BANG FOR THE BUCK

BANG FOR THE BUCK
With each development — hospital, hotel, office, software park, township — adding to the attraction of India’s Silicon Valley, Bangalore shows no signs of losing its hold over investors.

The Economic Times


FIRMLY established as a global technology hub, Bangalore’s economy is rapidly moving up the value chain. Not surprisingly, the country’s Silicon Valley was ranked No 3 among global cities for the office space absorbed in 2005 in a survey done by international real estate consultancy firm DTZ.
“In 2005, Bangalore witnessed absorption of 9.5 million sq ft, highest in India and the third highest in global office absorption after Tokyo (12.33 million sq ft) and London (9.96 million sq ft). The office market absorption continues to be driven by IT/ITeS sector which accounts for over 70% of total office space absorbed in this quarter, followed by the back office operations of banking, financial services and insurance companies accounting for 11% of the total absorption” says Hugh Hamilton, director, Global Corporate Services, DTZ Debenham Tie Leung, India. While global comparative figures are awaited, the year 2006 is expected to push Bangalore to the No. 2 slot despite its infrastructure concerns. Be it retail, residential or office spaces, the realty juggernaut shows no signs of slowing down here.
According to real estate consultant Jones Lang LaSelle’s ‘Emerging City Winners’ Report, within the Tier I cities, Bangalore, Mumbai and Delhi will remain the preferred option for many new market entrants. One of India’s fastest growing sectors, real estate is expected to expand rapidly and see a spurt in commercial offices and residential segment, shopping malls and retail areas, hotels and logistics. Following the partial relaxation of FDI regulations in February ’05, the country is now attracting interest from cross-border real estate investors.
Mysore and Mangalore are the emerging Tier III cities in Karnataka. These cities are attracting an increasing occupier interest but the investment market in these smaller cities is likely to lack liquidity, according to the JLL report.
Riding on stellar valuations, the real estate industry has jumped 10 places from last year to emerge at the No. 2 slot by contributing as much as 17% to the total funds mobilised through public issues — IPOs and FPOs — this year. Indian real estate developers and infrastructure companies raised a whopping Rs 3,994 crore in IPOs and FPOs in 2006 as compared to a mere 216 crore in the year 2005.
Favourable demographics, rising incomes and easier access to finance are fuelling strong demand for residential accommodation in the country. India has an acute shortage of housing, with an estimated shortfall of over 50 million units. Meanwhile, with the retail sector growing at 10% annually, construction for retail will see a marked increased in the coming years. And if there’s any state that can be said to have sent the country’s realty juggernaut rolling, it’s Karnataka.
“The available talent and cosmopolitan culture of Bangalore is a big draw and the key reasons why it continues to receive a phenomenal demand for space, exceeding all others,” says J C Sharma, managing director, Sobha Developers.
Adding to Bangalore’s magnetic appeal is the upcoming international airport at Devanahalli. While the appetite for commercial, residential and retail space is at an all-time high in the city as a whole, the progress in construction of the airport seems to be drawing the biggest names in the business to the city. Although some projects are being announced, the focus for now is on building land banks to be unlocked once the airport gets closer to completion, according to real estate analysts.
Sushil Mantri, managing director, Mantri Developers, says Bangalore is ready for enhanced action in the high-end residential townships. Flush with funds from its Rs 300-crore all-cash FDI deal with Morgan Stanley Real Estate, Mantri Developers has decided to concentrate on large-format townships in future, with a minimum size of 30 acres.
Strong construction activity can be witnessed across all the business districts in Bangalore. Bangalore Peripheral Business District (PBD) — Whitefield, Outer Ring Road, Sarjapur Road, Hosur Road, Electronic City and Bellary Road — has contributed the most to office space absorption in the IT city over the last two quarters, accounting for nearly 60% in Q1 and 75% in Q2 of total absorption in the city. The higher absorption in PBD is attributed to the lack of Grade A office space supply in the Secondary Business District (SBD).
“The SBD area is preferred by corporates because of better infrastructure and connectivity as compared to PBD. This quarter saw significant Grade A supply in SBD like IBC Knowledge Park (2 million sq ft), Chandrika Trade Centre (90,000 sq ft), Bagmane Parin (395,834 sq ft), Embassy Golf Links (4.5 million sq ft), ITBT Park (144,000 sq ft), Kalyani Magnum (400,000 sq ft in phase I) and RMZ Infinity (1.2 million sq ft) which accounted for a majority of absorption in the SBD,” Mr Hamilton said. However, a deviation was witnessed in the third quarter, with SBD accounting for nearly half of the total office space absorption, as against 33% by PBD areas. This is a significant change in absorption in SBD, as compared to 29% in Q1 and 21% in Q2.
According to DTZ, Grade A&B leasehold office space absorption in Bangalore crossed 8.9 million sq ft in the first three quarters of 2006. This is an increase of 25% as compared to 7.1 million sq ft in the year-ago period. There was a marginal increase of CBD’s share in total absorption of office space. As a result, rentals in the CBD area went up by 8% as compared to the last quarter. Warmshell leasehold Grade A office space rental in Bangalore CBD stands at Rs 61 per sq ft and is expected to rise further.
Rising demand from corporates and IT/ITeS sector has led to an increase in rental values across most micromarkets of Bangalore except in PBD which have witnessed steady supply of commercial space in line with the demand. PBD micro-markets like Whitefield are already witnessing a fall in rentals to the tune of 10%. SBD rentals have risen by 18% during the last quarter due to lack of sufficient commercial supply in the area.
With each development — hospitals, hotels, offices, software parks, townships — adding to the attractiveness of the location for investors, Bangalore shows no signs of losing its hold over investors.
Looking forward, owing to the demand stimulated by the IT/ITeS sector, the year 2007 is expected to follow 2006 in terms of transaction volumes. “Due to dearth of the organised retail space in the city, the launch of new mall projects is expected this year. The rentals and capital values are expected to increase marginally in the prime high streets because of the low availability of space,” says a leading realty consultant.