HOT PROPERTY SECTOR UPDATE - Edelweiss
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India Equity Research Real Estate July 14, 2021
HOT PROPERTY
SECTOR UPDATE
Commercial realty: Soft demand
Office space demand continued to be weak in Q2CY21 (down 2% YoY
and QoQ) with the second wave hurting absorption. While supply
declined too (down 35% QoQ), it continued to eclipse absorption, akin
to the previous quarter (refer to, Commercial realty: Weak quarter),
thereby pushing up vacancies 44bps QoQ to 16.6%.
While some green shoots are visible like: (i) pre-leasing in certain
projects; (ii) several RFPs being active; and (iii) vaccination progress,
we believe the pandemic’s second wave will keep near-term
demand/rents under pressure. In our view, DLF and Brigade are best
placed to play the likely revival in office demand in the medium term.
Q2CY21: Demand and supply decline QoQ; vacancies rise
During Q2CY21, while office space demand fell 2% QoQ to 3.6msf (down 2% YoY),
supply came in at 7.1msf (down 35% QoQ, up 14% YoY). Consequently, vacancies
rose 44bps YoY to 16.6%. Bengaluru and Hyderabad generated bulk of the demand
during the quarter. Except Chennai and Kolkata, vacancies rose QoQ across the
board. Tech-dominated markets such as Bengaluru and Pune still enjoy single-digit
vacancies. While headline rentals were broadly flat, developers gave concessions
such as lower CAM charges/higher rent-free period.
Second wave of covid-19 to keep demand muted in CY21
We believe fresh leasing trajectory hinges on the pandemic’s trajectory hereon. JLL
expects demand in CY21 to be flat YoY at ~26msf; it expects absorption to pick up
going ahead and hence believes vacancies will return to sub-15%. While the past
year has witnessed significant supply deferment, the trend lost steam in Q2CY21; in
fact, adjusting for completions in Q2CY21, the upcoming supply by CY23 actually rose
QoQ during the quarter. We believe this is a cause of concern since it can skew the
demand-supply equation. While de-densification and strong hiring by tech
companies are medium-term positives, the growing acceptance of ‘Work From
Home’ (WFH) among corporates/employees can affect absorption somewhat.
Outlook: Challenging path in near term
As argued in our comprehensive sector report, Real Estate - The Charge of the
Consolidating Brigade, consolidation in the office space in favour of financially
strong developers is helping them gain market share; we believe the ongoing crisis
will accelerate this process. While supply will eclipse demand in the near term
(leading to likely pressure on rentals), pick up in demand over the medium term is
likely to ensure that the demand-supply mismatch does not get out of hand.
Relatively low vacancies in tech-dominated markets and less market fragmentation
render this space ideal for recovery.
We believe developers with strong rental portfolios such as DLF (BUY), Brigade
Enterprises (BUY) and Embassy Office Parks (NOT RATED) will benefit from the likely
revival in office space demand over the medium term.
Parvez Qazi
+91 (22) 4063 5405
Parvez.Qazi@edelweissfin.com
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Contents
Q2CY21: Demand continues to be weak and trails supply ........................................ 3
Outlook: Near-term challenges ............................................................................... 12
Major developments during Q2CY21 ...................................................................... 18
Co-working space .................................................................................................... 20
REIT corner .............................................................................................................. 23
Bengaluru office space demand weakens ............................................................... 28
Hyderabad: Demand improves marginally .............................................................. 32
NCR: Demand and supply decline............................................................................ 36
MMR: Demand and supply pick-up ......................................................................... 40
Pune: Demand down, supply flat QoQ .................................................................... 45
Vacancies correct slightly in Chennai and Kolkata .................................................. 49
2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Q2CY21: Demand continues to be weak and trails supply
India’s commercial realty cycle enjoyed an upswing post-CY13 with vacancies
declining to 13.2% by CY19-end, from a peak of 19.7% in CY13. In CY19, demand as
well as supply at all-India level had scaled new peaks—demand surged ~55% YoY to
~42msf and supply shot up ~46% YoY to ~44msf.
However, covid-19 upset the apple cart with CY20 demand and supply coming in at
19.9msf (down 53% YoY) and 36.7msf (down 17% YoY), respectively.
Q2CY21 marked a continuation of the trend with demand plunging 2% YoY and QoQ
to 3.6msf in the wake of occupiers deferring leasing decisions. H1CY21 demand at
7.2msf is down 32% YoY, indicating the pandemic’s adverse impact.
Vacancies, which had been on a downtrend since peaking in CY13, are now on the rise
50 25.0
40 20.0
Vacancy levels (%)
30 15.0
(msf)
20 10.0
10 5.0
0 0.0
CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 H1CY21 CY21E
Absorption (msf) Supply (msf) Vacancy levels (RHS)
Source: Cushman & Wakefield, JLL, Edelweiss Research
Supply at 7.1msf during Q2CY21 rose 14% YoY, but declined 35% QoQ. This indicates
that labour disruption during the second wave was relatively much less compared
to the first wave. H1CY21 completions at 18msf are up 10% YoY.
Consequently, vacancy levels also inched up to 16.6% (up 285bps YoY and 44bps
QoQ).
Rental performance was a mixed bag--while Bengaluru and Kolkata witnessed
increase in rents YoY, others such as MMR, NCR, Pune, Chennai and Hyderabad
suffered a dip in rents YoY. With vacancies rising, pressure on rents persisted with
landlords being much more amenable to giving concessions such as lower CAM
charges, higher rent-free periods, lower rental escalation, fully furnished spaces, etc.
Going ahead, JLL pegs absorption at ~26msf in CY21 (flat YoY) and expects vacancies
to decline to sub-15% levels.
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India’s office stock crossed the 590msf mark at Q2CY21-end.
India 'Grade A' office stock at Q2CY21-end
City Stock (msf) Share in stock (%) Vacancy (%) Vacant stock (msf) Occupied space (msf) Share in occupied stock (%)
MMR 103.4 17.5 22.1 22.8 80.5 16.3
NCR 122.2 20.7 26.6 32.5 89.7 18.2
Bengaluru 158.2 26.8 9.2 14.6 143.6 29.1
Chennai 53.8 9.1 11.4 6.1 47.7 9.7
Hyderabad 71.7 12.1 13.1 9.4 62.2 12.6
Pune 55.0 9.3 6.9 3.8 51.3 10.4
Kolkata 26.2 4.4 32.2 8.4 17.8 3.6
Overall 590.5 100.0 16.6 97.8 492.8 100.0
Source: Cushman & Wakefield, Edelweiss research
Demand and supply decline QoQ in Q2CY21
Absorption as well as supply fell QoQ in Q2CY21—while demand slid YoY, the
situation was reverse on the supply front.
