Office Market Review Q1 - 2009

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KnightFrank.comRESEARCH

INDIA

office marketReviewKnight Frank

HIGHLIGHTS!

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Current financial crisis in the real estate sector has resulted in a number of major

players having to stall or offload stakes in ongoing projects

Approximately 183 mn.sq.ft. of office space, including SEZs, to be developed in

the 7 major cities of the country over 2009-11, which is expected to far exceed the

incremental demand for office space of about 122 mn.sq.ft.

Oversupply expectations are tempered by the fact that developers, cognizant of

the flagging market, will strive to align released supply with demand expectations

Rentals in Mumbai and NCR are expected to decline marginally until between the

second half of 2009 and the first half of 2010, following which rates will begin toappreciate

Q1 2009


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Q1 2009

INDIAOffice MarketReview

02

Rentals in office markets across India

declined markedly during the latter half of

2008 as the grip of the global financial crisis

intensified. Owing to a severe liquidity

crunch, prevailing lease rentals continue to

be subjected to downward pressure as

distressed occupants seek to negotiate lower

rates. In fact, rentals are even being

renegotiated during lease tenures, in spite ofthe fact that underlying lease agreements are

registered and contain lock-in clauses. One

could argue that the current decline was on

the cards considering that towards the end of

2007, rentals had begun to stabilise as

excess demand was rapidly eroded by the

bull market driven construction boom. Those

leasing out office space are increasingly

inclined to lower rentals in order to stave off

high vacancy levels. From Q4 07 to Q4 08,

vacancy levels increased from 2% to 5% and

1% to 5% in the prime business markets of

Delhi and Mumbai respectively. The impact of

the aforementioned factors has also

EDITORIAL significantly impacted the supply side asover-leveraged developers are struggling tofinance projects. Consequently, a number of

major players are having to stall or offload

stakes in ongoing projects and put off future

projects. In the face of slowing demand,

rising vacancy levels and a lack of financing

that has crippled the supply side, the office

market in India will likely remain subdued for

the foreseeable future.

One of the key symptoms of the ailmentafflicting India's office market is declining

rentals. In addition to current prices, the

subject of future price trends is generating

great interest. Knight Frank research is

constantly striving to augment the quality

and depth of its analysis, and in the spirit of

this perennial endeavour has formulated a

regression model that attempts to predict

office rentals in the micro-markets of Mumbai

and NCR over the coming three years.

The model analyses rental movement from

the perspective of various macroeconomic

factors, demand, supply and market

sentiments. It is based on determined

relationships between price and explanatory

variables such as vacancy rate, net

absorption and upcoming supply. In addition

to determining intra market relationships,

inter market relationships were also

analysed, with the focus being on

determining the influence of upcoming

supply in similar markets on the price of a

particular market. Our research revealed that

the vacancy rate is the most important

determining factor behind rental movements.

As per Knight Frank Research, Mumbai office

market rentals have witnessed a sharp price

correction in a short period of time, and are

now expected to witness a time correction,

identified by slow and marginal correction

over an extended time period. As per our

model, the Lower Parel and Powai micro

market rentals are expected to correct by up

to 60% and 57% respectively from their 2007-

08 peak levels. Rentals in other Mumbai

micro-markets like Andheri Kurla Road and

Bandra Kurla Complex (BKC) are expected to

correct by up to 49% and 46% respectively

from their peak levels. In the NCR, major

corrections are expected in Gurgaon and

Noida, where on account of rising vacancies,

rentals are predicted to correct by up to 63%

and 62% respectively from 2007-08 peak

levels. It is worth pointing out that historical

rental trends depicted for each city are not

meant to elicit comparisons between micro-

markets. This is so as even though rentals are

depicted on a per sq.ft. basis, the fact that

rates are levied on carpet area in some micro-

markets and super built up area in others

renders drawing comparisons more complex

than simply comparing per sq.ft. rates.

As alluded to previously, absorption levels

are declining around the country. During

2008, across the seven locations of Mumbai,

NCR, Pune, Hyderabad, Kolkata, Bengaluru

and Chennai, a total of 30.2 mn.sq.ft. was

absorbed out of a total supply of 51.8

mn.sq.ft. This is a particularly worrying

scenario when one considers that the present

oversupply scenario is likely to persist for the

foreseeable future. Knight Frank research

attempted to quantify this expected

oversupply by forecasting demand for and

supply of Grade A office space from 2009-

2011 across the aforementioned seven

locations. The supply figure includes only

those projects where at the very least ground

breaking has started and excludes those that

have simply been announced or are at the

planning stage. The demand figures were

estimated based on a regression model

which established the relationships between

national output, national employment, state

level output and trends in state and city level

output and employment. The variations over

time and across states/cities have been

captured in the model. The demand model

has projected the employment for the period

2009-2011, and this figure represents

employment in only the financing, insurance,

real estate and business services (including

IT/ITES) sectors, as these are the sectorsassumed to be the prime source of demand

for Grade A office space.

Figure 1

Distribution of estimated office supply

2009-11

Source: Knight Frank Research

NCR - 22%

Bengaluru - 17%

Pune - 15%

Chennai - 12%

Mumbai - 14%

Hyderabad - 12%Kolkata - 8%


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KnightFrank.com

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The respective employment figures for each

location are converted to incremental

demand for office space using respective

space/employee norms.

Certain factors, although relevant to future

price and demand trends, have not been

directly incorporated into our price and

demand prediction models as their impact is

reflected in the explanatory variables built

into both models. For example, the recent

decline of India's IT/ITES sector is a majorconcern for office space demand given the

dominance of this sector in various markets

around the country. Our outlook for the

performance of this sector is reflected by our

GDP forecasts, which drive our demand

projections and are assumed to be aligned

with the fortunes of the IT/ITES sector. The

same logic accounts for the impact of the

INR/USD exchange rate movement, which

due to the fact that a large number of IT

sector contracts are with US based firms, is a

key determinant of the fortunes of India's

IT/ITES sector. Other relevant factors driving

price of and demand for commercial space

are yet to take effect, and hence their impact

on India's office market will be more evident

with time. For example, the service tax

charged on commercial rentals was recently

revised downward, and following increased

pressure could be decreased further, a

scenario that would boost demand for office

space. Similarly, future infrastructure

developments will determine the trends in

real estate markets around the country,

particularly as improved connectivity and

accessibility to hitherto distant markets will

spread stock and supply, and consequently

reduce upward pressure on rentals in

currently congested markets. A good example

of this is the Worli-Bandra Sea Link in

Mumbai, which when opened will greatly

benefit the Bandra Kurla Complex micro-

market.

Knight Frank research estimates that from

2009 to 2011, 183.1 mn.sq.ft. of Grade A office

space will be infused across the seven major

cities studied. However, as per our demand

estimation model, this supply is expected to

far exceed the incremental demand for such

space of 122.4 mn.sq.ft. over the same three

year period. This demand figure is based on

our realistic forecasts for GDP over the

coming three years. The incremental demand

figures of 136 mn.sq.ft. and 106.9 mn.sq.ft.,

which correspond respectively to our

optimistic and conservative GDP forecasts,

also indicate that oversupply could be a

major concern over the coming years. The

locations forecasted to be the worst afflicted

by oversupply are NCR, Pune and Bengaluru,

for which predicted supply exceeds predicted

demand in a realistic GDP scenario by 70%,

61% and 55% respectively. Given that office

markets around the country are already

exhibiting signs of oversupply, rentals can at

best be expected to remain stagnant, if not

decline further over the coming three year

period. Faced by such a scenario, prominent

developers might want to explore

restructuring ongoing projects and

diversifying future project types in order to

spread the demand risk posed by the current

financial climate. In addition to this, a joint

venture is an example of how the supply side

could pull together to counter prevailing

financial constraints. A major driver of the

Indian office market in recent times has been

the IT/BPO sector, whose presence is

particularly strong in cities like Bengaluru

and Hyderabad. Due to the financial turmoil,

particularly in the US, business in this sector

has been badly hit, as evidenced by the fact

that the projected growth of IT/BPO exports

has been revised down to 16-17% from earlier

estimates of 25-30%. This in turn is adversely

impacting the substantial chunk of demand

emanating from this sector. However,

traditionally IT dominated centres are now

witnessing the growth of other business

sectors, and this should soften any potential

blows dealt by a flagging IT/ITES sector. For

example, Hyderabad, which has witnessed a

20% decline in IT Park rates, is also expected

to witness growth in other sectors such as

biotechnology, hardware, pharmaceuticals

and tourism. Similarly, Bengaluru iswitnessing a shift from being a

predominantly IT/ITES destination to

becoming an investment destination for other

sectors, as evidenced by the in-principal

approvals for 10 SEZs catering to the textile,

aerospace, manufacturing and R&D sectors.

