Robust Commercial Demand Continues in Bangalore, Corporate Tenants Leasing Large Blocks of Space

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According to global real estate firm Jones Lang LaSalle, demand continued to be robust in Bangalore with corporate tenants expanding and leasing large blocks of spaces. Rents continued to increase in 2Q11 due to the growing demand and limited ready- to occupy space in CBD and SBD micro-markets.

Bangalore: Grade A Office

The high occupancy levels due to the growing   demand resulted in increase of capital values in the CBD and SBD   micro-markets.

Demand

Bangalore continued to witness robust demand with corporates expanding their head-counts in the city and leasing large spaces. Few corporates who expanded in 2Q11 were Cisco, Accenture, Ciber and Delloite. Most of the leasing was focused in the SBD. Pre-commitments also remained strong in 2Q11. Overall Bangalore witnessed a total net absorption of 2.05 million sq ft (191,261 sqm) in 2Q11.This included 1.76 million sq ft of net absorption recorded in CBD and SBD.

CBD witnessed Life-size Communication leasing 21,764 sq ft (2,021 sqm) in Salarpuria Windsor in Ulsoor Road. While few transactions recorded in SBD were Accenture leasing 130,347 sq ft (12,109 sqm) in Pri Tech Park at Outer Ring Road, SBD. Leasing remained strong in the suburbs of Bangalore also. Few key leases closed this quarter in the suburban micro-markets were Fidelity Information Service leasing 93,480 sq ft (8,984 sqm) in SJR I Park and Huawei's lease of 31,458 sq ft in Prestige Shantiniketan both at Whitefield.

Market Supply

There was completion of only one project in SBD in 2Q11. Prestige Exora Block B2 located in Outer Ring Road commenced operations in 2Q11 and added about 0.7 million sq ft of space to the total stock of Bangalore which stood at 62 million sq ft at the end of 2Q11. Prestige Exora Block B2 which is a STPI building was operational with high occupancy. The key occupiers in this building are JP Morgan Chase and Juniper Networks. There were no completions in the CBD micro-market during this period.

Asset Performance

Average rents for office space in the CBD increased by 4.65% in 2Q11 which is about 9.5% increase from its last trough in 3Q10.Similarly the SBD also witnessed increase of about 5.33% on 2Q11 which is about a15.8% from its last trough in 3Q10. The appreciation of rental and capital values was higher in the CBD and SBD micro-markets than in other suburban micro-markets due to ongoing growing demand and limited ready-to-occupy office space.

Capital values in CBD continued to increase in 2Q11 by almost 4.5% which is about an increase of 10% from its last trough in 3Q10. Capital values in SBD witnessed an increase of about 5% in 2Q11 which is about an increase of 14.6% from its last trough in 3Q10. The high occupancy levels due to the growing demand resulted in increase of capital values in these micro-markets. However both the micro-markets did not witness any sale transaction in 2Q11.

12-Month Outlook

By end-2011, the CBD and SBD micro-markets are likely to have seen absorption of 2.74 million sq ft. These micro-markets are expected to witness new supply of 1.53 million sq ft by the end of 2011. Overall Bangalore commercial office space market is expected to witness new supply of about 6.44 million sq ft. Secondary and Whitefield micro-markets are expected to witness majority of the leasing activity in the city.

Gross rents and capital values across all the micro-markets increased in 2Q11 in a trend that is expected to continue until end -2011. Bangalore is expected to be in the rent rising cycle until end - 2011.

Bangalore: Retail Market

Leasing activity remained strong in the prime high   streets of Bangalore with large format retailers expanding their foot prints   in the high streets of the city.

Rents remained stable in the prime micro-markets   but increased by almost 11% in suburban micro-markets Capital value increased by almost 11% in the   suburban micro- market.

Demand

High street demand remained strong in Bangalore with large format retailer such as Reliance expanding their brands such as Reliance Digital and Jewel by leasing large spaces in the city. The malls in the city also witnessed good pre-leasing activity in 2Q11. The high Street micro-markets in the Indiranagar, Koramangala, Whitefield, BEL Road and Old Madras Road areas accounted for 148,676 sq ft of the leasing activity.

Overall the market recorded net absorption of 600,000 sq ft (55,742 sqm) in 2Q11. Vacancy rates decreased from 5.5% in 1Q11 to 4.9% in 2Q11 due to the completion of the Royal Meenakshi Mall with high occupancy rate and negligible vacancy. The key transactions in 2Q11 were Reliance Digital leased about 110,000 sq ft (10,219.3 sqm) in high street of Sahakarnagar, Sabaro's leasing of 320 sq ft (27.9 sqm) in Orion Mall in the Secondary micro-market.

Market Supply

The Royal Meenakshi Mall of 600,000 sq ft on Bannerghatta Road commenced operations in 2Q11. The mall commenced operations with high occupancy due to strong pre-commitments in the previous quarters. The mall has presence of large format brands such as Hypermart, Max and Reliance Trends and good number of small format stores such as Louis Philippe, Melange, Reebok, Nike, Fab India etc.

Asset Performance

The rents remained stable at 1Q11 level in 2Q11 in the prime micro-markets of Bangalore. The rents have remained stable for last five quarters as there is negligible leasable space in the malls in prime micro-markets. However the suburban micro- market has witnessed an increase of about 11% in rents in 2Q11 after remaining stable for last four quarters. This increase in rental values in this micro-market was due to completion of Royal Meenkashi mall, where the rental values are above the micro-market average.

The capital values remained stable at 1Q11 level in 2Q11 in the prime micro-markets and kept the yields stable at 11%. However the capital values in suburban markets increased by almost 11% in 2Q11. The yields remained stable at 11.8% in the suburbs in 2Q11.

12-Month Outlook

Demand is expected to gain momentum and so does absorption. By the end-2011absorption is expected to be about 2.31 million sq ft of the 3.3 million sq ft of space that will be available. At the same time, construction in projects nearing completion is likely to accelerate. Considering the five malls currently under construction and in the pipeline, we estimate vacancy rates to rise from 5.8% in 2010 to 16.4% by end-2011.

Rental and capital values across all micro-markets are expected to have increased by end-2011. In particular, we forecast rental values in the Prime City micro-market to have reached a range of INR 184-250 per sq ft per month by the end of the year due to a lack of supply amid growing demand. In malls in the Suburban micro-market, rental values are expected to have increased by 8% to 10% by end-2011 due to ongoing leasing activity in such upcoming malls as Park Square by Ascendas and Market City by Phoenix Mills in Whitefield. Increase in rental values despite the increase in vacancy is due to the good quality malls leasing their space at rents higher than the average market rental values.

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