Supply: Projects with pre-commitments drove completions during Q2CY21; overall,
supply during Q2CY21 dipped 35% QoQ, but rose 14% YoY.
MMR, Hyderabad and Bengaluru accounted for bulk of the supply during the
quarter. Except Bengaluru and MMR, supply declined QoQ in other cities.
H1CY21 supply – Higher YoY
50
40
CY15
Supply (msf)
30
20
CY16
CY15
10 CY12 CY17 CY15
CY13 CY15
0
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata India
Peak supply (CY12-18) CY19 supply CY20 supply Avg CY15-19 supply H1CY21 supply
Source: Cushman & Wakefield, Edelweiss Research
Note: Year denoting the peak supply has been shown
Despite the second wave, average quarterly completions during H1CY21 were still
higher than the average quarterly supply over CY15–19.
Demand: As far as demand is concerned, it declined QoQ as well as YoY as many
businesses continued to defer their leasing decisions amidst an uncertain economic
outlook and the fact that many employees have still not started getting back to
offices. Pre-commitments in supply aided absorption during the quarter. Overall,
office space demand was down 2% YoY and QoQ in Q2CY21. For H1CY21, absorption
at 7.2msf was down 32% YoY.
4 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Office space demand in H1CY21 – Bengaluru and Hyderabad emerge anchors
45
36
Demand (msf)
CY15
27
18
CY16
9 CY12 CY14 CY18 CY15
CY13
CY12
0
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata India
Peak demand (CY12-18) CY19 demand CY20 demand Avg CY15-19 demand H1CY21 demand
Source: Cushman & Wakefield, Edelweiss research
Note: Year denoting the peak demand has been shown
Bengaluru, Hyderabad and MMR were the largest contributors to demand during
the quarter with ~90% share. Except MMR and Hyderabad, demand slid QoQ in all
cities.
Average quarterly absorption during H1CY21 was lower than the average quarterly
demand during CY15–19, indicating the impact of the pandemic on leasing.
Vacancies rise QoQ all over except Chennai and Kolkata
45 CY15
36
CY15
Vacancy rates (%)
27 CY13
CY12 CY12 CY13
18 CY14
CY12
9
0
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata India
Peak Vacancy (CY12-18) CY19 Vacancy Q4CY20 Vacancy Avg CY15-19 vacancy H1CY21 vacancy
Source: Cushman & Wakefield, Edelweiss research
Note: Year denoting the peak vacancy has been shown
As far as vacancy levels were concerned, except Chennai and Kolkata, all other cities
logged QoQ increase. YoY, vacancies increased in all cities, except Kolkata. Pan-India,
vacancies rose 44bps QoQ to 16.6%.
Pune and Kolkata currently have vacancy levels lower than their respective averages
over CY15–19; the situation is reverse in other cities. For the country as a whole,
vacancy at Q2CY21-end was ~165bps higher than the average vacancy over CY15–
19.
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Pre-commitments supported Q2CY21 demand
Strong pre-commitments lent support to absorption during Q2CY21.
Pre-commitments in supply in Q2CY21
100
Pre-commitment proportion (%)
80
60
40
20
0
Hyderabad MMR
Pre-commitment as proportion of Q2CY21 supply
Source: Cushman & Wakefield, JLL, Edelweiss research
Over the past few quarters, 30-50% of the supply had been already pre-committed.
In Hyderabad, more than 70% supply during the quarter was pre-leased; the figure
stood at 48% for MMR.
Performance broadly similar across cities
While supply increased in MMR QoQ during the quarter, completions in other cities
declined or were flat. Absorption decreased sequentially in all cities, except
Hyderabad and MMR.
Sequential change in demand-supply parameters in Q2CY21 across cities
Particulars Supply (% QoQ) Demand (% QoQ) Vacancy rates (bps QoQ) Rents (% QoQ)
MMR 442 408 105 0.0
NCR (77) (67) 20 (0.5)
Bengaluru (45) (21) 32 0.0
Chennai NA (84) (4) (6.5)
Hyderabad (54) 21 93 0.0
Pune NA (35) 19 0.0
Kolkata (100) (91) (9) 0.0
All India (35) (2) 44 (0.9)
Source: Cushman & Wakefield, Edelweiss research
Note: The numbers next to the arrows denote QoQ change (% for demand, supply and rents and bps for vacancy rates)
With supply eclipsing demand, vacancy rates rose across cities QoQ, except Chennai
and Kolkata. As far as rentals are concerned, most cities clocked either flat rents or
a decline QoQ.
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Bengaluru, MMR lead demand in Q2CY21 MMR, Bengaluru lead supply in Q2CY21
Kolkata Kolkata
Pune 0% Pune 0%
5% 0%
MMR Hyderabad
Hyderabad 29% 26%
MMR
23% 38%
NCR Chennai
Chennai 4% 0%
1%
NCR
Bengaluru 8%
Bengaluru 28%
38%
Source: Cushman & Wakefield, Edelweiss Research Source: Cushman & Wakefield, Edelweiss Research
MMR, along with tech-dominated cities of Bengaluru and Hyderabad drove office
space demand in Q2CY21. As far as supply is concerned, Hyderabad, Bengaluru and
MMR made up ~92% of the overall supply in Q2CY21.
IT/ITeS segment retains dominant share of demand
The IT/ITeS segment (which is linked to global economy), on an average, contributed
~42% to office space demand in India over CY16–20. The segment continued to
contribute handsomely to leasing in Q2CY21.