In these trying times, all eyes are on the

central government's policy initiatives, which

it is hoped will stimulate aggregate demand

across the economy. However, fiscal and

monetary measures do not result in overnight

changes, and until the impact of recently

implemented and future initiatives starts to

tell, the office market is likely to remain

stagnant.

Table 1

Source : Knight Frank Research

NCR

Bangalore

Pune

Chennai

Mumbai

Hyderabad

Kolkata

Total

Estimated Demand2009-11 (mn.sq.ft)

Estimated Supply2009-11 (mn.sq.ft)

City

Optimistic Realistic Conservative

41.1 26.8 24.1 21.0

30.8 22.1 19.9 17.5

27.6 19.1 17.2 15.0

21.2 17.2 15.4 13.5

26.0 20.5 18.4 16.1

21.1 17.0 15.3 13.3

15.3 13.4 12.0 10.5

183.1 136.0 122.4 106.9


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Q1 2009


Mumbai

Market Review

The city of Mumbai, which is the financial

capital of the country, has witnessed

extensive office space development in recent

years. According to Indicus Analytics,

Mumbai contributed 6.16 % to the Indian GDP

during FY 07. However, changes in

demographics and consumer attitudes have

altered the profile of real estate development

in the city.

Prior the 1980's, the majority of commercial

activity was concentrated in the CBD and

off-CBD locations of Cuffe Parade, Nariman

Point, Churchgate, Marine Lines, Ballard

Estate, Fort and Fountain. Hence, these

locations currently account for 16% of office

space stock in Mumbai. Buildings in Ballard

Estate, Fort and Fountain largely house

government offices, while Nariman Point

comprises mainly national as well as

international companies and hotel brands.

Development styles range from the traditional

format of dedicated stand alone office

buildings to mall-cum-office developments ,

IT Parks with improved recreational facilities

and the fast-growing concept of green

buildings.

As the global economic boom heightened

and augmented construction activity over the

past 3 years, the IT/ITES sector grewphenomenally in locations like Thane and

Navi Mumbai. However, in the past few

months, construction as well as leasing

activity has been drastically subdued relative

to previous years. Many projects that were

expected to be completed in 2008 were

delayed, and only around 38% of supply that

came up across Mumbai in 2008 has been

absorbed.

In 1977, the MMRDA appointed a special

planning authority to oversee the planning

and development of Bandra Kurla Complex

(BKC) in the Western Suburbs. This

development was targeted at arresting the

increasing congestion of office space and

commercial activities in South Mumbai. Over

the past years, this location has emerged as

a thriving commercial hub, and along with

the contiguous western suburban locations of

Khar, Santa Cruz, Andheri, Malad and

Goregaon accounts for 44% of office stock

across Mumbai. The micro-markets of

Andheri , BKC and BKC-Kalina Road are the

highest contributors to total office space

stock in the Western Suburbs.

While the Indian economy thrived and the

population increased, lack of space within

the city for large scale developments resulted

in development spreading to locations like

Powai , Navi Mumbai and Thane. Currently,

office developments in these 3 locations

house primarily MNCs, BPOs, pharmaceutical

companies and IT/ITES companies, all of

which require large floor plate size for

operations. In 2005, the Supreme Court

cleared around 50 acres of mill land for sale

in the heart of Mumbai, and this, coupled

with the repeal of the ULCRA, led to the

development of this previously defunct mill

land.

Over the last 5-6 years, commercial

developments across the aforementioned

locations have varied in terms of design and

architecture.

Stock distribution


Figure 2

CBD & off-CBD - 16%

Other South Mumbai Locations - 11%

Western Suburbs - 44%

Central Suburbs - 5%

Navi Mumbai - 19%

Thane - 5%

04

western suburban

locations

Comprising bandra,

Khar, Santa Cruz,

Andheri, Malad and

goregaon account

for 44% of office

stock across

Mumbai.

Reliable Plaza, Navi Mumbai


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KnightFrank.com

Bank Of India(BKC), Mumbai


Figure 3

Estimated new office supply 2009-11

Supply Cumulative Supply

0

30

20

15

2009

2010

2011

25

Area(mn.s

q.f

t.)

10

5

11.2

9.2

20.4

5.7

26.0

Year

Supply and Development

Given the increasing dearth of space within

Mumbai, newer developments have come upin specific locations within various

micro-markets. With the freeing up of mill

land, locations like Lower Parel and Worli are

witnessing ample construction activity.

BKC average rentals declined 40% from peak

levels observed during Q1 08. Other western

suburban locations like Andheri (E) and

Malad experienced reductions of 44% and

42% respectively from 2008 peak rates. With

the downturn of the IT/BPO sector, rentals atlocations like Powai, Thane and Navi

Mumbai, all of which cater mainly to this

sector, experienced a 32%-46% slide from

peak levels of 2008. While Powai rentals

declined most during Q3 08, Thane and Navi

Mumbai rentals recorded their respective

maximum declines during Q4 08.

In total, around 8.33 mn.sq.ft. of office space

is expected to be infused into the Island city

market by the end of 2011, and 85% of this

projected space will be concentrated in Lower

Parel.

In the western suburbs, locations in Bandra,

Andheri, Vile Parle and Goregaon are

exhibiting the greatest number of upcoming

projects. Andheri accounts for around 55% of

the total upcoming supply in the western

suburbs, with a large portion being infusedalong Andheri-Kurla Road. In total,

approximately 8.79 mn.sq.ft. of office space

is expected to be infused into the western

suburban market by the end of 2011.

Powai and Kanjumarg comprise 22% and 32%

respectively of the total supply of 3.54

mn.sq.ft. that is expected to enter the central

suburban market by the end of 2011. Thane,

largely due to being a preferred destination

for IT/ITES space as well as dedicated IT

Parks, is expected to witness an additionalsupply of 1.79 mn.sq.ft. by the end of 2011.

This expected supply might not materialise

due to the ongoing economic slump, which

has adversely impacted the IT/ITES sector

across India. While retail projects are largely

concentrated in Vashi, newer office

developments are mostly situated not only in

Vashi but also in Turbhe and MIDC. In total

around 3.57 mn.sq.ft. will be infused into the

Navi Mumbai micro-market by the end of

2011.

Mumbai office market rentals have declined

significantly over the past year. Average

rentals in Nariman Point have declined by

25% from the 2008 peak rate. Rentals in

other CBD and off-CBD locations like Fort,

Ballard Estate and Churchgate witnessed a

higher drop of 32% from the peak average

rentals witnessed in Q1 08. Worli and

Prabhadevi rentals declined 37% from peak

rates, while Lower Parel average rentals

declined by 47% relative to peak levels.

Rental Profile

Distribution of new supply 2009-11

Figure 4


Island City - 32%

Western Suburbs - 34%

Central Suburbs - 13%

Thane - 7%

Navi Mumbai - 14%

05

BKC average rentals

declined 40% from

peak levels observed

during Q1 08. Other

western suburban

locations like

Andheri (E) and

Malad experienced

reductions of 44%

and 42% respectively

from 2008 peak rates.


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Q1 2009


Hewitt - Millenium Business Park, Navi Mumbai

Rental declines across the board can be

attributed primarily to the liquidity crunch

afflicting developers, who faced with reduced

demand were unable to sustain exorbitant

rentals. Financial turbulence, as reflected by

the fluctuations experienced by the stock

market during the latter half of last year, led

companies to abort expansion plans and

implement cost cutting strategies. Until

economic conditions improve and demand

picks up, office rentals can be expected to

continue to plummet.

concerns surrounding the completion of

developments in progress. This concern is

emanating from the actions of the market's

major players, examples being Omaxe and

Indiabulls, who have announced the

postponement of office projects in Mumbai.

Additionally, given the current vacancy levels

of around 62% across those projects that

were completed in 2008, developers might

be hesitant to invest in office developmentfor the foreseeable future, particularly as

there is every indication that vacancy levels

could rise as absorption continues to decline.

As discussed in the editorial, Knight Frank

research devised a model to forecast rentals

in Mumbai and NCR micro-markets for the

next three years.

06

while around 26.02

mn.sq.ft. of Grade Aoffice space is

expected to be

infused across

Mumbai, incremental

demand for such

space, assuming

realistic GDP

forecasts, is

forecasted to be

only 18.4 mn.sq.ft.

