the seven stars of india

8/9/2019 The Seven Stars of India

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The Seven Stars of IndiaIndias best performing micro markets for occupiers


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On Point The Seven Stars of India


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Through the Turn

With Indias economic recovery well under way, its commercial realestate market is beginning to stabilize. While the landscape will

remain favourable for tenants in 010, landlords will have greater

inuence starting in 2011. This closing window of opportunity for

occupiers means that they should be proactively looking to lock in

attractive leases in the near term as ofce rents are beginning to

bottom out and options for large, quality space abound.

Indeed, most cities in India have already witnessed an uptick in the

volume of lease transactions in 1Q 010 with NCR-Delhi, Mumbai

and Hyderabad having recorded more than a million sq ft of leaseseach. In 009, occupiers showed a strong preference towards

operational vacant stock rather than projects under construction,

a departure from 007-08.

With the forecasted growth of net completions expected to outpacethat of net absorption, a signicant supply overhang is expected to

remain over the next one year. This will lead vacancy level across

India, which was at 17.% at end-009 to rise to mid 0% by

end-010. Locational advantage and tenant mix will serve as key

differentiators as landlords struggle to lease unoccupied space.

The freefall in rental values has stopped or slowed signicantly in all

Indian metros with the exception of NCR-Delhi and Mumbai. While

these two cities are currently feeling the affects of a large supply

pipeline in the short term, they are also expected to lead the rebound

in the property cycle, followed by Bangalore, Chennai, Pune,Hyderabad and Kolkata.

Figure 1: Pan India supply demand scenario 1Q 010

.8

8.8

.9

.

1.6

.

9

.

.

8.8

.0

19.6

9.

.

.6

0

10

0

0

0

0

60

70

80

00 006 007 008 009 010F 011F 01F

Completions/Absorption(m

illionsqft)

0%

%

8%

1%

16%

0%

%

8%

%

Vacancy(%)

New Completions Net Absorption Vacancy

8.

.1

Figure 2: Vacancy and absorption uctuation 1Q 2010

0

10

0

0

0

0

60

70

Q0

Q0

Q0

Q0

Q06

Q06

Q07

Q07

Q08

Q08

Q09

Q09

AvailableStockforAbsorption(millionsqft)

(VacantStockfromP

reviousQtr+

NewCompletionsinCurrentQtr)

0%

10%

0%

0%

0%

0%

60%

70%

QuarterlyAbsorptionRate(%)

(NetAbsorptionasPercentageofAvailableStock)

Vacant Stock from Previous Qtr New Completions in Current QtrQuarterly Absorption Rate Net Absorption

Source: Real Estate Intelligence Service



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Decision Parameters

Portfolio Rationalization

2009 2010

Consolidation of multiple ofce spaces within a city

Value recovery from underutilized properties throughsale or subleasing

Occupiers with a long term India vision and clarityon location opted to buy instead of lease

Consolidation to give way to slow expansion towards

a multiple location strategy - suburban back ofcecoupled with a CBD head ofce

Opportunistic sales and subleasing to continue,especially with prime city properties

Buy vs. lease will continue to be closely scrutinized

Cost Reduction/Operational Efciency

Increased focus on reducing operational costsincluding headcounts

Halt to expansion and diversication plans

Cautious optimism leads to slow renewal of hiring andexpansion in human resources and real estate

Expansion options revisited

Leverage

Rather than waiting and watching markets, occupiersactively renegotiated on rent and incentives tothe maximum possible extent

Long lease negotiation periods awaiting global

expansion approvals

Extent of leverage reduced with demand stabilization

Still no room for large scale rental increments

Leasing activity gains momentum occupiers lock in

as a buffer against slowly rising rents

Completed V/SUnder-constructionBuilding Preference

Only operational, or ready to move in spaces arewithin the consideration set

Focus remains on operational projects

Under-construction properties with a maximum horizonof 6-8 months might also be considered

Location

Focus on Indias top 7 markets (Tier I and Tier II cities)

Scrutinize cost/benet of a CBD location and activelyexplore options in SBD and suburbs

Tier I cities will continue to remain the most preferredlocations, followed by Tier II markets

Better performing Tier III cities might be considered byyear end

Moving Ahead

Demand from global players, headquartered abroad, might catch up with domestic occupier demand by the year end.

IT/ITeS sector will continue to lead, followed by sunshine sectors including Telecom, Pharma and BFSI. Industrial growthmight spur ofce space demand from the manufacturing and engineering sector.

