bleak economic forecast for the coming

With market conditions deteriorating, office rates are likely to come down further. IT/ITES rentals are now about 50% of peak levels. no major new projects have been commenced in the last few 26 months.

26

financial year, rental values are expected to dip further over the course of the year.

Demand for existing space has reduced considerably, and even reputed developers are finding it hard to sell or lease space. As the economic downturn is affecting most industries, companies across the board have put their expansion plans on hold, while the worse affected are looking to shift to cheaper locations.

Mahindra World city -Chengalpet, Chennai

KnightFrank.com

The main problem today is a decline in office space demand. Micro-markets like Rajiv Gandhi Salai, Ambattur Industrial Estate, Tambaram and Vandalur, all of which are prime contributors to office space in the city, are witnessing reduced demand. High vacancy rates in these locations are indicative of the current market sentiment. Most office projects which are under development have been delayed as a consequence of limited financing options and forecasts of inadequate demand.

Beliciaa Towers-MRC Nagar, Chennai

Figure 36

This bull market scenario created a property

Certain redeeming factors could boost

Projected office demand 2009-11

bubble in the city, and commercial land was

Chennai's office sector during these turbulent

bought at irrationally high levels at the time.

times. Due to several infrastructure projects

Now, in the face of a drop in demand,

in the offing, the manufacturing sector is

developers who had incurred high project

expected to constitute a larger share of office

costs are finding it difficult to sell or lease

space demand in the city.

space. In addition to this, financing for

Locations such as the NH-4, being developed

developers has tightened to the extent that

as an electronic corridor, and Sriperumbudur,

banks are not making any up front capital

are inviting interest from the industrial sector

8

payments for the development of new

that could positively impact office space

6

projects, and are demanding pre-

development in the city. The development of

4

commitments of up to 30-40% of

the logistics and warehousing industry is also

2

developments before approving financing.

expected to augment office space demand in

0

Given that the cost of debt and yields for

Chennai. Confederation of Real Estate

commercial projects stand at 15-17% and

Developer's Associations of India (CREDAI)

9-10% respectively, and with no sign of price

has made a proposal to the state government

appreciation, it is reasonable to expect

to allow the leasing of unoccupied IT space,

investment in Chennai's office market to

which has been built on extra FSI, to non-IT

remain subdued over the near future.

companies, as is the case in Maharashtra.

20 18

17.2

16

15.4 13.5

12

Conservative

Realistic

10

Optimistic

Area (mn.sq.ft.)

14

Scenario Source: Knight Frank Research

This is especially true in the SEZ segment. Most builders have postponed development of SEZs, an example being the Estra SEZ at Padur. Capital and rental values are expected to decline further as a result of limited demand. Knight Frank research predicts that from 2009-11, assuming realistic GDP forecasts, projected supply of Grade A office space by 2011, will exceed incremental demand for such space by approximately 37%. As was the case with most prominent office markets around the country, the exorbitant appreciation of capital and rental rates for office space caused a dramatic increase in

However, despite the aforementioned bright

Knight Frank research predicts that from 2009-2011, assuming realistic GDP forecasts, projected supply of Grade A office space, will exceed incremental demand for such space by approximately 37%.

spots, the office sector in Chennai is unlikely to witness a revival without more realistic valuations, price stability of physical assets and loosening of credit restrictions on developers.

supply.

27

Q1 2009

INDIA Office Market RESEARCH Review

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