Mar'08

June'08

Sept'08

Dec'08

Mar'09

0

450

300

250

200

150


Figure 5

Rental trend

100

Rs./sq.ft.permonth

50

Nariman Point Fort/Ballard Estate/Churchgate

Worli-Prabhadevi Lower Parel

Andheri (E) Powai

Malad-Mindspace

350

400

BKC/CST Road

ThaneNavi Mumbai

Scenario

0

25


Figure 6

Projected office demand 2009-11

Optimistic

Realistic

Conserva

tive

Area(mn.s

q.f

t.)

20

15

10

5

20.5

18.4

16.1

As per the model, across the 8 micro-markets

studied, rental declines can be expected to

persist until anywhere between the second

half of 2009, and as in the case of Powai, the

second half of 2010.

The results of the model tell us that relatively

mature and stable markets l ike Nariman Point

and Fort/Ballard Estate, where rentals are

forecasted to bottom out at 27% and 41%

respectively below 2007-08 peak levels, are

more resistant to rental declines, simply due

to the fact that fresh supply and vacancies

will be limited in such markets.

OutlookOver the next three years, while around 26.02

mn.sq.ft. of Grade A office space is expected

to be infused across Mumbai, incremental

demand for such space, assuming realistic

GDP forecasts, is forecasted to be only 18.4

mn.sq.ft, or 71% of anticipated supply.

This amounts to a predicted oversupply of 7.5

mn.sq.ft., a figure that is mitigated by the fact

that due to financial constraints on the

supply and demand sides, restructuring andrealignment of projects could be a prominent

feature across India's real estate market over

the coming months. Currently, there are


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Q1 2009


08

PUNE

Market Review

The office market in Pune is largely IT/ITES

driven, although other services like banking,

financial services and insurance (BFSI) have

in recent times become more prominent in

the city. Most of the upcoming IT/ITES

developments in Pune are concentrated in

eastern and western zones, where larger land

parcels are available for campus

developments. The northern zone, which

comprises Pimpri Chinchwad, Chakan and

Talegaon, mainly houses the automobile

industry. The city's CBD is spread out in

pockets and comprises locations like Camp,

MG Road, Bund Garden Road and Dhole Patil

Road, which are considered prime locations

for office spaces. Development in peripheral

locations like Hinjewadi and Kharadi, located

along the primary road network, led to

decentralisation of the CBD, thus offering

new opportunities to the western and eastern

micro-markets.

The economic downturn and subsequent

decline in growth of the IT/ITES and BFSI

sectors have resulted in declining rentals in

all micro-markets and higher vacancy rates in

Of the total supply estimated to hit the

market in 2008, over 40% got delayed and

are slated to be operational by end-2009.

Examples of projects that got delayed areMantri IT Park (450,000 sq.ft.) by Mantri

Group, IT City Info Park Phase II and III

(940,000 sq.ft.) by Vascon Weikfield, Matrix

(300,000 sq.ft.) by Vascon and Tech Park

(500,000 sq.ft.) by Panchshil Realty. Most of

the delayed projects comprise IT projects

located in the western part of the city,

examples being Hinjewadi and Bavdhan.

This delay in projects can be attributed to the

fact that in 2008, absorption of office space

in Pune was only 1.7mn.sq.ft., which was

below the expected levels.

CBD locations. IT space accounts for 97% of

Pune's upcoming office supply, which is

concentrated primarily in suburban and

peripheral locations of the city. However, as

per NASSCOM, India's IT industry is expected

to clock relatively lower growth of around

20% in 2008-09, a scenario that is expected

to alter the profile of future supply in Pune.

At present, IT offices are increasingly shifting

to peripheral office markets due to their

relatively lower rentals as compared to CBD

locations.

In spite of the gloom surrounding the IT/ITES

sector, initiatives undertaken by the

government of Maharashtra to develop the

Mumbai-Pune Knowledge Corridor, which will

create an operational base for companies

across the globe, are expected to boost the

growth of the office market in the region. The

cornerstone of this long-term project will be a

business-friendly and progressive

environment coupled with world-class

facilities and infrastructure. In addition,

NASSCOM will partner around 100 colleges

under Pune University, with the aim of

imparting industry skills to students and

strengthening the prospective resource base

and job opportunities.

During the past 4 years, Pune has witnessed

the addition of around 12.57 mn.sq.ft. to its

office space stock.


Stock distribution

Figure 7


East - 23%

North East - 23%

West - 46%

Central - 8%

Infotech Park, Hinjewadi, Pune


0

30

20

15


Figure 8


2009

2010

2011

25

Area(mn.s

q.f

t.)

10

5

7.0

9.0

16.0

11.6

27.6

Year


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KnightFrank.com

09

Pune will witness fresh supply of 27.6

mn.sq.ft. of Grade A office space by the end

of 2011, with some projects phased out till

2012. This supply includes six upcoming SEZ

projects, which are evenly distributed

between the eastern and western zones. The

western zone, which features locations like

Hinjewadi, Aundh, Baner and Bavdhan,

accounts for the highest number of upcoming

projects and comprises a total supply of

10.9 mn.sq.ft. till 2011.

The main projects in this zone are the Blue

Ridge SEZ (2.7 mn.sq.ft.) by Flagship

Infrastructure at Hinjewadi, I Space (400,000

sq.ft.) by Kolte Patil at Bavdhan, Megaplex

(160,000 sq.ft.) by Amar Builders at Baner,

DLF Akruti IT Park (5.85 mn.sq.ft.), an SEZ by

DLF and Akruti Nirman at Hinjewadi.

The western office markets and Hinjewadi,

due to their proximity to the Mumbai-Pune

expressway, have the advantage of lesser

travel time between Pune and Mumbai. Also,these markets benefit from proactive

infrastructure development by both MIDC and

PMC. The eastern zone, which includes

locations like Hadapsar, Kharadi and

Phursungi, will contribute a total of 9.9

mn.sq.ft. to the total office space supply

expected in Pune by 2011.

western and eastern zones, a shift of office

space development from CBD to SBD

locations was almost inevitable. Hinjewadi

and Kharadi have emerged as preferred

destinations for IT/ITES as well as non-IT

companies, primarily due to factors such as

lower rentals, availability of affordable

residential apartments in the vicinity and

planned infrastructure. On the SEZ front,

lower rentals and tax exemptions are thefactors attracting IT companies to expand or

absorb facilities in IT SEZs in peripheral office

markets.

A number of IT companies which were located

in the CBD or other central areas are shifting

to areas like Hinjewadi and Kharadi, which

are prime SEZ locations.

Other companies with large space

requirements are also intending to move out

of non-IT developments in the city as soon as

the lock-in period is over. Due to this trend,

higher vacancy rates are being observed in

office developments located in the central

zone.

Owing to the current economic slowdown, the

Pune real estate market is witnessing

corrections in rental values. Rates have

dropped during the last three quarters and

are likely to come down further.

Rental Profile

This supply includes three SEZ projects;

Cyber City (4 mn.sq.ft.) by Magarpatta

Developers at Hadapsar, EON (3.8 mn.sq.ft.)

by Panchsil Realty at Kharadi and SP Infocity

(4 mn.sq.ft.) by Shapoorji Pallonji at Saswad

Road. The north eastern zone, comprising

Nagar Road, Airport Road, Kalyani Nagar,

Yerwada and Viman Nagar, will witness a

total of 5.3 mn.sq.ft. of office space supply by

the end of 2011. The main projectsconstituting this supply are Business Bay

(1.65 mn.sq.ft.) by Panchsil Realty at Airport

Road, Commercezone (2.3 mn.sq.ft.) by K

Raheja at Yerwada and IT City Info Park Phase

II & III (940,000 sq.ft.) at Nagar Road.

The central zone, which only features four

ongoing projects, will contribute 0.6

mn.sq.ft. of office space supply by the end of

2011. Matrix, which is being built by Vascon

at Wakdewadi, is a prominent project that as

alluded to previously has been delayed by ayear. Another notable construction is Kumar

Business Court (75,000 sq.ft.), a non-IT

project at Bund Garden Road.

Meanwhile, the northern zone, which broadly

comprises Pimpri and Chinchwad, features

two notable projects. Empire Estate, which

will be developed by Sukhwani builders, is

currently being planned, while Devi IT Park

(900,000 sq.ft.), which will be built by Devi

Constructions at Pimpri, has been delayed by

a year.

Due to the lack of large land parcels in the

CBD and the development of SEZs in the


Figure 9


North East - 19%

Central - 2%

East - 36%

West - 40%

North - 3%

Magarpatta City, Hadapsar 8, Pune


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Q1 2009


10

In western and eastern peripheral locations of

the city, where most large- scale SEZ and IT

Park developments were undertaken, the

rentals were lower due to lower land rates

and tax benefits of such developments.