Occupiers to remain exible in option selection; focus on growth and remain operationally efcient.Uncertainty over headcount will remain a challenge for CREs as they ensure that corporate real estate strategies are inline with broader organizational objectives.

Occupier focus will be on Special Economic Zones, due to the STPI sunset clause by March 011.

Source: Jones Lang LaSalle Meghraj Research

New Strategies for the Post-Downturn Era

Occupier Strategy

OccupierType

2009 2010 2011 2012

1H 2H 1H 2H 1H 2H 1H 2H

A

B

C

A. Occupiers who have a global footprint, primarily operating out of Europe or the US, but are new to the Indian market. They face global cost pressures butdo not want to miss the India cost arbitrage benet. For example: Amazon, First Data, ANZ Bank.

B. Occupiers who have a global footprint and have a long presence in the Indian market. These are tapping the present window of opportunity. For example:RBS, HSBC, Deutsche Bank, E&Y, Accenture.

C. Domestic occupiers who foresee brighter economic times in the near term. For example: TCS, WIPRO, Uninor, Reliance being a few.

As new market realities unfold, the real estate strategies employedby occupiers will depend in large part on the share of their

operational footprint within India vs. abroad. The occupiers, whom

weve clubbed into three types (primarily global footprint long in

India, primarily global footprint - new to India and domestic footprint),

will see their strategies progress from cautious to optimistic at

differing rates.

Regardless of operational footprint, in 010 occupiers are adjusting

their decision parameters with respect to portfolio rationalization,

cost reduction and location section.LEGEND Cautious Optimistic Growth Acceleration


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6 On Point The Seven Stars of India

The 7 Stars of India

A relative comparison of 16 micro-markets across Indias tier I &tier II cities was carried out in order to identify those which are

most favourable for occupiers. The analysis included a wide range

of real estate, infrastructure and socio-economic parameters.

Micro-markets were selected based upon expected supply, occupier

demand and indicator movement. Central business districts and

other high priced, low supply ofce destinations were not included

in the analysis.

The scores provided above are weighted average indices scored from an occupier point of view. This essentially enumerates that higher the rentaldepreciation, larger the vacancy uctuation and more the SEZ and STPI expansion option availability in a micro-market, higher would be its scoring.

Within the real estate parameters a higher focus has been provided to Occupier Demand, followed by Supply and Indicator uctuation within a city.

The segmentation above aims at combining quantitative parameters with qualitative assessment to identify one STAR performer from each city. Someof the remaining nine micro-markets were a close second to the star performers with strong fundamentals. These select micro-markets might emerge asrising stars of the future.

Based on relative scores, which are weighted average indices forindividual micro-markets, the best performers were collectively

titled as The Stars of India. These micro-markets shall maintain

top positions for occupiers, regardless of the industry type, having

witnessed substantial leasing activity in the past, substantial rental

correction making them affordable up to year 00-06 levels and

robust and good quality future supply.


Micro Market

Delhi NCR Mumbai Bangalore Chennai Pune Hyderabad Kolkata

Gurgaon

Noida

SBDCentral

SBDNorth

WesternSuburbs

EasternSuburbs

Thane-NaviMumbai

SBDBangalore

Whitefeld

SBDChennai

Suburbs

SBDPune

Hinjewadi

HitechCity&

Gachibowli

Rajarhat

SaltLake

RealEstateParameters

Demand 1.1 0.8 0.8 0.90 0.90 0.8 0.78 1.0 0.7 0.9 0.88 0.90 0.8 1.10 0.7 0.78

Supply 1.1 0.88 0. 0. 0.8 0.8 0.7 0.7 0.6 0.8 0.7 0.80 0.0 1.00 0.0 0.

IndicatorMovement

0.70 0.70 0.8 0. 0. 0.8 0. 0.0 0. 0.0 0.0 0.0 0. 0.0 0. 0.

Real EstateScore

1.06* 0.8 0.66 0.72* 0.70 0.6 0.7 0.84* 0.6 0.77* 0.76 0.78* 0.68 0.94* 0.7 0.59*

OtherOccupierConsiderations Infrastructure .0 .0 .00 . .0 .00 .0 .0 .00 .00 .0 .00 .0 .7 . .7

Social &Physical

Environment

. .0 .90 .80 .8 . .6 .98 . . .68 .80 .90 .80 .00 .78

Socio-Economic &

InfrastructureScore

3.87 .78 .9 4.58 .71 .7 .9 4.19 .60 3.67 .01 3.88 .1 3.58 .10 3.77


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On Point The Seven Stars of India 7

Indicators Employed

The scores listed are a weighted sum index for each of the sevenbroad parameters covered in our analysis. The sub-indicators

covered under each parameter are explained below.