IT-BPM – Biggest contributor to office space leasing historically
Q1CY21 4 10 2 10 53 10 0 11
Share in overall demand (%)
CY20 7 6 3 12 49 5 9 9
CY19 14 9 10 9 42 5 2 9
CY18 8 8 12 12 42 6 5 7
CY17 5 9 9 15 36 7 8 11
CY16 11 10 17 41 3 7 12
CY15 15 7 15 38 4 8 13
CY14 22 1 15 36 3 9 14
CY13 12 4 24 33 3 10 15
CY12 13 3 29 41 3 4 8
CY11 17 2 26 36 8 11
Co-Working provider
Telecom, Healthcare-Biotech, Real estate construction & other industries
Miscellaneous
Manufacturing / Industrial
IT / ITeS
Consultancy business
E-Commerce
Source: JLL, Edelweiss research
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IT-BPM – A significant demand driver across cities in Q2CY21
Q4CY20 Demand contribution (%)
MMR 12 11 28 20
NCR 17 11
Chennai 42 32
IT-BPM Healthcare/pharma Flexible workspace Captive centres BFSI Engg & Mfg Professional services E-Commerce
Source: Cushman & Wakefield, Edelweiss research
JLL expects the IT/ITeS sector to remain the key occupier group in CY21, while
demand from emerging sectors such as e-commerce, manufacturing and healthcare
is likely to increase further.
Warning sign: Supply deferment loses pace
As demand weakened post-covid-19, developers have steadily clamped down on
supply of office space over the past year. We have been highlighting supply
deferment in multiple reports (refer to, here, here, here and here). Overall, the
supply deferred over Q1–Q4 CY20 added up to a whopping 15–39%.
However, in what is clearly an ominous sign, the trend seems to be losing pace.
The upcoming supply over the next two and half years shows a mere 4% YoY
reduction in Q2CY21: On YoY basis, Bengaluru and NCR are in fact likely to
witness higher upcoming supply
Upcoming supply over next two and half years in various cities
45 20.0
36
Change in supply (%)
10.0
27
(msf)
0.0
18
(10.0)
9
0 (20.0)
Bengaluru Hyderabad NCR Chennai MMR Pune
Q2CY20 Q2CY21 % Change in supply (RHS)
Source: C&W, Edelweiss Research
Note: Compares upcoming supply over next two and half years at end of Q2CY20 and Q2CY21
8 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Adjusting for completions in Q2CY21, the upcoming supply by CY23 actually
went up QoQ during the quarter: Across all cities, the upcoming supply by CY23
rose QoQ when adjusted for supply during Q2CY21. The increase was highest in
NCR and Bengaluru.
Upcoming supply by CY23
35 15.0
28 12.0
Change in supply (%)
21 9.0
(msf)
14 6.0
7 3.0
0 0.0
Bengaluru Hyderabad NCR Chennai MMR Pune
Q1CY21 Q2CY21 % Change in supply QoQ (RHS)
Source: C&W, Edelweiss Research
This indicates that developers are planning to bring in more projects on line despite
the weak demand. We believe this is a worrying sign; in case demand continues to
be soft over the medium term, higher supplies have the potential to push vacancy
rates up and put pressure on rentals.
Office space continues to attract institutional investors
Over the past few years, PE funds, along with sovereign/pension funds, have
partnered/bought over assets from organised developers in a major way. The trend
has continued despite the softness in demand over the past year. The concentration
of funding in the hands of a few has led to rising consolidation in the sector.
India transaction volumes have been declining over the past few years
10 150
8 120
6 90
(USD bn)
(x)
4 60
2 30
0 0
CY08
CY06
CY07
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Institutional investments Number of deals (RHS)
Source: JLL, Edelweiss research
Historically, bulk of the investments in the office space have been by private equity
funds.
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PE investments picked up YoY in Q1CY21
4,500 25
3,600 20
2,700 15
(USD mn)
(x)
1,800 10
900 5
0 0
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 Q1CY21
PE investments in office space Number of deals (RHS)
Source: Knight Frank, Edelweiss research
Area of office assets transacted rose in Q1CY21
65
52
39
(msf)
26
13
0
CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 Q1CY21
Total area of the assets transacted
Source: Knight Frank, Edelweiss research
REITable area – 284msf
Pune Mumbai
11% 13%
NCR
17%
Bengaluru
31%
Chennai
13%
Hyderabad Kolkata
13% 2%
Source: JLL, Edelweiss research
10 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
REITable value – USD36bn
Pune
Mumbai
9%
19%
Bengaluru
31%
NCR
18%
Hyderabad
9% Chennai
Kolkata
13%
1%
Source: JLL, Edelweiss research
Over the medium term, attractive REIT opportunities in India are likely to lead to
higher institutional investments in the office space. India currently has 284msf of
REIT-able space with a value of USD36bn.
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Outlook: Near-term challenges
With the commercial realty segment doing well since CY13, it was natural that
developers would want to cash in on it by bringing more supply into the market.
CY19 had already witnessed an all-time high office space supply in India. However,
the pandemic has led to concerns about future demand trajectory, compelling
developers to scale down expansion plans.
Prior to covid-19, the strong absorption trajectory had ignited hope that the
upcoming supply could be absorbed without much challenge. However, the
pandemic has led to deferment of leasing decisions. We believe demand will pick up
in a meaningful way only in in CY22. We attempt to analyse and figure out the
markets that are vulnerable and the ones that are well placed in the near and
medium term.
Near term: In the near term, we believe supply will outstrip demand as leasing
trajectory continues to be in the slow lane. Consequently, vacancy levels will inch up
in most cities. This will keep rents range-bound.
Cities like Hyderabad and Bengaluru will be relatively better placed than others due
to healthy pre-commitments in supply expected to come on stream in H2CY21.
However, others like Pune and Kolkata have limited pre-commitments and are likely
to witness an increase in vacancies.
Upcoming supply in H2CY21
7.5 80.0
6.0 64.0
Pre-commitments (%)
4.5 48.0
(msf)
3.0 32.0
1.5 16.0
0.0 0.0
NCR Bengaluru Chennai Hyderabad Pune Kolkata
H1CY21 supply H2CY21E supply Pre-commitment in H2CY21E supply (RHS)
Source: Cushman & Wakefield, Edelweiss research
Our outlook for various operational parameters across cities is summarised below.
Outlook for next 12 months
Particulars MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Rents `
Vacancy rates
Absorption
Source: Cushman & Wakefield, Edelweiss Research
Medium term: About 114msf of incremental commercial space is expected to be
commissioned by CY23. We analyse and figure out the cities that are placed
comfortably as far as the demand-supply paradigm is concerned by comparing
supply with average demand over CY17–19.