Hence, contrary to the case in other cities, the

price correction in these areas has been lower

than that in the CBD. The exception to this, as

alluded to previously, is the micro-market of

Hadapsar, where rentals declined by 22%

from Rs.45/sq.ft. per month in Q4 08 to

Rs.35/sq.ft. per month in Q1 09.

markets peaked, and Q1 09. During this

period, rentals in the aforementioned three

markets declined by 26%, 25% and 13%

respectively. This correction was primarily

due to IT firms shifting to peripheral

locations, although new supply being added

to existing office space is increasing

competition and thereby also forcing down

rentals. Companies seeking to negotiate

lower rentals in order to slash costs also

represent a key factor weighing down rentals

across all office markets. Locations like

Aundh in the west, Nagar Road and Airport

Road have also witnessed a sharp fall in

rentals from Q3 08 peak levels. Between that

period and Q1 09, rentals in the

aforementioned micro-markets declined

markedly by 27%, 20% and 35% respectively.

These corrections can be attributed to the

slowdown in the IT sector, which has been a

key source of demand in these

micro-markets. Also, the developments inthese locations are mainly IT Parks approved

by STPI under the IT policy, which is about to

elapse, thereby resulting in companies

moving to peripheral markets for cost

advantages.

Rates for office space in Pune can be

expected to decline further not only because

of the expected decline of the IT/ITES sector,

which is forecasted to register below 20%growth during 2008-09 as opposed to 30%

growth during 2007-08, but also due to the

Outlook

EON IT Park, Kharadi

projected oversupply of this space type. From

2009-2011, assuming realistic GDP forecasts,

supply of Grade A office space is estimated to

exceed incremental demand for the same by

60%. Cognizance of this oversupply scenario

should result in fewer projects being

announced over the coming months. The

current scenario should precipitate a decline

of CBD Grade A space rentals by 10-15% over

the coming months. Similarly, commercial

developments in peripheral areas should

witness a 5-10% reduction of rentals. The

aforementioned demand-supply gap could be

mitigated by demand that is expected to

emanate from the growth of various other

employment sectors. If this proves to be the

case, declining rental and absorption rates

could stabilise sooner than the current

climate suggests.

Mar'08

June'08

Sept'08

Dec'08

Mar'09

90

60

50

40

30


Figure 10

Rental trend

Rs./sq.ft.permonth

Kalyani N agar N agar Road Hadapsar

Yerwada/Airport Rd. Aundh

Senapati Bapat Road

70

80

Karve Road/Kothrud

Scenario

0

25


Figure 11


Optim

istic

Rea

listic

Conserv

ative

Area(mn.s

q.f

t.)

20

15

10

5

19.1

17.2

15.0

Meanwhile, central locations like Bund

Garden Road, Kalyani Nagar and Senapati

Bapat Road, all of which were previously

preferred by both non-IT and IT companies,

have witnessed drastic rental declines

between Q3 08, when rentals in each of these

From 2009-2011,

assuming realistic

GDP forecasts,

supply of Grade A

office space is

estimated to exceed

incremental demand

for the same by 60%.


11/28

KnightFrank.com

11

Market Review

The real estate market in the NCR has

witnessed a considerable rise in 'diversified

developments' during the past 3-4 years.

Builders are exploring newer formats and

mixed-use developments, both of which are

intended to generate greater adaptability to

changing market dynamics. Examples of

newer formats being looked at include group

housing projects, townships, independent

penthouses and villas, built-to-suit office

spaces and green buildings. A noticeable rise

in mixed-use retail formats has been

observed in the form of retail-cum-office and

retail-cum-hospitality developments. A strong

industrial base, supported by the IT/ITES,

Pharmaceutical, Banking and Automobilesectors, has spurred NCR to become one of

the major commercial hubs in India.

NATIONALCAPITALREGION(NCR)

In addition, due to reduced affordability and

the need to trim costs, the demand for office

space in the NCR, especially in Gurgaon,

Noida and Greater Noida, is declining. To

counter this, developers are looking at

options such as the provision of better

services and customised office spaces, and

leasing out properties at concessional rates,

in order to maintain a steady cash flow during

these turbulent times. Parking space in office

projects has been a major concern for

corporates. To resolve this issue, developers

are now introducing multi-level parking

systems within office premises. As outlined

earlier, mixed-use developments, such as the

office cum retail projects observed in

micro-markets like Saket, Jasola, Gurgaon

and Noida, are proving a favoured option for

developers looking to diversify risk.

In addition, infrastructure developments like

the eight lane expressway connecting

Gurgaon and Delhi, the Delhi Metro Rail

project, the Taj Express Highway and the

Noida Delhi DND expressway are

strengthening the connectivity within NCR.

Connaught Place, Barakhamba Road, KG

Marg, Bikaji Cama Place, Nehru Place and

Mohan Co-operative Area form the primary

office markets within Delhi. High prices in the

CBD located at Connaught Place, low vacancylevels, limited stock and poor quality (Grade

B or C) developments in central Delhi have

led to the emergence of new office markets in

Gurgaon, Noida, Greater Noida and the

district centre at Jasola. These locations now

enjoy relatively better connectivity due to the

presence of express highways and the Delhi

Metro Rail project. Additionally, the

development of large office spaces and SEZs,

along with competitive rentals, has made

these regions attractive to corporates looking

to set up their operational bases.

In the past few months, the real estate market

in the NCR has witnessed a decline in growth

owing to the overall global economic

slowdown. On the supply side, reduced

liquidity and credit flow has impacted

developers who are facing rising construction

costs.

0

50

40

35

25

20


Figure 13


15

2009

20

10

20

11

45

Area(mn.s

q.f

t.)

10

5

30

14.9

10.4

25.3

15.7

41.1


Year

Figure 12

Stock distribution


Delhi - 27%

Gurgaon/ Manesar - 51%

Noida - 22%

Corenthum Tower Sec-62, Noida


NCR is one of the prime office destinations for

major national and international firms in the

country. The region has office stock of close

to 42.72 mn.sq.ft., of which

Gurgaon/Manesar constitutes 51%, Noida

constitutes 22% and Delhi constitutes 27%.


12/28

Q1 2009


12

The year 2008 witnessed a fresh supply in the

NCR of approximately 11.70 mn.sq.ft. of office

space, which comprises major developments

in Gurgaon, Noida, Greater Noida, Jasola and

Saket. By the end of 2011, the NCR market is

expected to be infused with new office space

supply of around 41.08 mn.sq.ft. This

additional supply is evenly spread, with

about 14.95 mn.sq.ft. and 10.40 mn.sq.ft.

estimated in 2009 and 2010 respectively, and

the remainder in 2011.

A large share of supply in the NCR will be in

the form of IT parks and IT SEZs in Gurgaon,

Noida and Greater Noida. Due to the lack of

fresh supply in the CBD locations and rising

demand for office space within Delhi,

developers are now exploring newer markets

like Dwarka, Saket and Jasola in the suburban

locations.

The major office hubs in Gurgaon are located

on the NH-8, MG Road, Sohna Road, Golf

Course Road and Gurgaon-Manesar Road.

Owing to favourable IT SEZ regulations

currently in place, developments have even

been observed in the Dharuhera and

Dandahera districts of Haryana.

Gurgaon/Manesar witnessed a fresh supply

of office space of around 5.70 mn.sq.ft. over

the past year, while another 23.82 mn.sq.ft.

of additional space is expected by the end of

2011.

Due to the increasing rentals in CBD and SBD

locations in Delhi and pockets of Gurgaon,

corporates looking for office space have

shifted their focus to the newer micro-

markets of Noida and Greater Noida. This has

led developers like BPTP, Logix, DLF, Unitech

and other local developers to come up with

Grade-A office properties in these micro-

markets. Noida is well connected to Delhi by

means of the DND express highway, and the

completion of the Delhi Metro project will

further improve connectivity. Major office

markets in the region include sectors 16, 18,

62 and 63 in Noida, sectors 125, 126, 127 and

135 on the express highway, and the Tech

Zone & Knowledge Park III in Greater Noida.

About 5.03 mn.sq.ft. was added to the stock

of office space in Noida and Greater Noida

during the year 2008. These micro-markets

are estimated to witness a supply infusion of

another 16.28 mn.sq.ft. by the end of 2011.

However, due to the present economic

landscape and a lack of financing, a major

portion of expected supply has been phased

out, a scenario that could adversely impact

supply expectations. Some of the prominent

office developments in the region include IT

SEZ projects by Unitech and Ansal API, aswell as the Kessel I-Valley IT Park in the Tech

Zone. Besides these, a number of office

projects by local developers like the Agni

Group, Assotech and Stellar Group are

located in Sector 62.