Supply:A weighted index inclusive of:

Existing stock

Future supply till 01

STPI options for next one year

SEZ availability for next one year (ready to move in options for

occupiers till 011)

Maximum supply score is 1.5

Demand:A weighted index inclusive of:

Average annual absorption from 007 to 009

Average annual absorption for 010 to 01 (forecast)

Vacancy change from peak (Q 008) and forecast for a year

ahead

Pre-commitment status (future supply till 011)

Maximum demand score is 1.5

Indicator Movement:A weighted index inclusive of:

Rental decline from peak, and forecast for a year ahead

Rental overheads such as CAM charges and property tax

Maximum indicator score is 1.0

Other Externalities: A weighted index inclusive of:

Infrastructure: new infrastructure initiatives, geographical

expansion, new transport and connectivity links, proximity to

airport, telecom and power availability

Social and Physical Environment: seismic risk, international

level educational, medical and social facilities, city culture and

recreation options, star hotel accommodation, cost of living and

cost of expatriate accommodation

Maximum externality score is 5.0

Market Segmentation

Keeping city dynamics, historical growth and other externalitiesin mind, one micro-market from each city has been shortlisted to

represent the star in that region. The star micro-markets represent

the opportunities that occupiers have in each city to expand their

base into.

Micro-market Segmentation

City Star Aspirant

NCR Gurgaon Noida

Mumbai SBD NorthSBD Central, Thane &

Navi Mumbai

Bangalore SBD Bangalore Whiteeld

Chennai SBD Chennai OMR

Pune SBD Pune Hinjewadi

HyderabadHitec City &Gachibowli

Kolkata Salt Lake Rajarhat

Stars: Market is moving, go lock a deal

Rents have reached their lows

Leasing activity in existing projects is high, followed by projects

getting operational in next six to nine months

Occupiers A, B and C (as dened in the occupier strategy

section) hold these as their rst preferences for city expansion

Large scale leases recorded in second half of 2009 and rst half

of 010

Markets moving towards rent recovery in next six to eight months

Aspirants: Options available but not for too long. Focus onrental negotiation; opt for the best option available.

Marginal rent compression possibleLeasing activity picked up from rst few months of 2010

Second preference for occupier A, rst preference for occupier B

and C

Developers should continue to demonstrate exibility in pricing

and offer rental incentives

Rental recovery in 011, not a 010 picture

A supply overhang over the next two years would imply that the Stars and the Aspirants would compete directly with each other in

attracting occupier demand. While Stars have traditionally been popular amongst occupiers (especially the A and B categories), they

would continue to press them against Aspirants to offer more price discounts. By doing this the occupiers would try to stretch their

negotiation leverage till second half or end of 2010, which might even postpone rental increments in Stars in the near future.



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The Seven Star Quadrant Analysis

Star micro-markets are a combination of high real estate development, coupled with a well developed support infrastructure and asustainable social and business environment.

Balanced Low on S&P* High on RE** Outliers

Balanced markets offer a great mixof social and physical environmentalong with favorable real estateindicators.

With all these markets dependenton IT/ITes industry, their strategyshould be to offer the best arbitrageon both fronts to remain competitive.

Although comparable to theBalanced in terms of real estateindicators, they score low on socialand physical environment.

A balanced approach towardsdevelopment would result inincreased preference towards theselocations.

Leaders among the pack in terms ofreal estate indicators, they compareequably to the Balanced in socialand physical environment and arepreferred destinations for occupiers.

They should strive for becoming aworld class destination by focusedefforts towards enhancing social andphysical environment.

SBD North and SBD Bangalore arehigh on real estate activity, as wellas social/physical infrastructure anattractive combination for occupiers.

Salt Lake has well establishedinfrastructure but lags behind inreal estate growth. Landlords mustcontinue to focus on affordablerents.

