Low Office Vacancy to Boost Rent in India

Low Office Vacancy to Boost Rent in India
20/02/2017 , by , in EXPERT ZONE

At the end of Q3 2016, India’s total Grade A office stock stood at 472 million square feet with an average vacancy rate of 15.3%. The average vacancy rate has been declining since 2013 amid strong demand from domestic as well as international office occupiers, and this trend is forecast to continue in the medium to long term.

If we look at the vacancy rate in cities, most are well placed except certain sub-markets of the National Capital Region (NCR) and Mumbai, which are skewing up the pan-India average (Figure 1). The NCR alone contributes about 41% to total pan-India vacant stock of 72 million square feet, followed by Mumbai contributing about 28% while Bengaluru, the second biggest office market in size after Mumbai, contributes just 4.2% to pan-India vacant stock.

The strength of markets such as Bengaluru, Pune and Hyderabad lies in their competitive rents, quality assets and large floor plates, as well as the availability of skilled human resources and an established IT base. Hyderabad has excellent road infrastructure that adds to the city’s attractiveness. All these factors have resulted in strong demand for office space in these markets, which is projected to put upward pressure on office rents in those cities thus raising overall rental rates across the country (Figure 2).

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Apart from each city’s own strength, the healthy demand forecast is backed by continued occupier interest in the Indian market with positive steps from government towards improving transparency and sustainability in the sector via various real estate and economic policies. In this context, the scarcity of office space has prompted new projects by developers, particularly in cities such as Bengaluru, Pune, Hyderabad and Chennai. In Mumbai, six out of eight sub-markets will likely see a decline in vacancy rates by the end of 2017 although currently they are close to city average at 19%.

It’s worth noting that the vacancy rate is often very different between Grade A assets and superior Grade A assets i.e. those that are of higher quality and in prime locations in a city. Our estimates show that the vacancy rate for superior Grade A assets is around 6% at the pan-India level as compared to 15.3% for the overall Grade A basket.

Overall, low vacancy levels in many Indian cities and the rising demand for high-quality Grade A space is likely drive up average rents, but at varying degrees for different sub-markets. For instance, sub-markets such as the Secondary Business Districts (SBDs) of Bengaluru and Pune, and Hi-Tech City in Hyderabad are expected to outperform the average, with rent growing 4-6% y-o-y in the medium term (2017-18). Meanwhile CBDs of all cities, suburbs such as MG Road, Gr Noida in the NCR, Salt Lake in Kolkata among others, will see stability or a negligible rent rise of 0-1% in the same forecast period.

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