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Upcoming supply – Except Kolkata, all other cities need demand uptick
6.0 35.0
4.8 28.0
Vacancy levels (%)
3.6 21.0
(x)
2.4 14.0
1.2 7.0
0.0 0.0
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata All India
Upcoming supply/Avg demand over CY17-19 Q2CY21 vacancy levels (RHS)
Source: Cushman & Wakefield, Edelweiss Research
Note: Upcoming supply refers to supply expected to come on stream by CY23
Note: The dotted line indicates a scenario wherein upcoming supply on an annual level is equal to average demand over CY17–19
A look at city-wise incremental supply (till CY23) indicates that all other cities, except
Kolkata, must clock higher cumulative demand till CY23 than that over CY17–19 to
absorb the upcoming supply. NCR, followed by tech-dominated cities of Bengaluru
and Hyderabad, are relatively well placed as far as the demand-supply equation is
concerned.
On the other hand, Chennai, MMR and Pune clearly need a significant uptick in
demand for absorption of upcoming supply. Chennai, especially, is struggling with
~11msf upcoming supply by CY23 against ~2msf average annual demand.
Meanwhile, the saving grace for Pune is that it still has single-digit vacancy; hence,
the demand-supply imbalance thereof may not lead to the situation getting out of
hand anytime soon.
Besides, one must consider that some of the upcoming supply may get deferred due
to labour/finance unavailability issues, or even developers themselves choosing to
defer projects in light of muted market sentiment. Significant supply has already
been deferred over the past year; a continuation of this trend could prevent the
demand-supply equation from getting bad to worse.
On the demand side, there is a clear recognition that leasing trajectory needs to pick
up in order to: (a) absorb the incoming supply; and (b) ensure that existing leases
coming up for renewals get addressed adequately.
This is important as lease renewal pressure is likely to be higher in CY21 compared
with CY22/23. As per Anarock, 7,400 leases spanning ~90msf are likely to come up
for renewal in CY21 across Bengaluru, Mumbai, Pune, Chennai, Gurugram and Noida
On the other hand, CY22 will see nearly 7,000 leases for ~78msf come up for
renewal, and ~4,200 leases for over 55msf in CY23.
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Upcoming leases for renewal
8,000 100
6,400 80
4,800 60
(msf)
(Nos)
3,200 40
1,600 20
0 0
CY21 CY22 CY23
Number of leases up for renewal Area of leases up for renewal (RHS))
Source: Anarock, Edelweiss Research
Breakdown of upcoming lease renewals by number
Gurugram Noida
15% 3%
Chennai
5% MMR
44%
Pune
17%
Bengaluru
16%
Source: Anarock, Edelweiss research
Breakdown of upcoming lease renewals by area
Gurugram, 15% Noida, 3%
MMR, 19%
Chennai, 12%
Bengaluru, 37%
Pune, 14%
Source: Anarock, Edelweiss research
14 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Long term - A new order may emerge: The covid-19 pandemic has led to the
realisation that the office segment will never be the same again. Most corporates
and employees have recognised the benefits of remote working. At the same time,
it is surreal to imagine that traditional offices will disappear and won’t be required
in the future. We believe, over the long run, both will co-exist.
In the ensuing sections, we take a look at a recent survey conducted by JLL across
the globe which highlights that employees want the flexibility of WFH as well as the
‘structured work environment’ that an office provides.
Fatigue from WFH emerges: The survey indicates that an year after the start of
Covid-19, some signals of homeworking fatigue have started emerging.
How many times in a week will employees want to WFH?
35
28
21
(%)
14
7
0
Never Less than once a 1 day a week 2 days 3 days 4 days 5 days
week
Oct-20 Mar-21
Source: JLL, Edelweiss Research
Hybrid working remains top of mind for employees, but that interest is
starting to decline: While employees still prefer a hybrid working scenario, the
desire to get back to offices is increasing.
Proportion of the workforce desiring to work remotely in each place post-pandemic (at least once a week)
100
80
60
(%)
40
20
0
At Home In office In 3rd party places Hybrid work
Oct-20 Mar-21
Source: JLL, Edelweiss Research
Productivity at home is declining: While initially WFH led to a feeling of
improved productivity, the feeling today is lower than a year ago. Interestingly,
employees are also more critical of their usual office.
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Productivity and workplace satisfaction
100
80
60
(%)
40
20
0
More productive at home than office Satisfied with current work place
Oct-20 Mar-21
Source: JLL, Edelweiss Research
Most employees missed the structured work environment that offices provide.
In addition, the opportunity for human interaction is another big advantage of
offices.
What do employees miss the most in WFH
65
52
39
(%)
26
13
0
Human interactions Collective face-to-face Separating work and Pofessional A daily office routine
work home environment
Source: JLL, Edelweiss Research
We believe the survey indicates the enduring strengths of traditional offices. We
believe the following trends will emerge in the long run.
Hybrid model the way going ahead: We believe the odds of a hybrid model to
be followed in the future are high. Under this model, employees will work a
couple of days from home depending on their work function/needs and the
remaining days of the week in offices. In fact, many employees have already
started veering towards this idea. An optimum portfolio mix will involve
traditional offices, flexible spaces and remote working strategies.
Flexibility to be paramount: We anticipate that flexibility in lease terms and
tenures will become the norms going ahead.
Technology firms will see enhanced demand for their services; CBRE expects
digital transformation of services to drive demand for on-shoring, near-shoring
and, more recently, end-shoring of operations towards India.
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Colliers believes that, over the next three years, tech companies in the domains
of digitalisation, artificial intelligence, machine learning and robotics are likely
to expand given higher demand for their services.
The trend of setting up global captive centres (GCCs) in India will continue,
driven by the availability of low-cost talent in the country.
E-commerce and data centres should drive space demand in the long run.
Overall, we believe that bespoke hybrid models will gain dominance in the future.
While WFH will continue, offices won’t become obsolete (for a detailed discussion
on impact of WFH on office space demand refer to, Hot Property - WFH: Much ado
about nothing; sector update).