SBD Pune

SBD Chennai

SBD Central Mumbai

NOIDA

East Suburbs Mumbai

West Suburbs Mumbai

Whiteeld

Thane & Navi Mumbai

Rajharat

Hinjewadi

Chennai Suburbs

Gurgaon

Hitec City and Gachibowli

SBD North

SBD Bangalore

Salt Lake

Noida

SBD North

SBD Bangalore

SBD Chennai

Gurgaon

SBD Central

WesternSuburbsEastern

SuburbsThane &

Navi MumbaiWhitefield

Chennai Suburbs

SBD Pune

Hinjewadi

Hitech City &Gachhibowli

Salt Lake

Rajharat

.90

.10

.0

.0

.70

.90

.10

.0

.0

.70

0.0 0.0 0.60 0.70 0.80 0.90 1.00 1.10

Real Estate Scores

Infrastructure,

Social&PhysicalEnvironmentScores

Source: Real Estate Intelligence Service *S&P: Infrastructure, Social and Physical Environment **RE: Real Estate

Star

Aspirant


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Introduction to the Seven Stars of India

DELHI NCR GurgaonReasons for Success

Locations of Interest

DLF-Cyber City

Golf Course Road

MG Road

Sohna Road

Udyog Vihar

Gurgaon is a clear winner when it comes to occupierdemand and availability of options due to sufcient qualitysupply, steep rental depreciation and exible approach ofdevelopers (led by DLF). It also scores high on a fair mixof retail, residential and hospitality concentration, MRTStransportation and regional connectivity, aided by proximityto the international airport.

NOIDA comes close as a second alternative, especially forIT occupiers, boasting of an excellent infrastructure and

lower rentals. Moving ahead, both Gurgaon and Noidawould compete for tapping occupier demand.

However, we believe that Gurgaon will continue to maintainits leadership position in the future.

Key Developments*

DLF Cybercity

Time Tower

Vatika Business Park

Welldone Tech Park

Unitech Infospace SEZ

DLF Silokhera

MUMBAI SBD NorthReasons for Success

Locations of Interest

Andheri

Andheri-Kurla Road

SBD North (primarily Andheri), at the heart of Mumbai, iscloser to the city airport, has an under-construction MRTSconnectivity, and boasts of more than dozen - star hotels,malls, social, medical and recreational facilities.

With more than million sq ft of future supply expected inthe next few months and a diverse mix of occupiers, SBDNorth has recorded one of the best absorption rates inMumbai over the past two years.

Thane, Navi Mumbai, Western and Eastern suburban micro-markets shall continue to attract IT/ITeS occupiers primarilydue to affordability.

Key Developments*

Kalpataru Square

1 Atrium

Nataraj

Akruti Star

Leela Business Park

BANGALORE SBD Bangalore

Reasons for SuccessLocations of Interest

Outer Ring Road

Inner Ring Road

CV Raman Nagar

Bannerghatta Road

Offering Grade A ofce space at the most affordable rentalranges (INR 8-0 psft pm) among the secondary districtsin the country, SBD Bangalore has witnessed more than million sq ft of average annual absorption from 007-009.

With proximity to key residential areas and availability oflarge land parcels, connectivity to the international airport,elevated expressways, the SBD micro-market in Bangaloreis currently the largest micro-market in the country in termsof operational grade A commercial stock with highestoccupancy rate.

We foresee the trend of single digit vacancy to continuein this micro-market due to controlled supply pipeline androbust occupier interest.

Key Developments*

Embassy Manyata Tech Park

Vrindavan Tech Village

Pri Tech Park

RMZ Ecospace

*Key developments include properties that are either operational or getting operational in the next six to eight months and witnessing large active leasing.


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Micro-Market Positioning:

Stars have been on the lower end of the vacancy variation, while witnessing rental dips comparable to Aspirants.

Gurgaon (NCR), Thane and Navi Mumbai (Mumbai) have

led all micro markets in rental depreciation, thus proving very

attractive for many occupiers. However, despite a low rental

correction in micro-markets such as Salt Lake (Kolkata),

SBD Bangalore, SBD Chennai, Whiteeld (Bangalore) and

Hinjewadi (Pune), they continue to remain attractive for

occupiers primarily due to low rental base, quality future

supply and existing tenant prole.

Kick start 2010: post the downfall, where do they stand

Most of the Stars have witnessed relatively low vacancy

rise from peak, as demand has managed to arrest micro-

market decline. Mostly suburbs have witnessed large vacancy

uctuations (beyond 1000 basis points), due to a supply

overhang and a demand drought. This continues to exert

pressures on rents in these micro-markets.