As the global economic slowdown taking

effect, the robust real estate market in the

NCR has taken a hit. Due to cautious

sentiments, demand as well as absorption

levels in the NCR office market have declined.

Of the 11.70 mn.sq.ft. of supply which cameup in the NCR market during 2008, a total of

6.37 mn.sq.ft., was absorbed.

The government's initiative to improve

connectivity to Gurgaon by way of the express

highway on NH-8 has helped to establish

Gurgaon as a strong business destination in

the NCR. This micro-market exhibits varied

office space options ranging from

multi-tenanted stand-alone structures to

campus developments.

Figure 14



Noida - 13%

Greater Noida - 27%

Delhi - 2%

Gurgaon - 46%

Manesar - 12%

DLF IT PARK Sec-62, Noida

due to the present

economic

landscape and lack

of financing, a

major portion

of expected supply

has been phased

out, a scenario

that could

adversely impact

supply expectations.


13/28

KnightFrank.com

13

Given the amount of supply in the pipeline,

the future for the NCR's office market carries a

serious risk of oversupply unless demand

issues are addressed.

A major supply infusion in the NCR market in

the past couple of years has had an adverse

effect on office space rentals. The major

share of this fresh supply is concentrated in

Gurgaon and Noida. The poor performance ofthe IT/ITES, Automobile and Financial sectors

as a result of the global economic recession

has led a number of companies to cancel

their expansion plans, hence limiting the

demand for office space in Gurgaon and

Noida. Properties in these locations also

commanded location premiums, especially

after the construction of the Gurgaon Express

Highway and Noida DND Expressway.

However, as absorption in the year 2008 was

low, rentals in these micro-markets have

witnessed a decline. Contrary to the above,

locations like Connaught Place, Nehru Place

and Mohan Co-operative Area in Delhi have

witnessed limited variation in rental values in

recent months.

Rental Profile

Connaught Place commands an average

rental of Rs.338/sq.ft. per month for premium

office properties, and Rs.200/sq.ft. per

month for Grade-B properties. Connaught

Place office rentals, which peaked in Q1 08,

have declined by 13% as of the end of

Q1 09. Rentals in SBD office locations like

Nehru Place are currently in the range of

Rs.140-288/sq.ft. per month, witnessing a

15% decrease while rentals in Mohan

Co-Operative and Okhla Industrial Area are an

average of Rs.68/sq.ft. per month and

Rs.59/sq.ft. per month respectively. SBD

locations in the NCR saw a correction in rental

values in the range of 10-36%.

Micro-markets like Gurgaon and Noida have

witnessed a correction in rental values by

about 30-34% since Q1 08. Average rentals

for Gurgaon have declined from a peak of

Rs.115/sq.ft. per month in Q2 08 to

Rs.74/sq.ft. per month in Q1 09.

Noida witnessed a similar trend, with average

rentals falling from Rs.83/sq.ft.per month in

Q1 08 to Rs.58/sq.ft. per month in Q1 09. This

is due to a decline in demand for office space

as well as the large quantum of fresh supply

infusion in these areas. Rentals in Gurgaon

and Noida vary across sectors as well as with

usage. While non-IT space commands higher

rentals, IT rentals are relatively lower.

The real estate market in India is witnessing a

temporary slowdown owing to a mix of global

economic and financial factors. Reduced

affordability on the demand side and a high

cost of borrowing on the supply side are the

biggest contributors to this slowdown. The

negative growth rate of other asset classes in

the equity and financial markets has served

to further exacerbate the current slump. The

impact of this slowdown is increasingly

evident in the NCR's real estate market,

especially in the office space segment. Due to

the poor performance of the IT/ITES,

Automobile and Exports industries, and

negative market sentiments, many

companies are deferring their expansions

plans and reducing operating costs.

Outlook

0

350

300

250

200

150


Figure 15

Rental trend

Mar'08

100

June'08

Sept'08

Dec'08

Rs./sq.ft.permonth

50

Connaught Place Nehru Place

Okhla Industrial Area Mohan Co-operative

Gurgaon Noida Bhikaji Cama Place

Mar'09

Vertex, Gurgaon

Due to the

increasing rentals

in CBD and SBD

locations in Delhi

and pockets of

Gurgaon,

corporates looking

for office space

have shifted their

focus to the newer

micro-markets of

Noida and Greater

Noida.


14/28


15/28


16/28

Q1 2009


Around 97% of

upcoming supply in

Kolkata is

concentrated in

suburban and

peripheral

locations of the

city. Rajarhat

comprises

approximately 74% of

upcoming supply.

16

During 2008, Kolkata's office market

witnessed the infusion of approximately

4.03 mn.sq.ft. of fresh space, which fell short

by almost 30% of the estimated supply that

was slated to enter the market during this

period. This can be attributed primarily to the

economic recession, which has adversely

impacted developers' liquidity and financing

options. The total space absorbed during the

year was around 1.8 mn.sq.ft., which was the

result of pre-commitments made while

various projects were underway.

amount, due to the fact that construction of

various IT SEZs has been phased out,

approximately 11 mn.sq.ft. is anticipated to

come up in 2010 and 2011.

Omega, being developed by TCG Real Estate,

is underway. The first phase was completed

in 2008 and includes TCS and Cognizant as

its major tenants. The second tower of

Globsyn Towers, a joint venture project

between Globsyn and Intelligent

Infrastructure, is also under construction and

is expected to be completed in 2009. Overall,

Salt Lake Sector V is expected to witness the

infusion of around 3.5 mn.sq.ft. of freshsupply by the end of 2011.

The status of Bantala IT Park is uncertain, as

is the case with most IT projects whose

progress has been hampered by the real

estate slump. However, owing to its fast

paced construction, a part of the Cognizant

campus at Bantala became operational in the

last quarter of 2008, and the complete

project is scheduled to be concluded in 2009.

Over the past year, Kolkata's suburban office

markets witnessed a significant correction in

rental values. While other micro-markets in

the city saw rentals decline in the range of 8-

10% from the peak values in June '08 to

March '09, Salt Lake Sector V witnessed a

steep rental decline of 33% during the same

period. This marked rental depreciation is

due to the fact that the large of quantum of IT

developments in the region have been

crippled by the IT sector slowdown.

Rental Profile

While Salt Lake Sector V has recently

assumed prominence in Kolkata's office

market, the newly developed Rajarhat area is

estimated to soon dominate office stock in

the city. This can be attributed primarily to

the development of a number of SEZ projects

in this micro-market. Leading national

developers like DLF and Unitech have set up

large scale IT SEZs, part of which have

already been absorbed. DLF IT Park, which

comprises IBM and Genpact as its major

tenants, was the first IT facility to come up in

Rajarhat. However, due to the economic

downturn, work has been stalled in most of

these projects. Due to the large quantum of

deferred supply, around 15.3 mn.sq.ft. of new

office space is in the pipeline and is expected

to be completed by the end of 2011. Of this

Figure 19



Salt lake Sector V - 23%

off-CBD - 1%

EM Bypass - 2%

Rajarhat - 74%

DLF IT Park, Rajarhat

Around 97% of upcoming supply in Kolkata is

concentrated in suburban and peripheral

locations of the city. Rajarhat comprises

approximately 74% of upcoming supply. Key

office projects in this micro-market include

those by DLF, Unitech, Bengal Ambuja,

Shapoorji Pallonji and PS Group. A few non-IT

office projects are in progress on EM Bypass

and Topsia.

The Godrej Waterside project, a 1.8 mn.sq.ft.

property, is amongst the major upcomingdevelopment in Salt Lake Sector V.

Meanwhile, second phase development of


17/28


18/28

Q1 2009


18

BEngalUrU

Market Review

Bengaluru, which comprises over 2,000 IT

companies and one third of the country's IT

population, continues to be at the forefront of

India's IT sector. During Q1 FY 09, the city

witnessed new developments while the new

international airport became operational and

the new state government took charge of

office. Although the new airport was

projected to augment the inflow of foreign

companies and new opportunities, the globalfinancial turmoil has had a severe impact on

the development of the city.

Bengaluru's economy is primarily dependent

on the IT/ITES sector, which has fuelled

growth in the city's office, residential, retail

and hospitality sectors. The city accounted

for 33% of India's IT exports (USD 32 billion)

in 2006-07. However in 2007-08, software

exports registered a growth of only 11% as

compared to 30% in 2006-07, reflecting the

depressing impact of the economic slowdownon India.

projected to enhance the contribution of the

manufacturing sector to the state's GDP from

approximately 15% to 20% in the next five

years. The new state SEZ policy offers various

tax exemptions from state and local bodies,

examples being exemptions on sales tax

based levies, VAT, entry tax and special entry

tax. The aforementioned progressive steps

undertaken by the government will help to

strengthen the region's economy.

