Owing to new outsourcing destinations like Eastern Europe, China, South Africa, Vietnam, Philippines etc., improvement of Bangalore infrastructure has become an indispensable prerequisite. Supply of office space is shifting from CBD to second centers before completion. Many office properties are being built in business parks, as only they have sufficient development land available.
The high level of development activity in the next few years (2006 and 2007 around 6 million sf.) may not significantly ease the market if demand continues to increase as fast as it has in the last few years. Development activity in the CBD will continue to be low. Of course, the vacancy rate can hardly fall any further. In peripheral locations, where most of the offices will be completed in the next few years, it could even rise slightly in the medium term. Top rents are expected to increase further during 2006 and 2007, stabilising only in the subsequent years. A moderation of the market may result from the development of the new airport in the north, as a new office location may be built in its surrounding area, which would take the pressure off the other sub-markets.
The greatest risk factor for Bangalore as a location is from the upcoming Tier II and Tier III cities which also aim to develop as IT centres. Wages in Chennai, Hyderabad, Ahmadabad and Kolkata are considerably lower than those in Bangalore. In some cases rents are also 10% to 20% less. Bangalore success story has also prompted would-be emulators in China and Eastern Europe. SAP CEO Henning Kagermann reputedly stated that he would like to invest more in Eastern Europe and China and less in Bangalore due to sharply rising costs.
This by no means indicates that the good times for Bangalore are nearly over. Although competition with other Indian, Chinese and Eastern European IT outsourcing locations is growing, at least in the beginning, this will mainly affect the basic service areas. Bangalore has now moved further up the supply chain. In December 2005, both Intel and Microsoft stated their intention to strengthen their development activities in Bangalore. In this respect Bangalore still has a unique selling proposition. However, developments in the Tier II and Tier III cities will somewhat dampen medium-term growth possibilities for Bangalore. The improvement of the infrastructure has therefore become an indispensable prerequisite for Bangalore.
Trends in the Indian office markets: For the whole of India, three trends are likely to hold over the next few years. First, office supply must increase considerably. In the three locations described, the office stock will have to increase by a total of nearly 20 million sf. annually in order to keep pace with the growing demand. Taking all the Indian cities having a population of over 1 million, nearly 55 million sf. must be completed each year. This could even prove to be a very conservative estimate. Not only have vacancy rates fallen in the last few years but the market for IT outsourcing is still far from exhausted. India is expected to gain above-average benefits from the further globalisation of services.
Second, the supply of space is shifting from the traditional CBDs towards secondary centres as a result of sharply higher land prices in the city centres. Another reason is that modern office buildings in newly developed areas enable the higher quality standards that are essential for IT services.