GurgaonNoida SBD Central

SBD - North

Western Suburbs

Eastern Suburbs

Thane-Navi Mumbai

SBD Bangalore

Whitefield

SBD Chennai

Suburbs Chennai

SBD PuneHinjewadi

Hitech City& Gachibowli

Salt Lake

Rajharat

-

00

1,000

1,00

,000

,00

,000

-70%-60%-0%-0%-0%-0%-10%0%

Rental Drop from Peak (Q 008 - 1Q 010) (% in INR terms)

Bubble Size: Existing Commercial Office Stock as on 010 (in sq ft; inclusive of IT, Non-IT and SEZ space)

VacancyRisefromP

eak(Q008-1Q010)(Basispoints)

Star AspirantSource: Real Estate Intelligence Service


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Circa 2011: picture of a year ahead

Micro-markets will get aligned closer to rental stability, NCR

and Mumbai being exceptions. It is visible that a lead in rental

appreciation would be taken by micro-markets with less futuresupply like SBD Bangalore, SBD Pune and Salt Lake, wherein the

supply overhang is relatively less pronounced. Gurgaon is in the

left half due to large supply-poor demand scenario in upcoming

locations of Sohna Road, Golf Course Extension and Manesar,

which together shall witness supply of more than 1 million sq

ft over the next years. Prime areas of Gurgaon such as MG

Road, NH-8 and Golf Course Road are expected to witness rental

price appreciation as early as 1H 011 due to forecasted strong

demand recovery.

Moving ahead, Stars will witness relatively low vacancy variationas these would be the most preferred destinations for rising

occupier queries. Hence, these would either witness rental stability

or positive rental appreciation. Although NOIDA is expected to

witness rental pressure in the near-term, we foresee occupiers

returning to the NOIDA market due to strong and improving

infrastructure, emerging residential support at affordable pricing

and existing population of about a million.

Most micro-markets are expected to reach their rental lows within

the next 2-3 quarters, if not reached as yet, which is reected in

the chart above. This indicates that the window of opportunityfor occupiers, where balance of power favors them, continues to

shrink with every passing quarter.

Gurgaon

Noida

SBD-Central

SBD-North

Western Suburbs

Eastern Suburbs

Thane-Navi Mumbai

SBD Bangalore

Whitefield

SBD Chennai

Suburbs ChennaiSBD Pune

Hinjewadi

Salt LakeRajharat

-00

0

00

00

600

800

1000

100

100

1600

-10% -8% -6% -% -% 0% % % 6%

Rental Variation (% in INR terms)

Bubble Size: Future Supply of commercial office till early 011 (in sq ft; inclusive of IT, non-IT and SEZ space)

VacancyVariation(BasisPoints)

Hitech City & Gachibowli

Star AspirantSource: Real Estate Intelligence Service


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Authors

Abhishek Kiran Gupta, Associate Director, Research & REIS

[email protected]

+91 611 600

Abhishek Kiran Gupta leads the Jones Lang LaSalle Meghraj India Research team and is based in

Mumbai. He manages research operations on a Pan-India level and is responsible for the teams

outputs, including research reports such as topical white papers, property market digests and bespoke

research projects based on specic client requirements. Prior to joining Jones Lang LaSalle, he had

seven years of experience in market research, business analysis and market strategy consulting,

servicing diversied industries including pharmaceutical, software publishing and insurance.

Abhinav Joshi, Assistant Manager, Research & REIS

[email protected]

+91 1 60 100

Abhinav Joshi joined Jones Lang LaSalle Meghraj in January 007 and handles the Delhi-NCR

Research and Real Estate Intelligence Services (REIS) team. Based out of Gurgaon, he contributes

to topical whitepapers, property market digest and research deliverables on the industrial, commercial,

retail and residential real estate markets in India.

He has also worked on numerous projects encompassing market research, business location advisory,

feasibility and valuation. He is a town planner by qualication and is pursuing an executive education

from Indian Institute of Management (Kolkata).

Trivita Roy, Assistant Manager, Research & REIS

[email protected]

+91 0 00 9100

Trivita Roy has joined Jones Lang LaSalle Meghraj Research team in 007. Based out of Hyderabad,

she contributes to topical whitepapers, property market digest and research deliverables on industrial,

commercial, retail and residential real estate markets in India. She is also responsible for Indian real

estate intelligence service (REIS).

Trivita is trained as City Planner from Indian Institute of Technology Kharagpur and has a two years

experience in real estate research.

Avinash Mirchandani,Assistant Vice President, Research and REIS

[email protected]

+91 611 600

Avinash Mirchandani supports the Jones Lang LaSalle Meghraj India Research & REIS team. Based

in Mumbai, he provides guidance and oversight on all of the teams research outputs and bespoke

client projects. Avinash originally joined Jones Lang LaSalle in 007 as the programme manager for

the World Winning Cities Research Programme, a multi-year research initiative conducted by ourGlobal Research team. Prior to that, he worked in a variety of consulting and research roles across

the biotech, aerospace and IT industries in the United States. Avinash holds a bachelors degree in

Economics from UCLA and an MBA from the Indian School of Business.


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the seven stars of india

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