Like every market, real estate is cyclical. While there is no reliable way to know what the real estate market is going to do, it is important that we are aware of overall market trends. The past and the present reveal a lot about where we are heading. The real estate market typically follows four phases as shown in the given image.

Hitec's office market was in Phase 1 by 2014 and the much needed revival kicked in post the state split. Market has been in its best phase over the last 2 years and currently it seem's to be at the peak point of Phase 2. This phase has ensured that rentals / land prices in Hitec for prime properties are at an all-time high, recent auctions are breaking all previous records, quoted yields are quite low and rentals / land prices seem to keep moving upwards on a regular basis. In 2018 the market is expected to remain at its peak and by 2019 move towards a potential Phase 3.

This peak brings the market to an important introspection point for developers / occupiers / investors, with regards to making some assumptions about the future trends. Some key points worth deliberating are as follows:

• Developers, especially non-Grade A developers are beginning to tread carefully in the current market with some preferring to sell commercial land holdings rather than develop. Are we already seeing a supply glut in the non Grade-A space?
• Major occupiers are exploring consolidation or expansion opportunities with the intention of reducing their real estate costs by shifting to peripheral locations of Hitec city. Is this going to effect attractiveness of Hitec as a preferred IT location?
• Some developers share the feedback that majority of their enquires for leasing are from the co-working brands. So is direct demand of IT showing signs of slowing down?
• Co-working brands are about to touch approx. 10000 seats in Hitec either operational or under development. All this has happened in just about 24 months and most of them seem to have more appetite for space in Hitec. Are co-working offering value for money options within Hitec city which standard developers lack?
• Startup's and SME's are no longer the main clients for co-working spaces. It is the mid & large corporates especially IT companies which are moving their operations to co-working spaces. Are we seeing a fundamental shift in the office space market demand?
• Thanks to co-working brands, concept of revenue sharing is picking up in the office market. Does this benefit the landlords / investors?
Increasing rentals have ensured a lot of interest in the Hitec city market. All leading pan-India developers and funds want a share of the market.

Interestingly most of them were avoiding this market between 2009-14. Numbers of supply coming up are mind boggling with some estimates even claiming 40-50 mn sft over the next 12-36 months. Vacancy numbers with leading developers was negligible or nil till last year. In the past few months this number has been climbing up slowly though still in single digits %wise. Above graph-wise Phase 3 seems to be on the anvil.

Previous experience shows that when investors / developers need to be careful, they tend to throw caution to the wind and when one needs to show an extra step of faith, they become increasingly cagey about any further investments. Today obviously everyone wants to remain oblivious to this possible upcoming situation and hope to complete their project leasing / selling before the supply deluge hits the street.

Most non-Grade A developers are quoting a standard average rent of Rs. 60/-psf/month for their buildings. Nowadays when you take a client for a site visit, after the first few inspections, clients start pulling ones leg, by asking us if the next quote is also Rs. 60/-. This number is being quoted irrespective of the building being ready, under construction, digging stage or even land acquisition stage. Every other person has started becoming a commercial developer which indicates that something is systematically wrong with the market. A correction would need to set in the distinguish the men from the boys and return some sanity to the market.

If one were to analyse availability of vacant space in the non-Grade A category, then it is common to find many buildings still lying vacant for the past 6-12 months. The quoted rentals for upper floors are the same Rs. 60/- and these higher quotes has ensured that leasing has remained stagnant. Ground floor rental quotes in such buildings are purely based on whims and fancies of the developer. Matters get complicated since such buildings are pre-sold to investors promising higher rental returns. It has become a practice nowadays for such developers / investors to quote the moon when they are close to completion. Leave them for 6 months and some of them come back to mother earth.