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 17HOT PROPERTY
Major developments during Q2CY21
We take a look at significant developments related to the office space during
Q2CY21:
April 2021
Majority of Indians want remote working option, shows survey (Economic
Times)
Recent Hiring Trends Of Large IT-ITeS Firms Expected To Spur Office Space
Demand - Report (Money Control)
Robust IT sector hiring sees 2 mn sq ft office space demand (Business Line)
IT hiring spree can improve demand for office space in 2022 - ANAROCK
(News Barons)
May 2021
COVID-19 second wave: Commercial real estate space occupiers put leasing
plans on hold (Money Control)
Office space occupancies face major test as large set of lease renewals due
in 2021 (Economic Times)
Second Covid wave unlikely to derail long-term prospect of office market in
India: Sankey Prasad, Colliers International (Economic Times)
Unfazed by virus, office space providers go ahead with expansion plans
(Economic Times)
Of 90 mn sq ft area commercial leases up for renewal in 2021, Bengaluru
has the highest share at 37% (Money Control)
Nearly 64% outdated office spaces in India offer Rs 5,500-crore untapped
investment value, says report (Economic Times)
Real estate sector news_ Real estate demand for data centres set to rise by
15-18 million sq ft by 2025, says report (Economic Times)
June 2021
Pandemic or not, work from home is set to become the norm (Economic
Times)
Commercial Real Estate - Hopeful And Holding On (Forbes)
Office leasing in 2021 may remain flat in 7 cities: JLL India (Economic Times)
Second half of 2021 to bring new opportunities for the commercial real
estate market: Experts (Economic Times)
India Ratings reiterates negative outlook on under-construction office
space providers (Economic Times)
Work-from-home trend may significantly damage office space market: Ind-
Ra (Economic Times)
Commercial hub proposed at North Delhi’s Azadpur (Economic Times)
18 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Pain continues for the commercial real estate sector as the pandemic
extends into FY2022 (Economic Times)
Pace of vaccination to decide fate of commercial real estate going forward:
experts (Money Control)
Commercial real estate will continue to face significant pressure in near
term: ICRA (Economic Times)
Tech sector set to boost office demand in Asia-Pacific region (Mint)
Commercial rentals in Indore drop by 15% during pandemic (Economic
Times)
Covid brings down office rentals by 5-20% in Ahmedabad (Economic Times)
Tracking developments by company
We take a look at significant developments related to the commercial realty space
during Q2CY21:
DLF
DLF leases 3 lakh sq ft office space in Gurgaon (Economic Times)
DLF expects office leasing recovery by FY23 (Economic Times)
CPPIB and Tata Realty
CPPIB, Tata Realty in talks to form Rs 2,000-crore property platform (Economic
Times)
Max Estates
Max Estates raises Rs 240 crore for commercial project in Noida (Economic
Times)
RMZ
RMZ raises Rs 1,500 crore from Canada Pension Plan Investment Board
(Economic Times)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 19HOT PROPERTY
Co-working space
Over the past few years, the co-working space has grown by leaps and bounds owing
to compelling benefits such as cost-savings and the flexibility that it provided to
occupiers. Its share in annual leasing rose from virtually nil in CY16 to 14% in CY19,
emerging as the second-largest contributor to office space demand (lagging the
obvious technology sector).
However, the pandemic dealt a heavy blow to the co-working segment. Many
tenants, with their profitability under stress, had to cut short their leases. As a result,
demand from co-working space plunged in CY20.
Demand from co-working segment slid in CY20
15.0
Transaction volume (msf)
12.0
9.0
6.0
3.0
0.0
2017 2018 2019 2020
Annual leasing
Source: Colliers, Edelweiss Research
Bengaluru and NCR major markets for co-working
12.5 7.5
10.0 6.0
(%)
7.5 4.5
(msf)
5.0 3.0
2.5 1.5
0.0 0.0
Bengaluru Chennai NCR Hyderabad Mumbai Pune Kolkata
Flexible workspace stock Proportion of total office stock (RHS)
Source: CBRE, Edelweiss research
Though the space was amongst the hardest hit by covid-19 (refer to Hot Property -
Co-working space: Set for a shake-up), it has already started to bounce back.
With the pandemic-induced volatility playing havoc, many start-ups as well as large
enterprises are evaluating flexible workspaces to meet their space needs over the
next couple of years. We believe a combination of flexibility and capital conservation
provided by the segment is particularly useful in an uncertain world. Driven by a
need to defer capex and to try the hub-and-spoke model, many corporates are
20 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
considering flexible workspaces. As a result, flexible space operators are likely to
witness good demand going ahead.
With corporates as well as employees viewing co-working positively, we believe
flexible workspaces will gather momentum going ahead. CBRE expects the following
changes for operators, occupiers and landlords as far as flexible space is concerned.
Source: CBRE, Edelweiss research
Note: *Themes still applicable in the future
**Operators obtain the present lease from occupiers holding on to excess space and thereby offer managed solutions. The balance area is then
marketed to other potential tenants.
Source: CBRE, Edelweiss research
*Themes still applicable in the future
**Core here refers to traditional office space take-up
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 21HOT PROPERTY
Source: CBRE, Edelweiss research
*Themes still applicable in the future
**Core here refers to traditional office space take-up
Major developments during Q2CY21
We take a look at major developments related to the flexible space during Q2CY21:
April 2021
With 10,000 desks and 7 lakh sq ft sold, WeWork India boasts new high in
quarter sales (Economic Times)
Managed office space provider Incuspaze adds 500 seats in Kochi (Economic
Times)
May 2021
Unfazed by virus, office space providers go ahead with expansion plans
(Economic Times)
Co-working operator The Office Pass to expand in Mumbai, Delhi-NCR
(Economic Times)
June 2021
Inspire Co-Spaces leases 15,000 sq ft in Indore to start co-working hub
(Economic Times)
KKR, TIGA Investments to buy office space provider Executive Centre (Economic
Times)
Co-working to attract more private capital with introduction of Model Tenancy
Act (Economic Times)
Increasing number of companies looking to shift permanently to flexible, fully
remote work model (Economic Times)
Flexible workplace operators to offer incentives to tenant (Economic Times)
Why organisations are shifting to flexible workspaces in Covid times (Financial
Express)
How covid-hit co-working spaces in Noida are wooing clients back (Times of
India)
22 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
REIT corner
The quarter gone by has been eventful for the REIT segment in India. We take a look
at significant developments related to the REIT segment during Q2CY21:
Overall REIT market:
Despite covid, are REITs still an attractive investment for retail investors?
