Sustained demand for office space in Chennai

The year 2006 has been a highly successful year for office developers in Chennai with most buildings completed till date being pre-leased. Projects such as Olympia Tech Park, Chennai One, Digital Zone 2, Amara Sri, Bascon IT Park and Kuppu Arcade have been fully pre-leased well before completion indicating strong market conditions. The Indian real estate market, the size of which is now estimated to be around Rs.72,000 crores, is expected to continue growing at its present growth rate of 30% per annum.Nearly 3 million sft was absorbed in the first three quarters of 2006 in Chennai. The absorption slowed down in the third quarter of 2006 due to the limited supply getting completed. In spite of that, Chennai is the second largest office market after Bangalore. Very few real estate markets have undergone such a dramatic and rapid change in such a short span of time as the Chennai real estate market. Chennai is witnessing a sustained real estate demand that has largely been a result of growth, spearheaded by a spurt in the knowledge sector largely comprising the IT and BPO led businesses. The year has also seen the emergence of Ambattur as an alternate IT destination to Old Mahabalipuram Road and Mount Poonamallee Road. Projects such as Prince Info Park and Arihant Insight have seen good pre-leasing enquiries. Developers such as India Land and the RR Group are constructing large IT Parks in Ambattur. However, the Government needs to proactively improve the infrastructure conditions in Guindy and Ambattur as they have become IT hubs. Major transactions The total office space absorption in 2006 is expected to be 4.5 to 5 million sft which would be an increase of nearly 30% from 2005. Projects of leading developers such as RMZ and Ascendas are getting ready only in 2007. This has led to the current shortage of quality Grade A office space in the city. Due to this shortage, the rentals for office space have increased by 10-15% in the last 6 months. However, the developers buying land at exorbitant prices should realise that most IT and BPO companies have a rental budget varying from Rs. 25 to Rs. 40 per sft per month. If this rental increase continues, the occupiers would start considering other lower cost cities over Chennai. Developers should also realise that projects in Chennai are not just competing with each other but also with projects from other competing low cost Tier 2 cities such as Hyderabad and Pune. A number of projects by prominent developers such as Hiranandani, K Raheja, ETA and Shriram would be ready for occupation in 2007. Also, the first phase of DLF IT Park @ Chennai, which is the largest office project in the city, would be available for fit-outs by the last quarter of 2006. A number of global technology and offshoring majors have committed for space in the DLF IT Park. With companies having realised that Chennai offers better infrastructure than many other Indian cities, has low attrition levels and a large pool of qualified human resources, the city is fast emerging as one of the most preferred destinations for IT and BPO companies in the world. The State Government should encourage growth of new townships, business parks and take up regional urban development plans where growth corridors can be identified and public-private partnerships promoted for investment in alternative nodes of development. The State Government should try and implement in Chennai the Madhapur model of IT Park development as in Hyderabad. In peripheral areas, the developers need to focus on fast track, low-rise buildings with large floor plates, large green areas, adequate power, water, roads and connectivity infrastructure at cost- effective rentals rather than over utilisation of permissible FSI. The arrival of the venture capital funds and the real estate mutual funds in the real estate scene will have an impact in a number of ways. The developers will get more organised, corporatise themselves and become more transparent to avail themselves of these funds. As foreign capital flows to Indian real estate, a number of sophisticated institutional players will emerge to dominate the real estate landscape in a paradigm shift away from small players and wealthy individuals. As the opportunities in outsourcing start filtering to additional service-oriented industries such as financial services and healthcare, the commercial real estate sector is expected to witness further investments in the construction of offices for the next few years to cater to the growing demand. Moreover, commercial real estate investments in Chennai offer relatively higher yields when compared to the rest of the world. Investors can expect yields of 10-11% in prime commercial properties in Chennai versus the global average of 5 - 5.5%, making it an attractive option for current income seeking investors. Also, many companies have realised the size of the SEZ opportunity and are evaluating options to optimise fiscal benefits. Many of them are reviewing the existing operations and growth plans and are rethinking on the real estate strategy. Companies are looking at migration and setting up SEZs as strategic option for business growth. The SEZ's are definitely lucrative investments to real estate developers as they will get a tax holiday for a consecutive period of 10 years (out of a 15 year period), exemption from the provisions of minimum alternate taxes, exemption from dividend distribution tax, service tax exemptions on input services, tax breaks for investing in an entity developing a SEZ and customs duty and excise duty benefit. Source : The Hindu