If we plot the rentals prevalent in and around Hitec city, for Grade A properties, on a graph then the data would resemble a hill shape similar to the image above. Madhapur would be at the peak of this graph. Areas north of Hitec like Kukatpally & Hafeezpet, south of Hitec like Kokapet and south-east of Hitec like Raidurg-Tolichowki corridor would be at the base of this graph. Quoted rentals for Grade A buildings is between Rs. 70-75/- in Madhapur, this number comes down marginally towards Gachibowli, Kondapur and Financial District. This number takes a sharp dip towards Rs. 40/- or below towards the peripheral areas of Kukatpally, Hafeezpet and Kokapet. Major occupiers like Genpact and Cap Gemini have moved to areas like Hafeezpet and Kokapet respectively to take advantage of low rentals in the peripheral areas. Apart from low rentals these properties are new IT compliant Grade A developments constructed by leading developers like Phoneix and GAR Corp. All technical features including parking facilities are much better than older IT buildings.

This kind of movement towards peripheral areas is a major shift for the market. Till couple of years back recommending property options to clients in peripheral areas was quite difficult. Clients would have a lot of resistance to move operations away from Hitec. The benefits of being closer to employee residential areas, amenities etc was always their but nobody wanted to be the first to move away from Hitec. With Hitec rentals reaching an all time peak, some occupiers have taken the right initiative of trying to cut their real estate costs, in this highly competitive environment, without compromising on building quality or specs by moving into brand new IT compliant buildings. Another area which could see development of office space buildings in the future is Miyapur. Metro is yet to make its mark on the office market, we will have to wait and see how this infrastructural development changes the office market in the future.

All these developments have a flip side towards the eastern side of the city. Earlier it was presumed that if an occupier had rental budgets ranging from Rs. 30-35/- then eastern side locations like Uppal, Pocharam etc were preferable. Now with peripheral Hitec offering sub Rs. 40/- options, eastern side could face the brunt with demand slowing further. This effects the ideal plan of equitable development of the city across all sides rather than just burdening the north-west corridor with all developments.

Beginning of this year any hints of slowing IT demand due to high rentals was more than enough made up by the insatiable demand for space from the co-working segment. Co-working segment would have picked up approx. 0.5 mn sft over the past 2 years. This number is likely to increase substantially over the next 1-2 years. 90% of this demand for space from the co-working segment is for Hitec city. We now find these brands setting up offices in each of the micro markets of Madhapur, Gachibowli and Kondapur. Financial district has not been a preferred destination yet but this would be just a matter of time.

A major shift in the co-working segment seems to be their focus on acquiring mostly mid and large sized clients for their spaces. Their model of tailor making space for clients, coupled with lower lock-ins & deposit, all-inclusive costs and lesser admin hassles are making them an ideal choice for tenants. Just imagine the extent of flexibility co-working spaces offer clients with multiple occupants working either two / general or 24/7 shifts from the same space. These occupiers would have ideally been dealing with the larger developers for space. Co-working model is expected to put a lot of pressure on the current model of straight leasing prevalent with developers, with clients asking for more value-adds. Today a client defines their rental budget as an all-inclusive per workstation cost model with options ranging from Rs. 5000-25,000 per workstation / month available to choose from. This compared to the prevalent model of defining rental budgets then trying to figure everything else like interiors, maintenance, running costs, admin etc, separately, is beginning to change.

Changes are likely to be seen in the pre-tenanted investor segment as well. Revenue share deals especially in the co-working segment with brands like Awfis are picking up. Such deals have the potential of much higher rentals than standard pre-tenanted deals. The landlords obviously take much higher risk in terms of investment in fitouts, nil or negligible deposits, no lock-ins etc, but the returns more than enough make up for such higher risks. On the positive side, the landlord engages with a co-working brand who markets the building across India through a large sales team to a large client base. In some cases it has been noted that landlords in the same building are earning more than double on fitted-out deals from revenue share deals than standard fitted out rental deals.

Another location which could see lot of leasing activity is the Raidurg-Tolichowki belt. Quality supply is coming up and occupiers are beginning to take notice of the same. Co-working will develop in this side of the market and is expected to boost this side of the market as well. Quality supply is no longer the forte of leading developers. Local developers have started delivering quality Grade A supply in Hitec.

Most of the upcoming supply seems to be targeted for 2019, making next year an interesting year to watch out for. Overall we feel the current market is not for the faint hearted or new starters. An interesting price war seems to be brewing in the distance. Overall the traditional way of conducting commercial real estate business is about to change drastically.