On a brighter note, a number of SEZs are

being planned in sectors like biotechnology,

health sciences, research and development,

textiles and aerospace. This will help

eliminate Bengaluru's dependence upon a

single sector. In 2008, the city witnessed a

predominant supply of SEZ projects in the IT

corridor located in the South East quadrant

along the Outer Ring Road. The concept of

green buildings is also gaining importance in

city, with the Ministry of New and Renewable

Energy (MNRE) planning to launch Griha, a

green building rating system which would

enable the government to give tax incentives

to developers. The Tata Xlyem project at

Whitefield was given a LEED gold rating,

while the Indian Green Building Council

(IGBC) has granted a precertification

platinum rating to the Vrindavan Tech Village

SEZ project at Outer Ring Road.

The state government has focused its sights

on improving the infrastructure of the city.

Measures are being taken to increase the

pace of construction of the Metro project, the

elevated road to Electronic City and the NICE

corridor. It recently announced the new

Industrial Policy for 2009-14 that placed

emphasis on employment-linked incentives

for micro, small and medium industries,

stamp duty exemption up to 100% and

farmer-friendly land acquisition rules that are


0

35

25

20


Figure 23


15

2009

2010

2011

Area(mn.s

q.f

t.)

10

5

30

14.213.7

27.9

3.0

30.8

Year

Stock distribution

Figure 22


East - 37%

North - 13%

South - 49%

off-CBD - 1%

Prestige Nebula, Bengaluru


At present, Bengaluru has an office stock of

around 41 mn.sq.ft., excluding unorganised

office space in the CBD of the city. During

2008, the city witnessed the infusion of 6.55

mn.sq.ft. of Grade A, non-SEZ office space, of

which around 4 mn.sq.ft. was absorbed.

However, the east quadrant of the city

continued to exhibit oversupply, as

evidenced by the fact that 4 mn.sq.ft. of office

space in the region has been unoccupied for

the last two years. Delays in project

completion resulted in a spill-over of about

2.54 mn.sq.ft. of office space to 2009. Due to

a decline in demand induced by the global

economic slump, prominent developers in the

city have put on hold projects with a potential

built-up area of 4 mn.sq.ft.


19/28

KnightFrank.com

19

New office supply (non-SEZ space) of 6.63

mn.sq.ft. is expected to enter the Bengaluru

office market in 2009. The CBD will witness a

supply of around 0.37 mn.sq.ft., which

includes major projects like the Redwood

Centre at Residency Road and Vaswani

Centropolis at Langford Road.

enter the market by 2010, with an additional

supply of 3 mn.sq.ft. expected by the end of

2011.

Bengaluru has got approvals for 35 SEZs, of

which 23 belong to the IT/ITES sector and 3 to

the IT and electronic hardware sector. 12

IT/ITES SEZs have been notified, of which 8

are already operational. 10 IT/ITES SEZs have

obtained formal approval, while another 3

have received in-principle approval. Of the

total 26 IT/ITES SEZs, 17 are non-captive and9 are captive SEZs. Major SEZs operational

since 2007 include the Manyata Tech Park in

North Bengaluru, Vrindavan Tech Village,

Cessna Business Park and Adarsh Tech Park

at Sarjapur Outer Ring Road. Biocon SEZ at

Hosur Road is the only biotech SEZ

operational in the city.

Office space supply emanating from IT/ITES

SEZs will total 28 mn.sq.ft. by the end of 2011.

During 2008, Bengaluru witnessed a supply

of about 10 mn.sq.ft of SEZ space, of which7.6 mn.sq.ft. was pre-committed in the

previous year. At present, IT/ITES SEZ space

of approximately 7.6 mn.sq.ft. is under

construction and is scheduled for completion

in 2009. SEZ developers have decided to

develop remaining land parcels only on a

built-to-suit basis, and this will account for a

built-up area of approximately 9 mn.sq.ft.

over the next 2 years.

Bengaluru's south-east quadrant will account

for around 13 mn.sq.ft. of office space supplyover the next 2-3 years. This will render the

region a major office hub, with related

developments in the residential and the retail

sector. Large land parcels in the north are yet

to be developed, leading to speculation in

the market about the future growth of this

sector.

In the CBD, rentals were as high as

Rs.100/sq.ft. per month in Mar'08. However,

the ongoing slump has adversely impacteddemand, resulting in a 25% fall in rental

values up to Mar '09. Rental values in

Koramangala remained stagnant, while

rentals in Indiranagar dipped by 10% because

of the ongoing metro work and related traffic

congestion in this location. From the peak of

2008, the peripheral locations of Whitefield

and Sarjapur Outer Ring Road witnessed a fall

in rentals of 12% due to the oversupply

situation. The elevated highway project at

Hosur Road has been delayed, and has led to

office space lying unoccupied for the last two

years, thereby resulting in a decline in rental

values of 24% from Mar '08 Mar'09.

Currently, the CBD continues to demand

rentals in the range of Rs.70-80/sq.ft. per

month, which is relatively higher than other

micro-markets in the city. Off-CBD locations

like Lalbagh Road, Indiranagar and

Koramangala exhibit rental values of

Rs.50-65/sq.ft. per month. In Whitefield and

Hosur Road, which have higher vacancy

rates, rentals range from Rs.25-30/sq.ft. per

month. IT/ITES SEZs across the city quoted

rental values in the range of Rs.40-48/sq.ft.

per month.

High rental values in Grade A office spaces

are pressurising companies to reduce the

leased area within the same premises.

Further, several companies have shifted their

office premises to Grade-B or Grade-C office

developments that offer lower rentals. Old

office buildings located in CBD and Off-CBD

locations are being leased as they offer

smaller spaces with fewer amenities,

resulting in lower maintenance costs.

Rental Profile

The only Grade A office project in Bengaluru

West is the Brigade North Star, which

constitutes 1 mn.sq.ft. In the south of

Bengaluru, office space supply of

approximately 0.78 mn.sq.ft. is expected in

2009, with key projects under construction

being the Global Technology Park at Sarjapur

Outer Ring Road, SJR Equinox at Electronic

City and Salarpuria Symphony at Hosur Road.New office space supply of 4.8 mn.sq.ft. will


Figure 24


CBD - 1%

East - 47%

West - 4%

North - 9%

South - 39%

Vrindavan Tech Village-SEZ, Bengaluru


20/28

Q1 2009


20

Mar'08

June'08

Sept'08

Dec'08

Mar'09

M.G.Road Whitefield Residency Road

Koramang ala Cunnigham Road Indira Nagar

OuterRing Road Banerghatta Road

Electronic City

0

120

60


Figure 25

Rental trend

Rs./sq.ft.permonth

100

80

40

20

Scenario

0

25

20


Figure 26


15

Optimistic

Realistic

Conservative

Area(mn.s

q.f

t.)

10

5

22.1

19.9

17.5

Despite falling rentals, office projects inperipheral locations like Whitefield and Hosur

Road have failed to attract tenants because

companies are not willing to commit to space

in such turbulent economic times. Existing

tenants are demanding lower rentals upon

the renewal of lease agreements. Another

option being explored by some companies is

sub leasing of their office space for a period

of two years, the idea being that market

conditions should improve within this time

frame.

The office market in Bengaluru is anticipated

to continue to be downbeat owing to the

current economic slowdown. The demand for

IT/ITES space, a prime source of demand for

office space in Bengaluru, is likely to

decrease in the future as the IT/ITES sector

across India toils under the weight of the

global crisis. However, upcoming sectors like

health, research and development and

biotechnology are projected to drive the

demand for office space in Bengaluru in the

coming years, and could offset the

Outlook

anticipated decline in demand affected by

the flagging IT/ITES sector.

The anticipated supply in the city during

2009-11 is comparatively lesser than previous

years and absorption levels may be lower due

to companies postponing their expansion

plans and reducing costs to counter the

financial crisis. It is thus that Knight Frank

research estimates that from 2009-11,

assuming realistic GDP forecast, supply will

exceed incremental demand for Grade Aspace by 55%. Prominent developers, who are

wary of a further decline in the market, are

focused on completing current projects and

leasing existing properties as quickly as is

possible.

Projects planned for the next two years have

now been deferred, and land parcels

acquired by developers in the south-east andnorth of the city are now being offered for

only built-to-suit options.

