Unlimited FSI Proving Bane For Hyd Realty: ICRA

Bizz Buzz view

Bizz Buzz, the business daily for digital age, has launched a campaign against unlimited FSI in Hyderabad, saying such a rule will be detrimental to the Hyderabad real estate and it will turn the City of Pearls into traffic chaos in long run. We have published nine articles so far, highlighting the dangers of the unlimited FSI for Hyderabad realty. ICRA rating agency’s latest report goes on to validate what we have been saying for the past two months. However, our campaign against unlimited FSI in Hyderabad will continue - Editor

Hyderabad is the only prominent major Indian city that has an unlimited FSI rule. Taking advantage of such norms, some developers are undertaking large speculative construction (without near-term visibility on tenant leasing), resulting in a huge demand-supply mismatch - Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA

Hyderabad: Vacancy levels for Hyderabad office market are expected to increase significantly by nearly 1,000 basis points to 24-24.5 per cent by March 2026 from 14.1 per cent as of March 2023 as the unlimited floor space index (FSI) has turned out to be big bane for the City of Pearls, according popular rating agency ICRA.

ICRA estimates that the occupancy in the Hyderabad market will come down to around 75.5-76.0 per cent for Grade A office space by March 2026 from around 86 per cent as of March 2023 as supply is projected to significantly outpace net absorption. The Hyderabad office market will be staring at lowest occupancies among top six cities in India by March 2026, it said.

“Office supply grew at a higher CAGR (combined annual growth rate) of approximately 14 per cent during FY2017-FY2024 for the Hyderabad market, compared to a CAGR of around 7 per cent for the top six office markets in India. Hyderabad accounts for around 15 per cent of total available office supply from the top six markets as on March 31, 2024, which is expected to rise to 17 per cent by March 2026,” ICRA said in a statement on Monday.

Giving more insights, Anupama Reddy, Vice President and Co-Group Head, Corporate Ratings, ICRA, said: “Hyderabad is the only prominent major Indian city that has an unlimited FSI rule. Taking advantage of such norms, some developers are undertaking large speculative construction (without near-term visibility on tenant leasing), resulting in a huge demand-supply mismatch. Hyderabad witnessed an all-time high supply of nearly 19 msf (million square feet) in FY24, the highest in its history and the largest yearly addition in India across locations”.

This high supply trend is expected to continue through FY25 and FY26 with estimated new supply of 17-20 msf each year. However, net absorption is expected remain in the range of 9-12 msf each year, resulting in a steep increase in vacancy levels to 24-24.5 per cent by March 2026 from 14.1 per cent as of March 2023 (19.3 per cent as of September 2024), she said

ICRA estimated the city would have the highest vacancy levels by March 2026 among India’s top six cities, surpassing Delhi NCR.

The north-west region in Hyderabad accounted for 88-89 per cent of total grade-A office space as on September 30, 2024. Hitech City, Gachibowli and Financial District are the top three micro-markets, which account for 70 per cent of the total office supply. The vacancy levels are expected to remain stable in Hitech City (9.5-10.0 per cent) as it remains the preferred office location for tenants due to good transport connectivity. However, vacancy levels are expected to shoot up significantly to 25-30 per cent for Gachibowli and Financial District by March 2026 as 60 per cent of the upcoming supply in FY26 is getting added in these two micro markets, resulting in supply outpacing net absorption. The top three segments, which continue to drive demand in Hyderabad, are IT–Business Process Management (BPM), Banking, Financial Services and Insurance (BFSI) and flexible workspaces, ICRA added.

“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 or new deals may happen at lower rates compared to current average rentals in these micro markets,” Anupama Reddy added. For some of the developers, this will have a bearing on the return metrics and debt-raising potential for the upcoming projects, where occupancy is expected to be low, she said.