(Economic Times)
Assets worth over Rs 3.5 trillion may get monetised via InvITs & REITs in one
year: ICRA (Economic Times)
REITs reduce borrowing costs by about 200 basis points or more in FY21
(Business Standard)
Sebi reduces REIT trading lot to one unit; move to enhance market depth
(Economic Times)
Ascendas:
Ascendas India Trust secures maiden S$100 million sustainability-linked loan
from UOB, Singapore (Business Line)
Brookfield REIT:
Brookfield Real Estate Trust posts net operating income of Rs 655 crore in FY21
(Economic Times)
Embassy Office Parks:
‘There is pent-up demand due to record tech deals, hiring’: Embassy REIT
(Business Line)
Embassy REIT plans 2.8k crore investment to develop office space (Economic
Times)
Embassy REIT appoints leasing co-heads, gears up for anticipated office demand
revival (Economic Times)
Mindspace Business Parks REIT
Mindspace REIT to distribute Rs 285.2 crore as dividend (Economic Times)
Mindspace Business Parks REIT commits to 100% renewable electricity use by
2050 (Money Control)
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 23HOT PROPERTY
Bengaluru maintained its numero uno position
Bengaluru continued to be the biggest market in the commercial space in India in
Q2CY21, followed by NCR. Overall commercial space in the country has now reached
~590msf, up from ~420msf in CY16.
Growth in India ‘Grade A’ office stock
600
Commercial space stock (msf)
480
360
240
120
0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
Split of India’s ‘Grade A’ office stock
100.0
80.0
Commercial stock split (%)
60.0
40.0
20.0
0.0
CY20
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
The top-3 cities of Bengaluru, NCR and MMR account for ~384msf office space,
Bengaluru, NCR and MMR account for around two-thirds of the overall commercial stock in the country.
around two-thirds of India’s overall
Vacancy levels (in %) in India had declined steadily over the past few years (from
commercial stock
19.7% in CY13 to 13.1% in CY19), though there has been an uptick since then (16.6%
in Q2CY21) due to the pandemic. Within this, while Bengaluru and Pune have single-
digit vacancy levels, MMR and NCR have vacancies at ~22% and ~27%, respectively.
Hyderabad’s vacancy level after entering double digit territory (12.5%) in Q1CY21
for the first time since CY14 further increased to 13.1% in Q2CY21. Vacancy levels in
Chennai and Kolkata remained flat QoQ in Q2CY21.
24 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Vacant ‘Grade A’ office stock in India
100
80
Vacant stock (msf)
60
40
20
0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
Split of vacant ‘Grade A’ office stock in India
100.0
Vacant stock split (%)
80.0
60.0
40.0
20.0
0.0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
NCR continues to have the highest share of vacant space in India at ~33%. Over the
past five years, it has contributed ~38%, on an average, to the overall vacant space
in India. MMR, with ~23% share, is next.
NCR and MMR cumulatively account
for ~57% of vacant commercial stock MMR emerges as the leader in Q2CY21
in the country
India’s office space has seen significant amount of changes over the past few years
in terms of contribution of various cities in supply and demand. While Bengaluru was
on top the heap in Q1CY21, MMR topped the list in Q2CY21. Hyderabad continued
its steady performance in the current quarter as well.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 25HOT PROPERTY
MMR contributed maximum supplies in Q2CY21
50
Commercial space supply (msf)
40
30
20
10
0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
During Q2CY21, supply in MMR spiked QoQ at ~2.7msf (up 442% QoQ). Bengaluru
and Hyderabad witnessed completions at ~2msf (down 45% QoQ) and 1.9msf (down
54% QoQ), respectively, during the quarter. On the other hand, Pune, Chennai and
Kolkata witnessed negligible supply.
MMR’s share in supply surged in Q2CY21
100.0
Commercial space supply split (%)
80.0
60.0
40.0
20.0
0.0
CY16
CY12
CY13
CY14
CY15
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
In terms of overall share, MMR contributed 38% of office space supply in Q2CY21
(compared to 5% in Q1CY21). On the other hand, Bengaluru and Hyderabad, which
had contributed ~33-38% to supply in Q1CY21, saw their share falling to 26-28% in
Q2CY21. Share of NCR also declined to 8% (from 24% in Q1CY21).
26 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
MMR bucks the trend, records QoQ growth in absorption
45
Commercial space demand (msf)
36
27
18
9
0
CY19
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY20
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
Barring MMR and Hyderabad, which recorded QoQ growth in absorption (at 1msf
and 0.8msf, respectively), all other cities witnessed a QoQ decline in absorption as
the country faced the second wave of covid-19 and occupiers postponed their
leasing decisions further.
Bengaluru and MMR contributed bulk of the demand in Q2CY21
100.0
Commercial space demand split (%)
80.0
60.0
40.0
20.0
0.0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
MMR NCR Bengaluru Chennai Hyderabad Pune Kolkata
Source: Cushman & Wakefield, Edelweiss research
In terms of share in absorption, the biggest gainer in Q2CY21 was MMR—its share
rose from ~6% in Q1CY21 to ~23% in Q2CY21. Apart from MMR, Hyderabad also
increased its share (~23% from ~18% in Q1CY21). Even though Bengaluru saw its
share plummeting to 38% from 48% in Q1CY21, it retained its top position in terms
of highest share in absorption.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 27HOT PROPERTY
Bengaluru office space demand weakens
The Bengaluru office market is amongst the biggest in terms of absorption in India
with the city, on average, contributing to around one-third of the total office space
demand over the past seven years. Its status as a tech hub and start-up magnet
Bengaluru is the best performing renders it amongst the best-placed markets in India in terms of fundamentals.
market in India in terms of demand- Another factor that burnishes Bengaluru’s office market prospects is the healthy
supply dynamics demand from co-working firms. In addition, it has one of the world’s largest
concentrations of ‘engine room’ population (20-40 year olds).
Supply-demand dynamics: Absorption in Q2CY21 came in at 1.4msf (compared with
net negative leasing in Q2CY20). QoQ, demand fell 21% QoQ, but was still the highest
in the country. Supply, on the other hand, increased 882% YoY (down 45% QoQ) to
2msf in Q2CY21. As a result, vacancy rate inched up to 9.2% from 8.9% in Q1CY21.
