Hyderabad houses FLEX SPACE one of the fastest grwoing

 Hyderabad houses 4.5 million sq. ft. of flex space; one of the fastest growing flex markets in the country: JLL

 

Hyderabad hosts 4.5 million sq. ft. of the total flex space stock in India and is one among the fastest growing markets in the country, according to a recently launched report by JLL, Reimagine Flexspaces A 360⁰ view.

The demand for flexible spaces in large cities such as Hyderabad is likely to grow, with businesses having a greater need to accommodate portfolio expansion and contraction along with crisis support. This indicates the inherent growth potential of the flex office market in India.

“Flex space operators provided organised workspaces with a lock-in-period of 1-2 years. Companies that have pre-leased with scheduled delivery over next 1-2 years have shown interest in such flex spaces to have their temporary offices. Apart from big MNCs, Hyderabad also houses many start-ups and small companies in the field of Consulting, IT, and logistics. Flex spaces have become financially feasible for such small players as well with low capex,” said Sandip Patnaik, Managing Director and Head (Telangana & Andhra Pradesh), JLL India

The flex space market in Hyderabad saw major traction from mid-2018 and peaked in 2019. Flex spaces accounted for 28% of total office space leasing in 2019 in the city. While flex spaces already enjoyed popularity amongst start-ups and small-sized companies, there has been an increased traction amongst large BFSI and IT-ITeS occupiers mainly as managed office spaces as well as incubation spaces. This supports the significant expansion by flex space operators in the city during the last 2-3 years.

As per a recent report by JLL strong signs of recovery were witnessed in the Hyderabad office market in Q3 2020 with a healthy gross leasing at 1.9 million sq. ft. At the same time, net absorption grew by 31% from the previous quarter to 1.5 million sq. ft. in Q3 2020.

The country is expected to witness deeper penetration, throughout 2021 and beyond, the flex space market is forecast to grow at a slower pace and more organically. Irrespective of several short-term disruptions and challenges, increased demand from large enterprises, will support the growth of the flex space market to more than 50 million sq. ft. by 2023. It is anticipated that flexible space will grow by an average of around 15-20% per annum over the next three-to-four years, although this trajectory will not be linear. Previously expected levels of new investment are unlikely to be seen, as operators look to solidify their existing operations and it is likely that certain operators will not be able to weather the storm.

As corporates return to the workplace, they are likely to further leverage flexible space to reduce capital expenditure and create cost savings, while allowing for split teams and de-densification requirements. Developments that initially drove the growth of the flex market, like the focus on utilizing workplaces to boost productivity and drive dynamic work cultures, enhance emphasis on employee health etc., will continue to influence the next phase in India.

 “While the flex-space market more than tripled in the last 3 years, the momentum going ahead will be relatively slower. Players are likely to tread cautiously, and the overall market is expected to expand 1.5 times from the current size. At the same time, demand for flexible space is likely to remain resilient and we expect the size of the flex space market to cross 50 million sq. ft. by 2023, led by increased demand from larger enterprises,” Dr Samantak Das, Chief Economist and Head of Research & REIS, JLL India.

In the commercial real estate space, flex spaces have become synonymous with adaptability. As preferences evolve, a range of flexible space options have taken shape to suit changing business needs, including remote working. To respond to the current disruption, and to lay the groundwork to deal with what may be permanent changes for the industry, flex space operators have been agile and are recalibrating their business strategies. They are now laying a greater emphasis on profitability and evolving strategies to ensure stable occupancy levels in their flex space centres.

 Large enterprises to drive demand

The densification trend that had emerged over the last decade will likely reverse with enterprises leaning on flexible office space to relax space density. Large enterprises might also look at splitting up their offices to reduce commute times and dependence on public transport. However, with expected economic uncertainty, companies will be hesitant to commit large capital to real estate. In terms of strategy, leasing directly to a third-party flexible space operator is the most widely adopted model. A partnership model allows both landlords and operators to leverage each other’s strengths. There are several ways to implement a partnership, with revenue shares and management contracts being the most common. Under the revenue share option, both parties split the upside. In the case of a management contract, the operator gets a fixed payment, while the landlord assumes all the leasing risk and enjoys the upside. Despite the benefits of this approach, partnerships are relatively less common in India for now.

What the future holds

The entry of more than 300 flex space operators into the country helped commoditize the market. Prior to the pandemic, most of these operators were focused on attaining scale and capturing market share. However, the availability of capital, in the current scenario, will be a challenge. Players who have embarked on aggressive growth so far will find themselves strapped for capital. In such a scenario, the market is likely to witness consolidation activity driven by larger operators with financial wherewithal acquiring smaller ones. 

Flexible workplaces will continue to be a major influence on the future direction of the Indian office market. There will be an even greater focus on providing customized office space solutions and demand for flexible space will not only return but increase, as occupiers embrace the core plus flex model more widely. Despite the massive disruption from the impact of COVID-19, the future of flexible workspaces will remain optimistic.