In spite of the above, except for nominal

decreases in certain micro markets, rental

values across the city are likely to remain

stagnant for the foreseeable future. Rentals

may further decrease in the Whitefield region

as this region has been exhibiting oversupply

since the last couple of years. As previously

alluded to, the city is gradually witnessing a

shift from being an IT/ITES destination to aninvestment destination for other sectors as

well.

Knight Frank

research estimates

that from 2009-11,

assuming realistic

GDP forecasts,

estimated supply

will exceed

incremental demand

for Grade A space

by 55%.

This is evidenced by the fact that Bengaluru

has in-principal approvals for 10 SEZs

planned in sectors like textiles, aerospace,

manufacturing and R&D. This diversification

is expected to augment employment in the

city and could prove a big boost in the current

economic climate. Although they are currently

not in popular demand, the future of IT/ITES

SEZs will depend on the government's

decision to extend the STPI scheme for two

more years.


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21

hyderabad

Market Review

The real estate market in Hyderabad has

undergone tremendous change in the recent

past. Rapidly improving infrastructure

facilities and proactive government policies

and incentives like tax benefits, subsidies,

easing of conversion of land use and flexible

floor space index (FSI) norms have stimulated

growth in the city's economy. Besides, in

recent years, the economy of Hyderabad has

burgeoned. The service industry, which

comprises almost 75% of the city's total work

force, has proved a key growth driver. Apartfrom the IT/ITES sector, other major sectors

like biotechnology, pharmaceutical and

medical tourism also have a strong presence

in the city.

In the past few years, with the pace of growth

in the city, developers and investors alike

found Hyderabad an attractive market to

invest in. With the expansion of the city

limits, the government has proposed an

Outer Ring Road (ORR) with the objective to

decongest the city and to improveconnectivity and reduce travel time. Other

infrastructure initiatives include construction

of 29 major radial roads connecting the ORR,

and a Mass Rapid Transport System (MRTS) to

facilitate public transportation in congested

areas within the city. The initiative to expand

infrastructure has also resulted in

developments like the knowledge corridor,

which extends from the ISB to the proposed

outer ring road, the financial district in

Gachibowli, residential cluster developments

and several SEZs along the Outer Ring Road.

Most real estate developments in these areas

are in the form of integrated township's

comprising residential, retail, office and

hospitality components.

The government's decision to promote

Hyderabad as the next IT destination resulted

in the development of Cyberabad in the

western part of the city. This was possible as

large contiguous land parcels were available

in that region. The development of the new

international airport, Fab City and Hardware

Park at Shamshabad, coupled with the state

government's promotion of SEZs over an area

of 20,000 acres between Shamshabad and

Ibrahimpatnam, indicates that the western

and south-western parts of the city are

expected to be major development centres

over the next 3-5 years. Land prices in the

vicinity of these regions have increased

considerably as a result of ongoing

developments. On the infrastructure front,

following the Satyam Computers scam, the

MRTS project by the Maytas-led consortium is

facing an uncertain future and is unlikely to

take off any time soon.

The global economic crisis has led to a

slowdown in India's IT/ITES sector, thereby

adversely impacting office space demand in

Hyderabad, where office markets have relied

heavily on this sector. While several

corporates are trimming employment and

holding back expansion plans, they are also

actively renegotiating lease terms. In order to

attract customers, developers are coming up

with new product mixes and additional

facilities, while remaining ready to negotiate

lease rentals and provide discounted rates.

Stock distribution

Figure 27


Distant Peripheral - 38%

Peripheral - 56%

Suburban - 4%

CBD & off-CBD - 2%

DLF Cyber City, Hyderabad



0

30

20

Figure 28


15

2009

2010

2011

Area(mn.s

q.f

t.)

10

5

9.4

5.0

14.3

Year

25

6.8

21.1


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Q1 2009


22

The relatively low supply during 2008 can be

attributed to liquidity problems faced by

developers as well as several projects being

postponed. Examples of this are the Mantri

SEZ, estimated to comprise 1.5 mn.sq.ft.,

which has been delayed, and Lanco, which

was expected to add 0.75 mn.sq.ft. by Q3 08

but has been deferred to 2009. Other projects

like Arena Town Centre by Asetz Group,

Techpark at Gachibowli, Technova at

Nanakramguda and the Maytas SEZ at

Bachupally are progressing slower than

expected. Prominent developments which

came up during 2008 include Raheja

Mindspace at Madhapur and Pocharam, DLF

SEZ at Gachibowli and L&T Hitech City II at

Madhapur.

Approximately 9.37 mn.sq.ft. of Grade A and

Grade B office supply, including BTS space, is

estimated to enter the Hyderabad office

market by the end of 2009, followed by 4.95

mn.sq.ft. in 2010 and 6.76 mn. sq.ft. in 2011.

The majority of this supply is coming up in

sub-urban, peripheral and distant peripheral

locations where large land parcels with lower

prices are available. The major development

in the CBD is by Cache properties, and

comprises 275,000 sq.ft.

Office spaces in STPI are facing strong

competition with the entry of SEZ projects in

Hyderabad. Out of the total 37 SEZs, 28 are

IT/ITES and the rest belong to manufacturing,

semi conductors, gems and jewellery,

biotechnology, aviation and airport based

multi-product types. 10 of them are captive

SEZs while the rest are non-captive. 12 IT/ITES

SEZs have been notified, of which 4 are

already operational. While 13 IT/ITES SEZs

have obtained formal approval, 1 has

received in-principle approval. This surge in

SEZ projects has resulted in oversupply, as

evidenced by the fact that only 60% of the 1

mn.sq.ft. which entered the market in the

form of SEZs has been absorbed. Further, the

extension of the STPI's sunset clause from

2009 to March 31, 2010 will have a bearing on

the absorption of SEZ office space.

Rental Profile

Despite the shift of the airport from

Begumpet to Shamshabad, the former

continues to remain the preferred location for

Grade-A and Grade-B office space. Rental

values in CBD and off-CBD locations have

dropped from Rs.70/sq.ft. per month in Q1 08

to between Rs.50-60/sq.ft. per month in

Q1 09.

Supply and DevelopmentHyderabad's office market is primarily

concentrated in the western region, although

supply is coming up in other parts as well.

Approximately 38 mn.sq.ft. of office space

entered the city's office market from 2005 to

2008. However, only 6.6 mn.sq.ft. out of a

planned total of 17.88 mn.sq.ft. entered the

city's market in 2008. Further, only 3.8

mn.sq.ft. of the total 6.6 mn.sq.ft. to hit the

market was absorbed during 2008. No

notable transactions were witnessed over the

last year.

Distribution of new supply 2009-11Figure 29


Peripheral - 50%

Distant Peripheral - 47%

Suburban - 3%

Mar'08

June'08

Sept'08

Dec'08

Mar'09

Banjara Hills Jubilee Hills Begumpet

Madhapur Raj Bhavan Road Somajiguda

Himayat Nagar

0

80

50


Figure 30

Rental trend

Rs./sq.ft.permonth

70

60

40

20

30

10

only 6.6 mn.sq.ft. out

of a planned total

of 17.88 mn.sq.ft.

entered the city's

market in 2008.

Further, only 3.8

mn.sq.ft. of the

total supply was

absorbed during

2008.

Silicon Towers, Madhapur


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The decline in rentals in the CBD has affected

off-CBD locations like Himayatnagar, leading

to a fall in rentals in this

micro-market by around 22% from peak

rentals as of Q1 09. Sub-urban locations like

Banjara Hills and Jubilee Hills, even with high

vacancy levels, had exhibited relatively

stable rentals over the last two quarters of

2008, although in Banjara Hills, during Q1

09, rentals declined by 14% from Rs.70/sq.ft.

per month to Rs.60/sq.ft. per month.

Peripheral locations like Madhapur and

Kondapur, where the IT/ITES sector has a

prominent presence, have witnessed

declining rentals. Madhapur has seen a

significant fall in rentals by about 20%

between Q3 08, when peak rentals were last

observed, and Q1 09. This can be attributed

primarily to the global economic slump and a

surge in office space supply. Rentals have

remained stable in distant peripheral

locations like Pocharam, Raidurga and

Shamshabad, and are expected to remain at

the current level of Rs.25/sq.ft. per month.

However, despite low rentals, these micro-

markets have failed to attract companies due

to the oversupply of office space in

competing markets like Madhapur and

Gachibowli, and the lack of quality social

infrastructure.

