Bangalore Offi ceAsian Cities Report – 1H 2020

REPORT

Savills Research

savills.com.cn/research

Bangalore Offi ce

Markets look to survive the lockdown

ECONOMIC OVERVIEW Though the initial three quarters of 2019 were marked by a number of negative factors including rising infl ation, a contraction in industrial output and a falling GDP growth rate; the economy towards the end of 2019 had started showing signs of a turnaround. Infl ation appeared to be easing, as industrial activity and the GDP growth rate began to show an uptick. 2020 opened on this positive note, with January and February indicating a revival in domestic consumption as well. Retail infl ation stood at 5.8% in March 2020. The shift in gears in the domestic economy could be attributed to a slew of sector specifi c reforms initiated by the government throughout 2019. Probably the biggest of them was the scaling down of corporate tax rates in September 2019 – a commendable eff ort to spur investment and boost economic growth.

However, the world economy was engulfed by the COVID-19 pandemic in a less than a quarter. When comparing India’s relative positions in 2020 and 2008 (during the Global Financial Crisis), it is evident that the country has been aff ected far more deeply this time. One reason for this is that the local economy is more closely tied to the global economy in 2020 than it was in 2008.

Domestically, as COVID-19 cases grew, the government declared a nation-wide lockdown on 22nd March 2020 and this has already been extended three times. Curbs on movement, supply chain disruption, the stoppage of construction activity and labour shortages in April and May, have caused a decline in most sectors of the economy including commercial real estate. Retail infl ation, including food infl ation, spiked in April 2020 owing to the disruption of transportation and supply chains.

As the country gears-up for a phased easing of lockdown, the economy, including real estate, is expected to begin a gradual recovery process. A host of liquidity-enhancing, consumption-boosting, and fi nancial relief packages have been announced by the government. The central bank has stepped in frequently, easing key interest rates. The Reserve Bank of India has also allowed deferment of commitments to fi nancial institutions by six months. On the ground transmission of policy rate cuts by nationalised lenders has improved signifi cantly and is expected to contribute to economic activity and overall consumption, when the revival process starts in 2H/2020.

COMMERCIAL OFFICE OVERVIEWOffi ce space in India has grown strongly in the last few years; with a CAGR of over 8% during 2014-19. 2018 and 2019 were record breaking years for offi ce leasing activity. The annual growth recorded in 2019 was the biggest ever, estimated at about 22%. Similarly, offi ce stock rose by nearly 155 million sq ft during 2014-15. Weighted average rents, though among the lowest compared to global peers, have increased steadily. Not surprising therefore, vacancy rates have correspondingly declined, making Indian offi ce segments attractive for foreign investors.

COVID-19 has undoubtedly, if briefl y, paused the momentum in Q2/2020 and while 2020 was expected to be a third successive growth year, this is almost certainly impossible now.

However, despite the current slowdown, a V-shaped recovery is widely anticipated once the pandemic driven disruption begins to fade. This is based on the strong inherent demand which had been driving offi ce markets up to the point where activity was abruptly halted. The recovery speed will depend on some critical factors such as new norms for offi ce set-ups, social distancing guidelines, splitting the workforce as ‘full-time in-offi ce’ vs. ‘transient’ resources, the re-design of offi ce layouts, etc. On the supply side, similarly, the speed and extent of recovery will be contingent upon availability and adequacy of labour, capital and machinery at construction sites. Business sentiment, profi tability, etc., are also expected to be important factors – whether for expanding to new locations or signing fresh leases.

BANGALORE COMMERCIAL OFFICE OVERVIEWBangalore has been the frontrunner in offi ce space demand for years, much ahead of more populous metropolitan regions of the country, NCR1 and Mumbai. 2019 again witnessed strong leasing activity in the city, with over 15 million sq ft of offi ce space leased out. Q1/2020, despite being exposed to the uncertainties of the COVID-19 pandemic, towards the end of the quarter, registered a healthy increase in demand compared to Q1/2019. The micro-markets of Outer Ring Road (ORR) and

1 National Capital Region; includes markets of New Delhi, Gurgaon, Noida, and several other urban areas in the vicinity.

GRAPH 1: India GDP Growth Rate, Q1/FY2019 to Q3/FY2020

Source Savills Research

GRAPH 2: India Absorption And Stock, 2014 vs 2019

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Source Savills Research

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GRAPH 2: India Weighted Average Rentals And Vacancy Changes, 2014 vs 2019

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Source Savills Research

Bangalore Offi ce

Whitefi eld continue to contribute signifi cantly to overall absorption in the city. As far as sectoral demand is concerned, IT and allied industry, fl exible spaces, fi nancial as well manufacturing organisations drive take-up in Bangalore. In 2019, the city saw additional completions of around 12 million sq ft with a majority of completions on the ORR, eastern peripheral business district including Brookefi eld and north Bangalore.

As availability of ready to move in Grade A offi ce spaces remained constrained, throughout 2019 rents witnessed a consistent increase in most micro-markets and good quality buildings witnessed signifi cant upward movement. Average rents in the Peripheral North micro-market increased signifi cantly by 25% YOY in 2019 whereas other micro-markets such as Peripheral East, Central Business District (CBD) and Secondary Business District (SBD) saw increases in rents by 15% to 20%. ORR, which is preferred by technology and fi nancial companies, off ers premium grade offi ce space and with rents being relatively low compared to CBD and SBD City, continued to see price appreciation in Q1/2020 as well.

IMPACT OF COVID-19 AND OVERALL OUTLOOKQ2/2020 leasing activity, expectedly, has been temporarily aff ected by the COVID-19 pandemic. There have emerged signs of rental realignments and discussions to revisit Common Area Maintenance (CAM) charges between tenants and landlords. Executions of new leases have been momentarily put on hold, at least until such a time that the business environment stabilises.

Among the top six commercial offi ce markets in India, Bangalore has witnessed the least number of COVID-19 cases. Lockdown restrictions are also comparatively less stringent in Bangalore, while construction activity has gradually resumed,

though much below Q1/2020 levels. Offi ces are reopening, with capacity restrictions and social distancing guidelines in place. Consequently, Q2/2020 is expected to be a blip in the success story of Bangalore. Nevertheless, 2H/2020 could provide a better picture for commercial real estate in the city. This is especially true of sunrise segments such as co-working, which constitute a signifi cant share of local leasing activity.

In response to the outbreak, the government has imposed strong lockdown measures, while announcing a fi nancial stimulus of

approximately USD265 billion, about 10% of the country’s GDP.

GRAPH 4: Bangalore Absorption, Additional Stock And Vacancy, Q1/2019 to Q1/2020

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Source Savills Research

GRAPH 5: Rental Trends - Micromarket Wise, Q1/2019 to Q1/2020

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Source Savills Research

TENANT BUILDING MICRO-MARKETAREA

(SQ FT)*

Google Bagmane Capital- Kyoto-West Tower Outer Ring Road 400,000+

Tablespace Kalyani Outer Ring Road 150,000+

Baker Hughes ( GE) Bagmane Solarium City Whitefi eld 150,000+

First Bank of Abu Dhabi

Bagmane Capital- luxor Outer Ring Road 100,000+

Wework Church Street CBD 100,000+

TABLE 1: Key Offi ce Transactions, 2020 YTD

Source Savills Research* Indicative numbers only

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