Boom time for Pune office real estate in 2014

Pune city is among the top ten largest metropolitan economies in terms of nominal GDP and per capita income in the country. It gained prominence as an industrial destination, when the automobile and pharmaceutical industries made large investments in the city and dominated its economic landscape.

According to Knight Frank, the leading real estate research firm, last decade saw the emergence of the IT/ITeS sector, which practically re-forged the city’s economy, catapulting it in to the forefront of India’s IT/ITeS growth story. Pune today is among the leading software exporting cities in India. The pace at which the IT/ITeS industry has grown, coupled with the growth in the manufacturing sector has sparked off a flurry of construction activity in the grade A office space market over the past decade.

The eastern and northwestern locations where the IT/ITeS sector has proliferated have the largest chunk of office space in Pune.

Currently, the total office space stock in Pune is occupied resulting in a vacancy level of 20 per cent. The vacancy levels have been declining consistently since 2009, when they peaked at 28 per cent due to the huge influx of new supply during 2008 and 2009.

More than 16 mn sq ft of incremental office space entered the market during these two years. However, 2010 onwards the vacancy levels started declining as the quantum of new supply entering the market receded significantly and absorption remained steady. The impact of this was reflected in the rental movement that witnessed steady appreciation in the last three years in most of the business districts.

An uninspiring global economic environment has caused expansion activity to stagnate over the past two calendar years.

The IT/ITeS sector, which is especially sensitive to global economic cues, has been treading cautiously and suspending expansion plans while waiting for the business cycle to turn. However, Q1 FY 2014 has bucked this stagnating trend and seems to have staged a reversal of sorts.

Absorption numbers in Q1 FY 2014 have soared almost 58 per cent from Q1 FY 2013 and more than doubled the volumes achieved during the preceding quarter. Transaction activity is largely cyclical in nature and the initial few months of the financial year experience bulk of the action as location planning and budgeting activities tend to get executed during this period. The fact that FY 2014 has started on a strong note is a powerful indicator of improving market traction.

Traditionally, the IT/ITeS sector that accounts for majority of the space transacted has dominated the Pune commercial office market with the Manufacturing and BFSI sectors vying for second place a long distance behind. Accounting for 66 per cent of the market, the IT/ITeS sector took up 0.59 mn.sq.ft. in Q1 FY 2014 which is a 52 per cent jump compared to the previous reference period.

Almost 60 per cent of the space transacted by the IT/ITeS sector was concentrated in Hinjewadi and Hadapsar. Four of the top six transactions during Q1 FY 2014 were accounted for by this sector and constituted almost 43% of the total absorption during the period.

The BFSI sector share has grown at a healthy pace over the past year. Q1 FY 2014 saw the BFSI sector consume almost 0.23 mn.sq. ft., more than doubling the space taken up during Q1 FY 2013.

Just two leases inked by Barclays and BNY Mellon constituted nearly 75 per cent of the total area transacted by the BFSI sector. Demand from the manufacturing sector has been on the rise providing a fillip to the health of the Pune office market as a whole. It has experienced tremendous growth during the last five years in and around Pune city limits.

Prolific expansion by automotive giants like Volkswagen, Mercedes, Mahindra and Hyundai has resulted in their vendor companies setting up factories in Pune. This has generated huge demand for industrial land in locations like Chakan, Ranjangaon, Talegaon and in new industrial locations like Shirval.

Most of these companies have taken up offices in the CBD and PBD locations for design centres and sales and service offices. However, the upbeat mood of the market did not extend to the manufacturing sector in the current quarter as the sector’s share fell considerably compared to both reference periods.

 

It should be noted that the sector accounted for a massive 40 per cent of the transacted space during Q4 FY 2013 (till March 2013), which speaks for its underlying strength. Knight Frank’s report says that the central government’s focus on increasing the share of the manufacturing sector in India’s GDP will enable this sector’s share to recover and stay buoyant in the coming quarters.