Bangalore Offi ceAsian Cities Report – 2H 2019

REPORT

Savills Research

savills.com.cn/research

Bangalore Offi ce

Absorption remains robust in 2019

ECONOMIC OVERVIEW The Indian economy, which registered impressive growth ranging from 6% to 8% per annum in the last couple of years, is experiencing slow movement at present. GDP growth in the fi rst quarter of Financial Year 2019-20 (April to June) was estimated at 5%, with a downward revision likely for the next quarter1.

The reasons behind this deceleration are several, as summarised here. The country has experienced a series of initiatives and structural reforms in the last three years. Though much needed, the reform-process has caused a notable disruption in traditional ways of conducting business and coincidently, the timing of domestic reforms has come at a time of global disruption caused by trade-disputes and the resultant economic slowdown. India’s overall exports have shrunk due to weak global trade and delays in refunds to exporters. Most of this occurred in the year of implementation of India’s new tax regime, the Goods and Services Tax (GST). Rising bad debts in public sector banking, coupled with IL&FS2 payment default in September 2018, aggravated the liquidity situation in Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs). The crisis, commonly referred to as the ‘liquidity crisis of 2018’, led to a severe fi nancial squeeze on the supply as well as demand sides. Its impact is most visible in industries linked with real estate, automobiles and travel & tourism, and has signifi cantly slowed consumption in these sectors. The eff ects of this liquidity crunch are still in evidence more than a year later.

Faced with the series of challenges described above, the government has continued to act positively to arrest the slowdown and bolster growth. The Finance Ministry and the central bank – the Reserve Bank of India (RBI) – have taken a series of steps in quick succession. The RBI has lowered its benchmark lending rates by 135 basis points at fi ve consecutive policy meets. The Finance Ministry, apart from announcing a variety of fi scal and policy measures (in the interim budget in February and the full-budget in June) added some more by rolling-back the enhanced tax on the super-rich segment that it had proposed in the budget. Relief measures and recapitalisation of public sector banks was announced in the budget, with an infusion of INR70,000 crore (approximately US$9.77 billion) for the banks. The biggest impact-measure, however, came in the third quarter, with the Central government announcing a scaling-back of Corporate Tax to 22%, implying an eff ective rate of 25.17%. This is proposed to be inclusive of all cess3 and surcharges for domestic companies. Further, the tax rate for new manufacturing companies was changed to 15% from an earlier 25%, implying an eff ective rate of 17.01%, inclusive of surcharges and cess. These recalibrated tax-rates have been brought into eff ect from the current fi scal year.

1 Figures for July-September quarter growth are expected to be announced by the government towards the end of November-20192 Infrastructure Leasing and Financial Services, a holding company for multiple non-bank lending organizations3 A ‘cess’ in the Indian tax system is a tax on tax, meant for specifi c purposes such as education, irrigation, etc

GRAPH 1: YTD Offi ce Absorption, January to September 2019

Source Savills Research

GRAPH 2: YTD New Completions, January to September 2019

CBD / Off-CBD11%

Outer Ring Road42%

Peripheral East 29%

Peripheral North

11%

Suburban South

7%

Source Savills Research

BUILDING TENANT MICRO-MARKETAREA LEASE

(SQ FT)

TRANSACTED LEASE

RENTS

(INR PER SQ FT)

REMARKS

Bagmane Constellation Amazon Outer Ring Road 676,000 67 Warm Shell

Bagmane Solarium Cognizant Whitefi eld 480,000 53 Warm Shell

Sattva Knowledge Court Harman International Whitefi eld 350,000 60 Warm Shell

Near L&T ST Telemedia Whitefi eld 350,000 TBD Warm Shell

Prestige Shantiniketan Exxon Mobile Whitefi eld 250,000 48 Warm Shell

North Gate Cerner North Bangalore 150,000 52 Warm Shell

RGA Tech Park PayPal Outer Ring Road 150,000 75 Warm Shell

TABLE 1: Key Offi ce Rental Transactions, YTD 2019

Source Savills Research

CBD / Off-CBD10%

Outer Ring Road39%

Peripheral East 22%

Peripheral North

4%

Peripheral South

3%Suburban East

14% Suburban South

8%

Bangalore Offi ce

POLICY CHANGES ANNOUNCED FOR REAL ESTATE 2019 has been a year of several policy announcements for real estate as well. In order to boost demand, the government has asked the banks to link consumer lending rates to the RBI’s benchmark rate. This is critical for accelerating the transmission of RBI’s rate-cuts, which remained largely ineff ective as banks were often found to be reluctant in passing on the cuts. Additionally, liquidity support to HFCs was increased to INR30,000 crores (approximately US$4.18 billion).

A major reform of 2019 included a radical reduction in GST rates: to 5% from 12% for general housing, and to 1% from the earlier 8% for aff ordable housing. Two other forward-looking legislative actions, namely, the Model Tenancy Act and Draft National Logistics Policy, have been devised to tackle long-standing problems of rental-housing development and warehousing respectively. These policy changes, among others, underscore the policy focus on transforming the landscape of the Indian real estate sector. The full budget also highlighted a clear focus on road, rail and metro connectivity, ‘Ease of Living’, and signifi cantly, infrastructure development by allocating INR100 trillion (approximately, US$1.39 trillion) over the next fi ve years, towards creation of more liveable cities.

Finally, to address current liquidity concerns, the government has recently announced the creation of a real estate stressed assets fund (called Alternative Investment Fund or AIF for short) to the tune of INR25,000 crores (approximately US$3.49 billion). The objective is to enable real estate developers to complete stalled projects, irrespective of the stage of completion. This comes with eligibility conditions though, where the projects need to be RERA registered and should be net worth positive. This is expected to boost the beleaguered supply side in the residential segment.

BANGALORE OFFICE MARKET OVERVIEWAbsorptionDuring the nine months ended September 2019, Bangalore offi ce space gross absorption witnessed a YOY growth of 12%, to reach 12.5 million sq ft. The Outer Ring Road and Peripheral East (Whitefi eld) micromarkets together accounted around 60% of total absorption. IT-BPM-BFSI and the engineering and manufacturing sectors dominated the overall absorption.

CompletionsThe YTD new completion stood at 15.7 mn sft. The Outer Ring Road (ORR) and Peripheral East (Whitefi eld) micromarkets dominated new completions with 6.6 mn sft & 4.6 mn sft approximately. ORR witnessed signifi cant pre-leasing activity. Whilst the vacancy level of ORR stood at sub 5% , it was around 15% for Whitefi eld. At a city level, vacancy levels have reportedly dropped from 7.5% to 6%.

Rental movement and outlookRents are estimated to have grown by 10% in 2019, over 2018. This is led by strong demand especially in micro-markets such as Whitefi eld, North Bangalore & SBD City apart from constant demand in Outer Ring Road. The city is likely to witness an absorption of 4 million sq ft in Q4/2019 and 16-17 million sq ft in 2019.

Strong demand from co-working operators continues in Bangalore.

GRAPH 3: Offi ce Rental Movement, Q1/2018 to Q3/2019

60

65

70

75

80

Q1 Q2 Q3 Q4 Q1 Q2 Q3

2018 2019IN

R P

ER

SQ

FT

Source Savills Research

GRAPH 4: Offi ce Rents By District, Q3/2019

0

40

80

120

160

200

CBD /Off-CBD

OuterRingRoad

PeripheralEast

PeripheralNorth

PeripheralSouth

SuburbanEast

SuburbanNorthWest

SuburbanSouth

INR

PE

R S

Q F

T

Source Savills Research

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