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Squeeze on tech firms could pull down IT office rentals in NCR

Squeeze on tech firms could pull down IT office rentals in NCR
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First Published: Tue, Jun 03 2008. 11 03 PM IST

Cheaper space? A view of DLF Cyber Greens in Gurgaon
Cheaper space? A view of DLF Cyber Greens in Gurgaon
Updated: Tue, Jun 03 2008. 11 03 PM IST
New Delhi: An anticipated oversupply in information technology, or IT, office market is expected to push down rentals of these buildings in the National Capital Region (NCR), which includes Delhi and its environs, according to real estate consultant Jones Lang LaSalle Meghraj. Rentals of such office space are presently hovering at around Rs 35-70 per sq. ft in NCR.
Cheaper space? A view of DLF Cyber Greens in Gurgaon
“I think there will be an oversupply in the IT office market,” Abhishek Gupta, head of research, Jones Lang LaSalle Meghraj, said. “Rentals will certainly come down. The only question is which micro markets will be able to sustain rentals.”
IT offices, as they are commonly referred to, house firms that process business from overseas clients or design, develop and implement software and systems for these clients.
According to Jones Lang LaSalle, the demand for IT office space may come under pressure due to a slowdown in outsourcing from US companies. This could lead to an oversupply in such space in Gurgaon and Noida in NCR.
The US is still the largest market for Indian information technology companies contributing to as much as 45% to the total IT and back office services outsourcing business in India.
“Nobody knows whether there will be a recession in the US or not,” Gupta said. “But assuming US does go into a recession, then there will be a good pressure on the IT business and this will adversely affect demand.”
The US market has been hit by a credit crunch, falling home prices, high job losses in banking, steep oil prices and shrinking business—threatening to push the world’s largest economy into recession.
Demand for IT space may also come down because of the upcoming IT special economic zones (SEZs), says Sunil Malhotra, vice-president, finance, Omaxe Ltd, a real estate developer. Companies located in SEZs are eligible for fiscal and other benefits and incentives.
Several IT companies have moved to these zones are will do so before 2009 because that is when a tax holiday for them was supposed to end (this has since been extended by a year). “If you look at the requirement for IT office space, in future it will be met by SEZs where companies will be given tax benefits. The demand for IT office space outside SEZs will be less.”
Interestingly, while IT office building rentals are expected to come down, non-IT office buildings in Delhi and its suburbs command higher rentals, because of a lack of supply.
Rentals of non-IT office buildings are far higher at Rs 110-160 per sq. ft, because of this. Developers rushed to build IT parks because they found this to be a very lucrative opportunity, given attractive Union and state government policies such as tax benefits and higher Floor Space Index for IT parks, Gupta said. The Floor Space Index regulates the amount of space that can be built on a plot of land.
“People completely ignored the demand for non-IT space though this space was also growing at around 20% every year though not at 100% like the IT industry,” he added. “Right now, there is actually an undersupply in the non-IT office space.”
Even in other cities such as Mumbai, Bangalore, Chennai, Hyderabad and Pune, non-IT office space rentals are at least 50% more than IT office space rentals. Non-IT office rentals have also been growing at a faster pace than IT office rentals. Over the past six years, rentals have been growing at 9.4% and 16.5% for IT and non-IT office space, respectively.
This is largely on account of the significant increase in IT office space over the past several years. In 2001, IT office space in India was about 7 million sq. ft., while non-IT space was about 16 million sq. ft. But by end-2007, IT office stock in tier I and II cities stood at 85 million sq. ft compared with 35 million sq. ft in the non-IT segment, according to a report by Jones Lang LaSalle..
The sealing of illegal buildings in Delhi has also created a shortage in the non-IT office space in Delhi and its environs, according to the Jones Lang LaSalle report. Because of the sealing exercise, where commercail properties in residential areas were closed, many tenants were forced to move out. But since most of the Grade A space in Gurgaon is occupied by IT companies, tenants affected by the sealing exercise relocated to other locations, which has helped in the steep rise in rentals for non-IT space.
According to the Jones Lang LaSalle’s report, developers who have gone ahead and built non-IT office space will benefit from the rising rentals and high occupancy rates in the non-IT office market.
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First Published: Tue, Jun 03 2008. 11 03 PM IST