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Review of office, retail real estate markets in 2007
Source : The Hindu Property Plus Published On : 2008-01-26 City : Chennai

Spurt in the knowledge sector largely comprising IT/ITES segments has created a sustained demand for real estate in Chennai, writes RAMESH NAIR

 

The year 2007 was another record year for the Chennai Office real estate market with approximately 7.1 million square feet of office space being absorbed. This is a growth of over 40% as compared to 2006 which saw an absorption of around 5 million square feet reiterating Chennai’s position as the second largest office market in the country after Bangalore and one of the most sought after IT and BPO destinations in the world. Very few office real estate markets in the world have undergone such a dramatic and rapid change in such a short span of time as the Chennai office market in the last 4 years.

     Major transactions in the SBD included EDS Mphasis, IBM, CSC and Symantec leasing space in DLF IT Park @ Chennai, Pfizer and Lion-bridge leasing space in Ascendas ITPC Phase 2. Major transactions in the PBD included Accenture leasing space at Shriram Gateway, HCL in ETA Techno Park, Mindtree in Ascendas Mahindra City and EBay in Futura. Major transactions in the CBD were RR Donnelley and Oracle leasing space in Acropolis, ABN Amro and JLLM leasing space in TVH Belicaa Towers and Sony Ericsson leasing space in Sterling Towers.

     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 of the IT/ITES segments. Mount Poonamalle Road and GST Road have emerged as alternative IT destinations to Old Mahabalipuram Road. Although supply has outstripped demand in 2007, most of the vacancy was seen in STPI IT Parks. The yield levels stabilized at 10 % to 11%. Developers and land owners should realise that projects in Chennai are not just competing with each other but also with projects from other competing low cost cities such as Bangalore, Hyderabad and Pune.

     Therefore stability in rentals and low operating costs are important to maintain Chennai’s position as one of the most preferred IT destinations in India.

 

Outlook

 

     With the current vacancy of less than 0.5% and limited future supply in the CBD, the rentals are expected to further increase by around 20%. The rentals in the PBD are expected to stabilize given the quantum of supply coming into the market in 2008. However, SEZ rentals are expected to go up in 2008 is very limited. Developers offering SEZ space in 2008 will find ready takers.

     Also the emergences of satellite townships are expected to change absorption dynamics. The oversupply situation may not be as bad as it was expected, given that the self correction phase has started with developers slowing down the their construction and changing usage of their projects expecting a market correction. STPI buildings in close proximity to SEZ projects could get impacted, unless STPI is extended beyond 2009. The demand for Serviced offices or business centre is expected to increase.

 
 
 
Retail
 

     No new malls were completed in the last one year in Chennai. Inspite of nearly 8.5 million sft of retail mall space under planning or construction, the overall supply addition in 2007 was negligible. Significant preleasing activity was witnessed in malls under construction a clear pointer to the fact that there is still enough unmet demand for retail space in the city.

     The vacancy levels in high street was also at its lowest given the limited space availability.

     This shortage of space pushed the rentals up by 20% in 2007.

     High street leasing activity further increased in locations such as R K Salai and Arcot Road. Given the shortage of space and spiralling rentals, many retailers have found it difficult to acquire space of the right size at the right location at the right price in Chennai.

     Only 2 reasonably sized malls currently exist in Chennai – Spencer Plaza with 5.6 lakh sft of retail space and operational since 1991 and Chennai City Centre measuring 3.25 lakh sft which has been operational since 2006. Most of the organized retailers in these malls have been successful due to the lack of competition, short supply of mall space in Chennai and the current CBD location. Around 15 new malls totaling 8.5 million sft is expected to be operational in the next 3 years.

    

    The majority of these malls are located in the CBD, Old Mahabalipuram Road, GST Road and Velachery.

     However, some mall developers need to realize that at current rentals, retailers will find it difficult to sustain their business in the medium term.

     At present the CBD and suburbs such as Velachery and Anna Nagar definitely hold good potentials for malls. GST Road and OMR are expected to evolve as mall locations in the medium term given the fact that primary catchment zones are still growing in these corridors.

  

 Most of the upcoming walls are expecting to do well, given the fact that these malls are spread out in different directions – in the centre, west, south east and south west. Also the existing mall space is negligible compared to NCR, Mumbai and Bangalore.

     A number of factors have contributed to the current mall boom in the city. Chennai has been the pioneer in organized retail from early 1990’s. The penetration of organized players especially in the food segment is quite high.

  

 Favourable demographics, rising disposable incomes, growing middle classes, rise of “super rich”, Increased double income no kids (DINKs) families, returning NRI’s, shift from “saving” to “spending” mentality, domestic retailers consolidating and aggressively expanding and new market entrants have all contributed to this growth.

     Most of the new malls have received good response and anchor tenants are already in place. Retail in Chennai has traditionally been of the high street retail format and is still evolving and getting more structured.

     There has always been a scarcity of good quality retail space due to the unavailability of land in the concentrated retail hubs.

   

 The ground coverage rules of CMDA, whereby FSI decreases with increase in ground coverage is another one of the reasons why developers have not gone for mall construction.

 

Outlook

 

     High street rentals are further expected to go up by around 15% given the short supply of space. Net addiction to mall space in 2008 is expected to be only 600,000 sft with Ampa Mall and Coromandel Plaza being completed.

     Many malls which were expected to be completed in 2008 and 2009 is further expected to be pushed further due to delay in planning approvals and slow speed of construction.

     In the future, the size of a mall will definitely play an important role but size has to be proportionate to the catchment.

     Given the width of experience and depth of product offering expectations from a shopper, large malls will definitely have an advantage over smaller malls.

     Mall developers need to analyze the characteristics of the catchment in detail before finalizing on the size and tenancy mix.

     Developers need to realize that sustaining a mall is more important than developing one and focus on areas such as Mall Management. Due consideration should also be given to issues such as circulation, parking and experience.

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