Vacancies rose in Q2CY21, but still remain in single digits
15 15.0
12 12.0
Vacancy levels (%)
(msf)
9 9.0
6 6.0
3 3.0
0 0.0
CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 Q1CY21 Q2CY21
Absorption (msf) Supply (msf) Vacancy levels (RHS)
Source: Cushman & Wakefield, Edelweiss research
Demand: While absorption had showed signs of recovery in Q1CY21, the second
Supply eclipsed demand in Bengaluru wave halted the momentum during Q2CY21. Gross leasing at 1.1sf declined 435 YoY
during Q2CY21 and 57% QoQ. Net absorption came in at 1.4msf (down 21% QoQ) due to tenant
exits as part of portfolio consolidation
The Peripheral North and ORR micro-markets contributed a lion’s share to
absorption during the quarter.
Supply declined 45% QoQ to 2msf in Q2CY21 (up 882% YoY). The second wave had
relatively less impact on completion when compared with the first wave, resulting
in YoY increase in supply. Completions declined QoQ as some ready projects are yet
Except Peripheral North, Peripheral
to receive OCs. The Peripheral North, ORR and Suburban east micro-markets
East and Peripheral South, all other
micro-markets in Bengaluru have contributed bulk of supply during the quarter.
single-digit vacancy levels
Overall vacancy levels: Vacancies rose ~270bps YoY to 9.2% (up ~30bps QoQ), still
amongst
t the lowest in the country.
h
Vacancy levels in various micro-markets: Robust fundamentals of the Bengaluru
e
market can be gauged from the fact that barring the Peripheral North, Peripheral
P
East (Whitefield) and Peripheral South regions, all other micro-markets in the city
e
have single-digit vacancy levels. ORR, which contributes around half of the office
r
space in the city, in fact had vacancy levels of mere 3.2% at Q2CY21 end.
i
p
h
e
r
28 Edelweiss Research is also available on www.edelweissresearch.com,
a Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Most micro-markets have single-digit vacancy levels in Bengaluru
25.0
20.0
Vacancy rates (%)
15.0
10.0
5.0
0.0
Q4CY16
Q4CY19
Q2CY21
Q4CY13
Q4CY14
Q4CY15
Q4CY17
Q4CY18
Q1CY19
Q2CY19
Q3CY19
Q1CY20
Q2CY20
Q3CY20
Q4CY20
Q1CY21
CBD / Off CBD ORR Peripheral East Peripheral South
Suburban East Suburban South Overall Bengaluru
Source: Cushman & Wakefield, Edelweiss research
Rentals in Bengaluru had shot up ~64% Rentals: As a result of falling vacancies, average rentals in the city catapulted ~64%
on an average over CY13-20 over CY13-20 with individual micro-markets enjoying 30-90% rental appreciation
during this period. Within this, the highest rental uptick had been in ORR. Rents
remained flat for the fifth consecutive quarter in Q2CY21.
Rentals have been flat in Bengaluru over the past year
170
Rental rates (INR/sft)
136
102
68
34
0
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY18
Q1CY19
Q2CY19
Q3CY19
Q4CY19
Q1CY20
Q2CY20
Q3CY20
Q4CY20
Q1CY21
Q2CY21
CBD / Off CBD ORR Peripheral East Peripheral South Suburban East Suburban South Overall Bengaluru
Source: Cushman & Wakefield, Edelweiss research
Major leasing transactions during Q1CY21
City Micro-market Property Tenant Area (sft)
Bengaluru Peripheral North Modern Asset North Gate Phase II - Wing B Collins Aerospace 3,15,000
Bengaluru Suburban South Kalyani Magnum TE Connectivity 1,70,000
Bengaluru Outer Ring Road Bagmane Constellation Business park (Virgo Block) Archwell 49,000
Bengaluru CBD / Off CBD Vaswani Centropolis Cloudtail India Pvt. Ltd. 25,500
Source: Cushman & Wakefield, Colliers, Edelweiss research
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Major developments during Q2CY21 in Bengaluru office market:
Byju's leases 4 lakh sq ft office space in Bengaluru (Magic Bricks)
Bengaluru sees 8% CAGR in rental growth over last decade; NCR, MMR
remain flat. (ET)
Of 90 mn sq ft area commercial leases up for renewal in 2021, Bengaluru
has the highest share at 37% (Money Control)
Office stock addition: The city has witnessed steady expansion in office stock over
the past few years—jumped 77% to ~158msf since CY13.
Office stock has risen steadily in Bengaluru
Commercial space stock (msf)
200
160
120
80
40
0
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
CBD / Off CBD ORR Peripheral East Peripheral North
Peripheral South Suburban East Suburban North West Suburban South
Source: Cushman & Wakefield, Edelweiss research
ORR’s share in office stock has improved
100.0
Commercial stock split (%)
80.0
60.0
40.0
20.0
0.0
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
CBD / Off CBD ORR Peripheral East Peripheral North Peripheral South Suburban East Suburban North West Suburban South
Source: Cushman & Wakefield, Edelweiss research
In terms of share in overall stock, the contribution of ORR—Sarjapur, KR Puram,
Hebbal, etc. —has grown from ~41% in CY14 to ~45% currently. This has come at the
cost of Eastern suburbs (Indira Nagar, Old Airport, C.V. Raman Nagar), which have
clocked slower growth.
30 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Outlook: We believe the Bengaluru office market has robust fundamentals, which
should help it tide over the crisis. Our views on various operational parameters are
summarised below:
Demand: The second wave of covid-19 has led to deferment of leasing decisions
for the time being. While some occupiers are progressing with portfolio
consolidation/contraction, many tenants are in a ‘wait-and-watch’ mode
regarding their expansion plans considering the volatility in the market.
In spite of the second wave, several RFPs and ongoing deals remained active
during the quarter. Hence, demand is likely to increase in H2CY21 and CY22 once
the conditions normalize in the coming 6-12 months.
Supply: Bengaluru is likely to add ~4msf supply during H2CY21 and ~9.5-10msf
during CY21 considering healthy pre-commitment levels in the projects awaiting
OC or nearing completion.
Cumulative ~31msf supply will come in the city by CY23. The fact that this
exceeds the expected supply over next three years at CY19 end indicates the
strong fundamentals of the market.
