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Colliers Quarterly Hyderabad Q1 2017

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Amid surging office demand in this re-established IT
hub, most of the upcoming quality office spaces
have been pre-committed by occupiers, creating a
severe supply shortage. Hyderabad's average office
rent is likely to surge in 2017, as en-bloc
completions are still 12-15 months away. We advise
developers to expedite construction and undertake
new projects to meet the heightened occupier
demand to retain the city's image of an affordable
Information Technology and Information Technology
and enabled services (IT-ITeS) location.

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Colliers Quarterly Hyderabad Q1 2017

  1. 1. Office rents likely to surge in 2017 Divya Grover Senior Manager | Hyderabad Amid surging office demand in this re-established IT hub, most of the upcoming quality office spaces have been pre-committed by occupiers, creating a severe supply shortage. Hyderabad's average office rent is likely to surge in 2017, as en-bloc completions are still 12-15 months away. We advise developers to expedite construction and undertake new projects to meet the heightened occupier demand to retain the city's image of an affordable Information Technology and Information Technology and enabled services (IT-ITeS) location. Forecast at a glance Demand Occupier demand to remain upbeat; entrepreneurial and start-up community to increase footprint too Supply To remain under pressure as part of the expected completions of 4.5 million sq ft (418,100 sq m) in next quarter may bet deferred Vacancy rate Vacancy set to decline to 9.5% by Q4 2017. SBD vacancy for Grade A properties might be only 1-2% by year end Rent Overall, average city rents to grow by 10% in 2017 as strong occupier demand is expected to continue in prime micromarkets Price Capital values to strengthen in short to mid-term throughout the Secondary Business District (SBD) Continued expansion momentum by occupiers in Q1 2017 Hyderabad's commercial office sector remained in a healthy phase as large occupiers in the Information Technology and IT-ITeS segment continued expanding their footprint. Such expansion requirements led by occupiers trying to lock long-term leases has created an acute paucity of supply in the city restricting the leasing activity temporarily. In fact, a few occupiers with small and mid-sized space requirements are also buying fully furnished spaces in the newly completed developments in suburbs. In the first quarter of 2017, gross leasing reached 0.51 million sq ft (48,800 sq m), which is at par with the previous quarter. In comparison to Q1 2016, this figure represents a 60% decrease. However, in our opinion the surge in leasing in Q1 2016 reflected strong pent-up demand in the city as a result of a stable political environment. Though we expect strong occupier interest to continue, a supply crunch may restrict the occupiers to take-up large spaces. In line with past trends, concentration of Grade A properties in SBD garnered the maximum share of overall quarterly leasing. In Q1 2017, SBD accounted for an 80% share followed by PBD (14%) and Off-CBD (6%). While the IT-ITeS segment witnessed 61% share of overall leasing, healthcare (20%), business centres (15%) and others (4%) comprised the remainder of the pie. Rental Values Micromarkets Rental Values1 q-o-q change y-o-y change CBD 45 - 50 0% -5% Off-CBD 45 - 50 0% 0% SBD 53 - 58 0% 21% PBD 25 - 30 0% 0% Source: Colliers International India Research 1 Indicative Grade A rentals in INR per sq ft per month Colliers Quarterly HYDERABAD | OFFICE 13 April 2017
  2. 2. 2 Colliers Quarterly | 13 April 2017 | HYDERABAD | OFFICE | Colliers International Supply crunch likely to prevail for at least 12 to 15 months In Q1 2017, city level vacancy dwindled to 8-9% for Grade A spaces. This is mainly due to high occupancy rates in the CBD, Off-CBD and SBD where vacancy levels are as low as 2% in Grade A buildings. We expect healthy occupier demand to continue putting further downward pressure on vacancy rates in the mid-term, mainly in the SBD. New supply remained absent in Q1 2017 with no new building in any IT Parks or IT Special Economic Zones (IT SEZ) becoming operational. Only a small commercial building with an area of 120,000 sq ft (11,150 sq m) came on the block in Gachibowli. While we expect 4.5 million sq ft (418,100 sq m) to become operational in Q2 2017, most of these spaces are already pre-committed and so will not provide substantial supply for new occupiers. Moreover, some of these spaces may be deferred to later periods resulting in a supply crunch. With major