Hyderabad real estate – A road map amid the COVID -19 crisis

Hyderabad emerges most resilient; returns to normalcy faster than other cities: JLL report

• The city has the least unsold inventory as on H1 2020 that can be offloaded in next two years
• It stayed strong with the second highest residential launches over second quarter of 2020
• The city led India’s office supply with a 30% share in H1 2020, significantly driving the country’s office absorption with an 18% share during same period

Hyderabad continues to show resilience and its real estate dynamics kept up the momentum according to the JLL-CII report “Hyderabad Real Estate - A Road Map amid the COVID -19 crisis,’’ launched today. The city’s real estate performance was far better in H1 2020 as compared to other cities in India. Its formal economy was one of the first in urban India that resumed its stability as the lockdown rules were relaxed.

Despite the nationwide lockdown, in Q2 2020, Hyderabad continued to witness relatively good office leasing and residential sales. Once construction activities resumed in May 2020, the city also saw supply of new office buildings in addition to new residential projects. Hyderabad also led India’s office supply with a 30% share in H1 2020, significantly driving the country’s office absorption with an 18% share during the same period. Further, the city reported strong sales with the least unsold inventory in India which can be offloaded within two years. 

“Hyderabad’s resilience comes from the confidence of doing business instilled by the state government. The business-friendly policies of the government has helped corporates leverage the existing ecosystem in the state to maximize output and emerge as the destination of choice. For example, growth of the IT sector in the state: While national IT exports grew by 8% in 2019-20, IT exports here grew by 18% in the same period. Owing to its robust and fast developing infrastructure along with ease of living, offering a cosmopolitan environment, today, Hyderabad is a major destination for India’s young workforce,” said Ramesh Nair, CEO & Country Head, India, JLL.

In JLL’s latest GRETI (Global Real Estate Transparency Index) report in 2020, India experienced higher improvement and it is in the cusp of becoming a transparent economy. The focus of the government on sustainability transparency with focus on wellness and PropTech adoption drove this improvement.

Hyderabad has been one of the fore runners in India in these parameters. This further strengthens the investor confidence in the city’s real estate. Through the much-appreciated TS-iPass, ICT Policy and other investment friendly initiatives by the state government, the city has witnessed a major economic growth in the last six years.

“Hyderabad’s positive reaction to the crisis has reflected tremendously in the city’s real estate performance. The focus of the government on business-friendly policies has helped Hyderabad emerge as a one of the leaders despite the global pandemic,” said Sandip Patnaik, Managing Director – Hyderabad, JLL. He further added, “Impressive investment in the infrastructure sector and the state’s fast track execution has tremendously contributed to the city’s real estate growth. An active real estate market and strong economic growth along with a thriving start-up culture have helped the city to gain one of the leading positions globally.”

To understand the depth of the crisis and the reaction of stakeholders, JLL conducted a survey to understand the strategies of the top ten developers in various sectors and interviewed corporate leaders of companies in Hyderabad.

The results of these surveys and discussions on each sector is summarised in the following sections.   

Office Real Estate - As the city opened in early May 2020, construction activity resumed in a few projects and a few office projects started operations by June 2020. A total supply of 3.7 million sq. ft was added in H1 2020. Demand dynamics also remained strong as a few key office leases with large area were closed after the lockdown was relaxed in May 2020. The city reported an absorption of 2.1 million sq. ft in H1 2020 which dropped the city’s vacancy rate to 9.2 %.

Residential Real Estate - Hyderabad witnessed highest quarterly launches ever during the lockdown period in Q2 2020. Most of these launches were in the northern and eastern submarkets. Despite the healthy volume (of launches), good sales kept the city’s unsold inventory at the lowest in the country.  Construction resumed in many projects in the city, albeit at a slow pace due to reverse migration of construction laborer’s during the lock down. 

Retail Real Estate - Developers in Hyderabad offered rental waivers or rental deferments to battle the ongoing crisis. Highstreets in Hyderabad, meanwhile, gave some relief to the retailers as they are a relatively cost-effective solution to malls in these tough times. Leasing activity has continued in Highstreet retail properties. Construction of upcoming malls has resumed, although at a slow pace.

Urban infrastructure development of fringe area with tech solutions, diversification of economic base and development of new economic hubs will assist Hyderabad’s real estate sector to overcome this storm and emerge stronger. Digital technology solutions like the Internet of Things (IoT), AI, sensors and geospatial technology, can be used to gather accurate data and detect real time problems to efficiently manage the urban infrastructure of the city. As office assets showed confidence of high growth and stable returns for the medium to long-term, global institutional investors and sovereign wealth funds showed an increasing interest in the city over the past few years.

While the state government gave confidence to corporates through its business-friendly policy support in H1 2020, it utilised the lockdown period to upgrade the city’s urban infrastructure and aesthetics by employing labour who otherwise would have been unemployed. Hyderabad recorded the highest office net absorption in 2019 (as a proportion of existing stock) compared to any city globally, while standing among the world’s best-performing cities for prime office rental growth according to the recent JLL City Momentum Index (CMI) 2020 report.