ICRA estimates the occupancy in the Hyderabad market to decline by ~500 bps to around 81.0-81.5% for Grade A office space by March 2024 from ~86.0% as of March 2023 due to all-time high supply addition of ~21.5 million square feet (msf) in FY2024.
The office supply grew at a CAGR of ~13% during FY2017 – FY2024 (estimates) for the Hyderabad market, compared to a CAGR of ~7% for the top six cities[1] in India. Hyderabad accounts for around 14.2% of total available office supply from the top six markets as on June 30, 2023, which is expected to increase to 15.5% by March 2024. ICRA has maintained a Stable outlook on India’s commercial office sector.
Post the lockdown in FY2021, Hyderabad saw healthy net absorption in FY2022 and FY2023, backed by good deal traction in new leases, back-to-office plans, and a steady rise in the physical occupancy in offices despite a hybrid working model. Vacancy levels thus eased to 13.8% as of March 2023 from 16.5% 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 ~12 msf in FY2024, similar to FY2023. However, with an all-time high supply of ~21.5 msf, 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 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% 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% 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% in FY2023) in FY2024 due to higher supply than absorption. Despite higher rentals by around 9-10% in Hitech City compared to Gachibowli and Financial District, it remains the preferred office location for tenants due to good transport connectivity.
The top 10 developers in Hyderabad (out of a total 130 – 140 developers) contribute to around 60-61% 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%, which is 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 ~50% 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.
