Over the years, average rents of Indian office CBDs have been either declining or stabilising. Rents in the SBDs are rising slowly, while rents in most of the Suburban sub-markets are rising at a faster pace.

This trend is likely to continue and we will likely see more growth in rents in the Suburbs than in the CBDs and SBDs, which are maturing and, hence, stabilising.

The faster appreciation in rents in several Suburban sub-markets has been driven by demand for superior Grade A assets, quality infrastructure and close proximity to a talent pool. It is easier and less expensive to build world-class infrastructure in the Suburbs, which will drive more occupiers to these markets, where more relocations and consolidations are expected.

CBDs are witnessing a slowdown in demand across the board, which is the main cause for the rental decline. Old assets, small floor plates and inadequate infrastructure are the major reasons keeping occupiers away from CBDs.

Figure 1: Rental trends of India’s CBDs, SBDs and Suburbs (2004-2017)
Source: Real Estate Intelligence Service, JLL Research

SBDs have become alternative CBDs for cities like Mumbai, Pune or Bengaluru due to their strategic location, better connectivity and established occupier base. Many occupiers have preferred to move to SBDs to save on real estate costs after the global financial crisis. However, continued demand for space in these markets has resulted in a sharp rise in rents.

Our data indicates that the difference between average rents of CBDs and SBDs has substantially narrowed in the past six to seven years (Figure 1). The average rents of CBDs stood at INR 117 (US$1.83) per sq ft per month while the average rent of SBDs has come closer to that of the CBDs, standing at INR 98 (US$1.53) per sq ft per month as at end-4Q17.

Table 1: Stock/vacancy rate of Indian CBDs, SBDs and Suburbs
Source: Real Estate Intelligence Service, JLL Research

How the Suburbs are competing with SBDs

Now it seems that most of the SBDs, such as the SBD of Bengaluru, Delhi, SBD BKC-Mumbai, SBD City-Chennai, SBDs of Hyderabad and Kolkata, are slowly maturing and moderate rent growth is expected. The Suburbs are competing with SBDs in several key aspects:

1. Non-IT occupiers are gradually going to Suburbs for the newly available quality assets.
2. New entrants like e-commerce and co-working occupiers are leasing equally in Suburbs as SBDs.
3. Most of the superior lease-only assets are taken up by leading global investors and are in the Suburbs.
4. Competitive rents and close proximity to talent.
5. Good existing physical infrastructure and the potential to build more.

During the last five years, i.e. 2013 to 2017, pan-India Suburbs rents grew by healthy 18 per cent, compared to 13 per cent and 0.3 per cent for the SBDs and CBDs, respectively.

Rents in the Suburbs are again expected to rise faster by 3.4 per cent and 2.5 per cent in 2018 and 2019, respectively, compared to 2.5 per cent and 1.4 per cent in SBDs over the same period.

Suburbs such as Thane, Western and Eastern corridors of Mumbai, Hinjewadi of Pune, Whitefield of Bengaluru, Prime Gurgaon and Noida City & Expressway of NCR, Hi-tech City, Gachibowli of Hyderabad, and PBD GST of Chennai are well placed in terms of vacancy rates, which are either at single-digit or low double-digit levels. Less availability but strong demand for these markets will help rents appreciate.

Moreover, it is possible that in the long-term, perhaps 10-15 years from now, there will not be much difference between rents of the CBD, SBD and Suburban sub-markets, with more homogeneous market characters, greater distribution of occupiers and asset types (IT & Non-IT) and infrastructure across these office sub-markets.

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