completions of IT Parks and SEZs only likely to materialise in 2018, we expect Hyderabad to reel under the pressure of low vacancy rates for at least 12 to 15 months. Gross Office Absorption in million sq ft Source: Colliers International India Research Average city rents to grow by 10% in 2017 Occupier preference remained skewed in favour of the SBD due to its superior asset quality. Surprisingly, despite the absence of new supply and the fact that vacancy dwindled to the lowest level in SBD area, overall rents remained stable across all micromarkets in Q1 2017. However, this may reflect the fact that rents have already increased by more than 20% in the SBD over the past twelve months, suggesting that there is limited room for further appreciation. However, looking forward, the acute shortage of ready supply may result in a 10% increase in average rents by end of 2017 as continued occupier demand will probably put pressure on rents in second generation spaces in the CBD and Off-CBD too. Given high occupier demand and very low vacancy, landlords are likely to remain less flexible in negotiating lease terms. We advise occupiers who want to expand their footprint to lock in long term leases soon for rent arbitrage and not delay new operations or consolidation decisions. Smaller occupiers should also consider business centres and flexible working options available at affordable rents to tide over the short-lived supply crunch phase. Rents likely to increase by 10% across micromarkets. Rental Value Trend (INR) Source: Colliers International India Research Note. The above graph represents average Grade A rents in INR per sq ft per month New developers likely to foray into the city in 2017 As per market sources*, RMZ Corp, a leading commercial space developer is planning to develop nearly 10 million sq ft (929,000 sq meters) through a joint venture with local developer My Home Group which is likely to entail an investment of USD 1 billion. Located strategically in the SBD, the first phase of this project should augment the Grade A spaces in this micromarket which is much preferred by IT-ITeS multinationals. The technology driven companies that are actively scouting for new spaces should consider pre-commitments in the upcoming developments. Source: * The Hindu Business Line and Deccan Herald 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 2010 2011 2012 2013 2014 2015 2016 2017 Q1 Q2 Q3 Q4 0 10 20 30 40 50 60 70 80 Q12011 Q12012 Q12013 Q12014 Q12015 Q12016 Q12017 Q12018F Q12019F Q12020F
  3. 3. 3 Colliers Quarterly | 13 April 2017 | HYDERABAD | OFFICE | Colliers International We expect that cautious expansion plans by occupiers will remain the predominant theme for Hyderabad's commercial sector in 2017. Though likely completions of nearly 4.5 million sq ft (418,000 sq m) in next quarter should easy vacancy levels in the short term, timely completions remain a key challenge after demonetisation of higher denomination notes. Average city rents are likely to grow by 10% in 2017 due to continual demand. Colliers View KEY UNDER CONSTRUCTION PROJECTS BUILDING NAME DEVELOPER AREA (SQ FT) LOCATION POSSESSION My Home Divija My Home Group 3,000,000 Raidurg 2018 Meenakshi IT Campus Meenakshi Infrastructure 1,540,000 Gachibowli 2017 Salarpuria Knowledge City HITEC City 1,200,000 Raidurg 2018 MAJOR TRANSACTIONS OF Q1 2017 CLIENT BUILDING NAME AREA (SQ FT) LOCATION LEASE/SALE Deloitte Zen Money Building 48,000 HITEC City Lease Prime Era My Home Hub 30,000 Madhapur Lease Deloitte Sarvottam Care 50,000 Madhapur Lease Accretive Health NSL Arena 34,000 Uppal Lease Aspire Systems Divyasree Orion 21,000 Raidurg Lease Source: Colliers International India Research Notes: 1. Office Market: The major business locations in Hyderabad are the CBD(Banjara Hills No. 1,2, 10 and 12), Off CBD (Begumpet, Somajiguda), SBD (Madhapur including HITEC City, Gachibowli, Nanakramguda, Manikonda and Raidurg, Kondapur), PBD (Pocharam, Uppal, Shamshabad) 2. Rents/Capital Value: Market average of indicative asking price for Grade A office space. 3. Available Supply: Total Grade A office space being marketed for sale or lease in surveyed quarter. 4. All figures in the report are based on market information as on 25th March 2017. Source: Colliers International India Research Copyright © 2017 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. For more information: Surabhi Arora Senior Associate Director | Research Tel: +91 124 456 7500 Surabhi.arora@colliers.com Hari Prakash Senior General Manager | Office Services Hari.prakash@colliers.com Level 7, Maximus Towers Building 2A, Mindspace Complex HITEC City Hyderabad - 500081 India

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