Office space occupancy in Hyderabad to be down by five percentage points by FY2024: ICRA

HYDERABAD: The Investment Information and Credit Rating Agency (ICRA) estimated that occupancy in the Hyderabad market will fall by 500 basis points (bps) to around 81.0-81.5 percent for Grade A office space by March 2024, down from 86.0 percent in March 2023, due to a 21.5 million square feet (msf) supply addition in FY2024.

The office supply market grew at a Compound annual growth rate(CAGR) of 13 percent during FY2017–FY2024 (estimates) for the Hyderabad market, compared to a CAGR of 7 percent for the top six cities in India.

As of June 30, 2023, Hyderabad accounted for around 14.2 percent of total available office supply from the top six markets, with that figure predicted to rise to 15.5 percent by March 2024.

Following the lockdown in FY2021, Hyderabad had solid net absorption in FY2022 and FY2023, supported by good deal traction in new leases, back-to-office plans, and a sustained growth in physical office occupancy despite a hybrid working model. Vacancy levels thus eased to 13.8 percent as of March 2023 from 16.5 percent as of March 2021.

Giving more insights, Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA, said: “The net absorption in Hyderabad is expected to remain at approximately 12 msf in FY2024, similar to FY2023. However, with an all-time high supply of approximately 21.5 million square feet, the vacancy will go up steeply by 500 bps. The current over-supply market conditions could turn out to be favourable for the new tenants. For the existing leased spaces, the rentals are expected to rise steadily due to contracted rental escalations. However, for new leasing, the landlords are expected to remain flexible by offering an extended rent-free period and consequently, the effective rent rate would be at a discount to the prevailing market rates. The top three segments, which continue to drive demand in Hyderabad are IT – Business Process Management (BPM), BFSI and Pharma/life sciences segment. Moreover, the share of flexible workspaces is likely to increase in the medium term."

The North-west Region in Hyderabad accounts for 88-89 percent of total grade-A office space as on June 30, 2023. Hitech City, Gachibowli and Financial District are the top three micro-markets, which account for 75-76 percent of the total office supply.

The vacancy levels are expected to remain Stable in Hitech City (8.0-8.5%), high for Financial District (18.0-18.5%) and increase significantly for Gachibowli (19.5%-20.0% from 11.6 percent in FY2023) in FY2024 due to higher supply than absorption.

Despite higher rentals by around 9-10 percent in Hitech City compared to Gachibowli and Financial District, it remains the preferred office location for tenants due to good transport connectivity.

The top ten developers in Hyderabad (out of a total 130 – 140 developers) contribute to around 60-61 percent of the total grade-A office supply as of June 30, 2023, with seven of the top 10 having healthy occupancy of greater than 85 percent, which was higher than the average city-wise occupancy for Hyderabad on a sustained basis. The share of the top 10 developers is expected to remain intact as approximately 50 percent of the new supply is being added by them in FY2024.

"ICRA has maintained a Stable outlook on India’s commercial office sector as India remains a preferred destination for global capability centres (GCCs). Favourable demographics, a highly skilled and cost-effective talent pool, availability of high-quality office spaces at competitive rentals, would continue to drive demand for the Indian office portfolio in the medium to long term, " Reddy added.

Net absorption to decline by 10 percent YoY in FY2024 for office leasing segment; vacancy levels to rise marginally by 60 bps to 15.5 percent. Sustained demand from 3PL, automobile and e-commerce sectors to support warehousing leasing; occupancy to remain at 90 percent.