It's problem of plenty in office, retail space

The improving economic indicators suggest the demand for office space will rise over the next 12 months in Bangalore. However, supply is expected to exceed demand. As rental values have already fallen significantly since the onset of the downturn in mid-2008 and the demand improving, any further rental corrections seem unlikely. The balance in the leasing market is expected to remain in favour of the tenants due to the strong supply in pipeline in Bangalore.

According to a report from realty consultancy company Jones Lang LaSalle Meghraj Research, the demand for office space in Bangalore continued to increase in 2Q10 due to the strengthening business sentiments indicated by the increase in hiring activity and expansion of corporate firms within the city.

In 2Q10, the average rent for office space in the CBD (central business district) and the SBD (secondary business district) remained stable at Rs 74 per sq ft per month and Rs 38 per sq ft per month, respectively. The rents have remained stable for the last three quarters as the high supply in the pipeline kept them under pressure. Over the same period, investment yields in the CBD and SBD remained unchanged as rental values and capital values remained stable.

Dwelling on the retail space market, the report said the market is witnessing an oversupply in the secondary micro-market and developers are struggling to lease out their space. The malls scheduled for completion in 2Q10 were postponed by a couple of quarters.

The prime city and secondary micro-markets of Bangalore witnessed no corrections in rents. The average rents for the malls in the prime city remained at Rs 178 per sq ft per month in 2Q10. Meanwhile, average rents for the malls in secondary micro-market were recorded at Rs 85 per sq ft in 2Q10.

The report added that the existing malls in prime city will continue to witness a steady demand and might register growth in rental values in 2H11, primarily due to low prevailing vacancy coupled with negligible upcoming supply. However, the malls scheduled for completion in the next 12 months in the secondary and suburban micro-markets will continue to face the challenge of attracting retailers in an increasingly competitive market. About 7.72 million sq ft of retail mall space is expected to be operational in Bangalore between 2010 and 2012.

Rental values across malls in prime city will remain unchanged due to a lack of upcoming supply in this micro-market for a few more quarters. Meanwhile, the malls in the secondary micro-market of Bangalore are expected to remain under pressure due to the huge supply that’s in the pipeline and inadequate demand. Landlords are offering revenue-sharing arrangements instead of fixed rents, subsidising fit-out costs and the waiving-off of the minimum guarantee as options to attract tenants.

The report further noted that vacancy levels in the malls in prime city micro-market remained unchanged as there was no fresh supply in this micro-market and the existing malls are fully occupied. Vacancy levels in the malls in secondary micro-market witnessed a marginal decrease of 20 basis points from 2.5 per cent in 1Q10 to 2.3 per cent in 2Q10. The upcoming malls in secondary micro-market witnessed some pre-leasing activity in 2Q10.