Pune office rentals on the rise

The following is an analysis piece on Pune office rentals by Ashutosh Limaye, National Director – Research, JLL India

Surge likely to continue till enough fresh supply becomes available

After years of stable rental growth thanks to the y-o-y supply-demand ratio remaining almost at par, Pune has seen a rapid growth in office rents over the last four-six quarters. This is due to absorption having increased during the same time period while Grade-A supply remained subdued. Interestingly, this rise in rentals is across Grade-A and B buildings. Project-specific rents also increased significantly higher than the market average during the period.

Parameters                         Last 3 Years – Grade-A supply (from 3Q12 to 3Q15)

Supply                                       10.5 million sq ft

Absorption                               12.6 million sq ft

Demand Supply difference   Approx 2 million sq ft

(Grade A)                             

The annual rental growth witnessed in Grade-A projects is to the tune of 10-13%. Securing space in the form of pre-commitment has been an increasing trend in Pune due to the limited vacant space in completed Grade-A projects. The limited availability and comparatively higher rents in Grade-A projects has given rise to a trend of tenants securing space in built-to-suit (BTS) properties or opting for Grade-B properties in Pune.

The overall vacancy in Pune has reduced from 16% in 2011 to 5% in 2015. The absorption in Grade-B buildings has increased significantly in the last four-six quarters. Not only the demand by IT/ ITeS players, which has shown robust growth over the years, but also demand by BFSI players is rising in the city. However, corporate occupiers actively evaluating Grade-B options often face issues like lack of larger floor-plates, amenities, good locations and connectivity.

Pune office                                  Overall    CBD      SBD      SBD (Suburbs

Vacancy (as of 3Q15)                  5%           4.5%     3%        11%

What actually happened?

A few years ago, when IT office supply increased, developers imagined a possible situation of oversupply in the market – if new supply kept entering the market at that rate. Anticipating such a scenario, a few players de-notified their special economic zones (SEZs) or converted their commercial development plans into residential ones. At that time, residential realty looked like the safest bet. The demand was, however, misinterpreted and has continued unabated unlike what developers had expected.

The way forward

Rents are being revised upwards by developers given this situation. On the back of continued demand, office rents will keep increasing across the city until enough fresh supply becomes available. It is high time more IT/ ITeS supply was bought in. On the back of a positive business sentiment, select IT/ ITeS occupiers have expansion plans. Some may go ahead with constructing BTS facilities. Others are likely to lease space in IT and IT-SEZ office buildings.

Demand in 2015-2016 will primarily be driven by companies in the IT/ ITeS and banking, financial services and insurance (BFSI) sectors. The contribution of BFSI to the total absorption has shown continuous improvement in the past few quarters and there will be need for office spaces for these companies too.