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.

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 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
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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
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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
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