Rentals: While demand remains soft, rentals are unlikely to decline due to: a)
tight vacancies; and b) most of the office inventory being owned by institutions.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 31HOT PROPERTY
Hyderabad: Demand improves marginally
Hyderabad has gained the maximum
Hyderabad has been the biggest gainer in absorption amongst various cities and its
incremental share in demand in
current decade and has emerged share has more than tripled since CY12. It has been the second-biggest market in
second-biggest market since CY16 terms of demand each year over the past four years.
Sharp fall in Supply QoQ
11.0 15.0
8.8 12.0
Vacancy levels (%)
(msf)
6.6 9.0
4.4 6.0
2.2 3.0
0.0 0.0
CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19 CY20 Q1CY21 Q2CY21
Absorption (msf) Supply (msf) Vacancy levels (RHS)
Source: Cushman & Wakefield, Edelweiss research
Demand: Gross leasing was ~2.8msf, which was almost double QoQ, indicating
limited impact of the second wave. Demand was also helped by significant pre-
leasing activity. Net absorption increased to 0.8msf (up 21% QoQ, down 54% YoY).
Occupiers continued to remain cautious and some of them have deferred expansion
/ relocation / consolidation plans in the short term as they rework their realty space
needs.
Gachibowli accounted for more than two-third of demand during the quarter.
Supply: Completions came in at 1.9msf (down 54% QoQ and 38% YoY) during
Q2CY21 of this, nearly 72% was already pre-leased. Gachibowli contributed bulk of
the supply during the quarter.
Demand drivers: IT-BPM, Engineering and Healthcare sectors dominated the space
take-up during the quarter.
Overall vacancy levels: After touching a double-digit vacancy level in Q1CY21,
vacancy in Hyderabad continued to increase. Vacancy levels rose to 13.5%, up
~90bps from 12.5% in Q1CY21. This was a result of new supply, occupier exits and
portfolio consolidation by occupiers.
32 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Vacancy in Peripheral East decreases QoQ
60.0
48.0
Vacancy rates (%)
36.0
24.0
12.0
0.0
Q4CY18
Q4CY12
Q4CY13
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q1CY19
Q2CY19
Q3CY19
Q4CY19
Q1CY20
Q2CY20
Q3CY20
Q4CY20
Q1CY21
Q2CY21
Madhapur Gachibowli Peripheral East Overall Hyderabad
Source: Cushman & Wakefield, Edelweiss research
Vacancy levels in micro-markets: Unlike the Bengaluru market, vacancy rates differ
widely amongst various micro-markets in Hyderabad. While the Madhapur market
has continuously enjoyed single-digit vacancy levels in the current decade, others
Madhapur provides bulk of office like Gachibowli and Peripheral Eastern suburbs (Pocharam and Uppal) have had to
space in Hyderabad and has the contend with double-digit vacancy rates for quite some time.
lowest vacancy rate amongst all
micro-markets Madhapur had vacancy of mere ~1.5% at Q1CY20 end, the lowest since CY16; with
covid-19 playing spoilsport, vacancies here have risen to 9.5%. On the other hand,
vacancy levels in Gachibowli, which were at ~11% during Q1CY20, declined to 7.5%
during Q2CY20, before rising to 21.1% in Q2CY21.
Rentals in Hyderabad have been
stable since Q1CY20 after having
surged ~60% on average over CY13- Rentals: Despite vacancy levels rising, rentals have remained broadly stable since
19 Q1CY20 in Hyderabad even as landlords have been accommodative regarding lease
terms. Average rentals in the city had surged ~60% over CY13-Q2CY20 with
Madhapur witnessing ~74% hike. However, there had been some softness in rents
in Madhapur in H2CY20 due to the flexibility in negotiations enjoyed by occupiers
post covid.
Rentals broadly flat over past few quarters
80
64
Rental rates (INR/sft)
48
32
16
0
Q4CY12
Q4CY13
Q4CY14
Q4CY15
Q4CY16
Q4CY17
Q4CY18
Q1CY19
Q2CY19
Q3CY19
Q4CY19
Q1CY20
Q2CY20
Q3CY20
Q4CY20
Q1CY21
Q2CY21
Madhapur Gachibowli Peripheral East Overall Hyderabad
Source: Cushman & Wakefield, Edelweiss research
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 33HOT PROPERTY
Major leasing transactions during Q2CY21
City Micro-market Project Tenant Area (sft)
Hyderabad Madhapur Avance H09 Legato 2,90,000
Hyderabad Madhapur KRC Commerzone Qualcomm 15,00,000
Hyderabad Peripheral South GMR Aero Tower-2 OSI Systems 46,000
Source: Cushman & Wakefield, Edelweiss research
Office stock addition: Hyderabad’s office stock addition has, in fact, been higher
than even Bengaluru, albeit on a lower base. The overall office stock in the city has
surged ~166% since CY13, with overall stock touching ~72msf in Q2CY21.
Office stock has risen steadily
70
Commercial space stock (msf)
56
42
28
14
0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
Madhapur Gachibowli Peripheral East
Source: Cushman & Wakefield, Edelweiss research
Madhapur maintains dominant position
100.0
Commercial stock split (%)
80.0
60.0
40.0
20.0
0.0
CY12
CY13
CY14
CY15
CY16
CY17
CY18
CY19
CY20
Q1CY21
Q2CY21
Madhapur Gachibowli Peripheral East
Source: Cushman & Wakefield, Edelweiss research
In terms of share in overall stock, the lion’s share comes from Madhapur (including
Madhapur, Kondapur, Raidurg), which has historically provided around two-thirds
of the overall pie. In fact, its share has been rising and has catapulted ~733bps since
CY12 to ~69% at Q2CY21 end.
34 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities LimitedHOT PROPERTY
Outlook: We expect vacancies to increase in the Hyderabad office market in the near
term. Our views on various operational parameters are summarised below:
Demand: Demand is likely to improve gradually in H2CY21.
Supply: Supply is expected to remain strong with ~23msf of planned and under-
construction supply coming up by CY23. Of this, ~46% will be in Madhapur, with
the rest belonging to Gachibowli.
New supply of around ~4msf is expected in the remaining part of the year; two-
third of it is already pre-leased.
Vacancy levels: Vacancy levels are expected to inch up to 15-18% by CY22 due
to combined impact of new supplies and tenant exits.
Rentals: Going ahead, rentals are likely to face downward pressure over CY21-
22 as incremental supply, portfolio consolidation and rising vacancies allow
occupiers to negotiate from a position of strength.
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited 35You can also read
