Demand surges for Hyderabad's leased office space despite cramped supply

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A spurt in office space absorption in Hyderabad during the January-March period this year indicates not just an increased demand for grade-A office space in the city, but also the lack of adequate supply, according to real estate experts.

For the first time, the city of Nizams surpassed India's silicon valley, Bengaluru, in office space absorption in this three-month period, though it hasn't been able to match the latter in terms of volume or sustained supply of office space over a longer period in the past.

According to property consultant CBRE's recent report, Hyderabad has seen office space deals totalling 3.2 million square feet in January-March compared with 2.5 million square feet offtake in Bengaluru. Together, the two southern cities have accounted for over 47 per cent of the total volume of office space absorption across nine cities, including NCR and Mumbai, in the three-month period. This has happened at a time when the overall office space offtake remained flat at 12.8 million square feet.

Same time last year the office space absorption numbers for Hyderabad and Bengaluru stood at 5.5 million sq ft and 1.1 million sq ft respectively and even on a sequential basis, the offtake was 1.6 million sq ft and 3.2 million sq ft for the two cities respectively in October-December 2018, as per to CBRE's data.

"The sudden jump seen in office space absorption in Hyderabad was largely due to the fact that in the first quarter, the city saw new Grade-A supply hit the market, which has been relatively low over the last few years. For instance, the overall new office space supply in 2018 in Hyderabad was limited to 1.7 million sq ft, which in Bengaluru was nearly 9.6 million sq ft during the same period. Clearly, even while demand is very high in Hyderabad, the city lacks new supply.  Hence, as soon as new supply hit the market, occupiers came forward to lease space," Anuj Puri, chairman-Anarock Property Consultants said in response to a question on recent office space absorption trends in respect of the two southern cities.

To assume that Hyderabad will henceforth steal the show from Bengaluru in office leasing activity in 2019 may not be entirely accurate, according to Puri.

The CBRE data for the three month period show that the city of Hyderabad witnessed a supply addition in the form of one large-sized SEZ and two IT developments in Raidurg and Kondapur in IT Corridor II, one medium-sized SEZ in Kokapet in Extended IT Corridor and one medium-sized SEZ in peripheral business district (PBD).

Part of the reason why there was a renewed influx of office space in Hyderabad was explained by CBRE senior director Romil Dubey, as he sought to predict the trend in coming quarters based on the current data: "Hyderabad witnessed increase in rental values by about 2-5 per cent and 3-6 per cent quarter on quarter, owing to increased occupier interest towards recently completed developments. Going forward we expect Hyderabad, among others, to account for a substantial share of SEZ pipeline in the upcoming quarters. Given the approaching sunset data, we foresee an increase in demand for SEZ space," he said in the recent report.

At the peak of sanctions by the Board of Approvals (BoA) the developers in Hyderabad received approval for more than 30 IT SEZs in and around Hyderabad prior to the state bifurcation. As per the sunset clause, only those SEZs and the SEZ units that become operational before March 31, 2020 are eligible to claim incentives offered under the SEZ Act, there has been a clear rush as far as SEZ projects in Hyderabad was concerned. According to a report released by CBRE last year, almost 90 percent of the SEZ stock was located in Hyderabad.

Hyderabad-based Phoenix Group, one of the prominent IT SEZ developers in the city, believes that the demand pick-up in office space leasing in the city was an outcome of several factors such as low property prices and the abundance in availability of manpower for both the core IT and the support services, including KPO and BPO. 

"The office space lease rentals in Hyderabad are competitive compared to that in Bengaluru but not very low any more. However, when it comes to the trained manpower, Hyderabad emerged as the best place to find people for every job profile, probably because present generation of employable youth finds the city a value-for-money proposition in terms of cost of living or buying a house to settle down in life. As every single direct job in IT sector creates 6 indirect jobs, the role of support services and manpower required in those services also play an important role in overall IT growth," Phoenix Group director Srikanth Badiga said while adding that the demand for office space from KPO, BPO and other support services has also been very high in Hyderabad these days.