Hyderabad expects pressure on office rental prices

It can be observed that office developers in Hyderabad are flooding the market. Office space currently has really good yields in the city, but an over-capitalisation of this may spur on an early turn of the cycle. But what will the side effects of this truly be?

This was discussed at length at a GRI Club India club meeting focusing on the Hyderabad office market - where the countries’ leading developers, lenders, and investors participated.

Debated at the club meeting was the feeling that the office market is becoming increasingly saturated. The most apparent reason being that while the bigger developers can afford to wait to sell at the right price if there is an inconsistent supply/demand, a collection of local developers would be affected by a downturn in the cash cycle and would be forced to start lowering their rents to sell out their space. This would in turn push down the rents in all pockets of Hyderabad.

This may mean a compromise in quality to preserve margins as cost goes down. Some attendees however believed occupiers will still choose higher quality office space over cost efficiency in such a market. The room’s opinion overall was split - many thought the market is robust enough to survive.

The amount of workspaces being made available also implies that Hyderabad is expecting 500,000 new jobs created over the next two years. Some of the participants remained skeptical as the number seem overly ambitious, but Bangalore’s IT industry boom did something similar just a few years previous. 

Another challenge raised was the cities infrastructure. It was considered one of the best in 2008, but recently the traffic has become an issue. Some suggested it was falling behind Pune, which are currently working on adding 3 new roads on the highway among other infrastructural improvements. When you also factor in the higher number of employment opportunities, huge commercial IT parks and proximity to Mumbai, one suggested Pune is Hyderabad’s top competitor and thus way more likely to attract a steady workforce. 

In conclusion, the participants attending the GRI Club meeting didn’t actually believe the bubble would burst but did foresee immense pressure on rentals. Perhaps wishful thinking, but it was made clear that developers would have to work together to ensure rentals hover at a median.

 

For more discussion on the current state of Indian real estate, India GRI 2019 is taking place on the 18-19 September in Mumbai. 

Article by Matt Harris