23

Outlook

As the Hyderabad office market is primarily

IT/ITES driven, the global economic slump

and the subsequent decline of this sector

across India has adversely affected demand

for office space, leading to the renegotiation

of lease rates. This is evidenced by rates in

the peripheral IT Parks, which have already

witnessed a decline by 20%. Bearing this in

mind, most developers and investors are

following a conservative approach to counter

diminishing demand. Several Hyderabad

projects in the pipeline have been

postponed. Despite this, assuming projects

in progress are completed on schedule,

Knight Frank research estimates that from

2009-11, assuming realistic GDP forecasts,

supply of Grade A office space will exceed

incremental demand for the same by 38%.

Realising that such a scenario could further

depress the city's ailing market, the stategovernment has proposed to tackle the

oversupply situation by restricting the

allotment of land only to companies which

are Fortune 500 listed, and proposing to

make an investment of at least Rs.500 million

in the city to generate employment for a

workforce of 1500 people. Such measures,

coupled with the diversification of the city's

office market to increasingly encompass the

financial, biotechnology, hardware,

pharmaceutical and tourism sectors, could

somewhat mitigate the forecasted oversupply

over the coming three years.

Scenario

0

18


Figure 31


Optimistic

Realistic

Conservative

Area(mn.s

q.f

t.)

14

12

10

8

6

4

2

16

17.0

15.3

13.3

Midtown, Banjara Hills

Although no exaggerated variation in rentals

is anticipated across the city's micro markets

for at least the next couple of quarters, the

current scenario, should it persist, could

precipitate a more serious decline in the

city's office market. Faced with such a

scenario, developers could, over a period of

time, explore shifting from conventional

buildings to green buildings, as the latter

would reduce maintenance costs.

Foreseeing an

oversupply situation,

the state govt has

proposed to

restrict land

allotment only to

Fortune 500

companies, andproposing to make

investment of

minimum Rs.500

million to generate

employment for 1500

people.


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Q1 2009


24

Chennai

Market Review

The Chennai property market has been

considered relatively stable when compared

to those of the other Tier I cities in the

country. Over the past couple of years, as a

consequence of the rise of the IT/ITES

industry, the demand for office space had

witnessed significant growth and has fuelled

office space development in the city. The

current financial slump across the country

has had a strong adverse effect on theChennai office market. The number of IT

companies shifting to the city has fallen

below expectations, with major corporates

stalling their expansion plans. Absorption of

office space over the past year has been

dismal, thereby exerting pressure on cash-

strapped developers. Highly-leveraged

prominent developers are seeking faster

turnaround of inventory in order to service

their liabilities. In the non-IT sector, financial

constraints have forced companies to

consider shifting their back-end operations

from the CBD to suburban and peripheral

locations.

On a positive note, Chennai has always

featured a strong manufacturing sector due

to its comparatively better infrastructure

provisions. Locations within the city are well

connected, and the development of the MRTS

connecting Rajiv Gandhi Salai to Velachery,

coupled with the Bypass Road connecting

Ambattur to Mount Poonamallee Road, will

facilitate connectivity between south-western

locations and the rest of the city.

Over the last year, owing to the

aforementioned factors, Chennai's office

market has witnessed a significant price

correction, which is unsurprising given the

financial pressure on developers, who are

being forced to stall ongoing developments

due to prevailing market conditions. The IT

sector, which has been the hub of office

space development in the city, has been

adversely hit. For example, prominent office

locations like GST Road and Ambattur

currently exhibit developments whose

completion has fallen behind schedule. As

part of their strategy to counter vacancy,

developers in the city are trying to attract

non-IT companies into absorbing space

which was anticipated to cater to IT

companies.


CBD - 22%

South - 62%

West - 16%

Stock distribution

Figure 32


0

25

20


Figure 33Estimated new office supply 2009-11

15

2009

2010

2011

Area(mn.s

q.f

t.)

10

5

7.0

9.4

16.4

4.8

21.2

Year

E-gate-appaswamy, Chennai

As outlined earlier, these non-IT companies,

predominantly located in the CBD, are now

considering relocating their back-end

operations to peripheral locations.


From 2005, when the Chennai office market

took off, until 2008, 25.14 mn.sq.ft. of office

space has been infused into the city's office

market.

Absorption of

office space over

the past year hasbeen dismal, thereby

exerting pressure on

cash-strapped

developers.


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KnightFrank.com

Projects which werecompleted over the

past year are

witnessing high

vacancy, a scenario

that was

unimaginable a

couple of years

back.Source: Knight Frank Research

CBD - 13%

South - 61%

West - 26%


Figure 34

Approximately 4.1 mn.sq.ft. of space was

absorbed over the past year, a figure that

represents a marked dip from the expected

absorption of 9 mn.sq.ft. Out of the total

supply estimated for 2008, about 3.5

mn.sq.ft. has spilt over to 2009. Projects

which were scheduled to have been

completed last year have been delayed, and

projects which are ready for occupation have

witnessed limited interest. This can be

attributed primarily to a decrease in office

space demand as a consequence of the

economic slowdown, the adverse effect of

which is evidenced by the fact that no new

projects have been announced in the first

quarter of 2009.

The suburban office locations, which include

Guindy, Kilpauk, Adayar, Anna Nagar and

Mount Ponamallee Road, are expected to

contribute about 4.1 mn.sq.ft. to the expected

supply of 21.2 mn.sq.ft. in Chennai by 2011. A

major development comprising this

upcoming supply is the DLF IT Park, to be

situated at Manapakkam. Other prominent

developments include the long delayed

Bridgetown IT Park by Robin Estates and the

recently completed Jayant Tech Park at

Nandambakkam. Over the past few years,

locations like Guindy and Mount

Poonamallee Road have emerged as

important office destinations due to their

relative proximity to developed parts of the

city.

The majority of upcoming supply in the city

will be concentrated in peripheral locations.

Prime markets in such locations include GST

Road, comprising Tambaram, Vandalur,

Maraimalai Nagar, Rajiv Gandhi Salai,

comprising Thoraipakkam, Perungudi,

Sozhlinganallur, Navallur, Siruseri, Egatur,

Karapakkam and Velachery. About 2.83

mn.sq.ft. of office space is expected to come

up in these regions by the end of 2009. A

large amount of the new office space supply

will comprise SEZs, which are mostly located

in the aforementioned peripheral locations.

Prominent developments in progress include

Mahindra World City, located at Chengalpet

and promoted by Mahindra Lifespace, ETATechnopark, being developed at Rajiv Gandhi

Salai by Dubai based developers, and

Estancia, located at Maraimalai Nagar and

promoted by Arun Excello and L&T.

The last few years have seen an increase in

the development IT/ITES SEZs in the city.

Mahindra World City, at Chengalpet, is one of

the first multi-product SEZs to become

operational in India. DLF IT Park, at

In Chennai, the key office space locations in

the CBD and off-CBD comprise Anna Salai,

Nungambakkam, Egmore, Kilpauk, RK Salai

and T Nagar. These micro-markets will

witness a supply of approximately 0.8

mn.sq.ft. in 2008. Projects which were

completed over the past year are witnessing

high vacancy, a scenario that was

unimaginable a couple of years back.

Prominent developments which are being

made available include Navin's Presedium, at

Amjinkarai, The Exotica, constructed by

Chaitanya Developers at Venkatnarayana

Road, and Seshachalam Centre, constructed

by Ceebros at Teynampet.

25

RMZ Millenia Business Park, Chennai

Manapakkam, is another prominent SEZ, and

houses IT corporations like IBM. Despite the

impressive initial response and a favourable

investment atmosphere, the market downfall

has slowed the development of the

aforementioned SEZs. Close to 47 mn.sq.ft. of

SEZ space has been planned in the city, and

if this planning comes to fruition, over-supply

might result in the Chennai office market.

However, given the current market scenario,

the development of these projects is

expected to take longer than originally

envisaged.


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Q1 2009


Rental Profile

The rental values across major office

segments in Chennai have dipped over the

past year. Locations like Rajiv Gandhi Salai,

which is the major office market for the

IT/ITES sector, has seen rental values

declining from Rs.45/sq.ft. per month a year

back to a current range of Rs.25-30/sq.ft. per

month Locations in the CBD, which includes

both IT as well as non-IT spaces, exhibit

varying rates depending on the space type.

The lease values quoted for non-IT spaces

range from Rs.70-Rs.80/sq.ft. per month,

while rates for IT spaces are being quoted

between Rs.60-70/sq.ft. per month.

Rental values in the city are declining

considerably on account of the economic

downturn. Since March last year, rentals in

micro-markets towards the west and central

locations have declined by 7-15%, and

locations towards the south, for example

Rajiv Gandhi Salai, have witnessed decliningrentals to the tune of almost 33%. The

southern micro-markets of the city developed

in recent years and emerged as prime office

destinations in

Office Market Review Q1 - 2009

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