The frenzied overbuilding in city suburbs, often in terms of rows and rows of commercial buildings and assorted technology parks, is set to spark off a decline in rentals in some parts of the country. And India’s southern city of Chennai may be the first to see this trend even as red-hot Bangalore is starting to see islands of excess space emerge.
Part of the problem stems from concentrated pockets of construction in the commercial building boom that is happening across the country. A research report from Knight Frank, an independent consulting firm, estimates that nearly 14% of the 103 million sq.ft of new supply coming up by 2008 will be in Chennai.
In terms of supply, the city is ranked third behind Bangalore (19%) and Hyderabad (15%), but is ahead of both Mumbai (13%) and the National Capital Region (12%). The report estimates that approximately 30 million sq.ft of office space is entering the market nationally each year.
As a result, for the first time in five years, commercial rentals in Chennai may drop by around 15% this year because of overbuilding by developers who misread demand, sayindustry experts.
Ravi Ahuja, national head of project marketing at Cushman & Wakefield, estimates that while demand in the city is for about 5.5 million sq.ft, nearly 9 million sq.ft of new space will be ready for clients by the end of this year. “Projects that are getting ready earlier will benefit,” he says, adding that those that come up later in the year will have to deal with few potential renters and abundant choices.
Worst affected will be the properties that are coming along the Old Mahabalipuram Road, which connects Chennai with Mahabalipuram and runs for about 45 km. This stretch is the site of many buildings aimed specifically at the information technology sector. Of the estimated 9-11 million sq.ft of space that is nearing completion in Chennai, a whopping 60% is in this stretch alone.
As a result of this kind of over-building, between two million sq.ft and four million sq.ft of commercial space in Chennai is likely to have no immediate takers, according to an informal survey of five local real estate watchers.
Leading domestic and international players such as Singapore-based Ascendas, Shriram Properties and RMZ are all independently building office space in excess of one million sq.ft each and most of these are likely to be ready for occupation by this year.
This kind of supply “will bring down the unrealistic expectations of property developers,” says Thirumal Govindraj, Chennai head of CB Richard Ellis, who is expecting rentals to start sliding. “The excess supply is good because it will remove the current froth in the market,” he adds.
Until now, with growing demand from IT and related services companies, prices of office rentals in Chennai have nearly doubled in some parts of the city such as Guindy, the erstwhile industrial area of the city, over the last four years. Further afield, prices have risen between 30% and 80%, according to real estate consultants Jones Lang LaSalle India.
In Bangalore, the massive build-up of real estate space to accommodate information technology centres is creating some pockets of excess capacity in a city better known for acute shortage of space.
The forecasted supply in Bangalore in the commercial real estate arena in 2007 is estimated at 15–20 million sq.ft while the overall demand at present is estimated to be about 11-12 million sq.ft. This imbalance has the potential to cause dips in rentals with some Bangalore real estate observers predicting a decline of up to 20% in office rentals in some parts of the city’s outskirts, from about Rs30 per sq.ft per month to Rs24 per sq.ft per month.
“The growing oversupply in the commercial office space in Bangalore will begin to show by the second half of 2007,” says Ankur Srivastava, the managing director of real estate consultancy firm DTZ Debenham Tie Leung.
The oversupply, however, will be concentrated in the peripheral suburbs of the city ranging from the northern tip adjacent to the upcoming International Airport down to the south east and southern ends of the city — termed as the IT Corridor. These areas are seeing construction of large self-contained office townships and technology parks that usually have large companies as tenants with campus-like settings of between 35,000 and 40,000 sq.ft.
Back in Chennai, fingers are being pointed by real estate firms at local and small developers for the pressure on rental prices. “Excess supply will first impact new and small builders who don’t have a brand,” says Lee Fu Nyap, head, Chennai operations of Ascendas, which is building a 1.5 million sq.ft of IT office space at the beginning of the Old Mahabalipuram Road. Ascendas will be finishing the 0.7 million sq.ft second phase of the project this year.
Builders who have recently finished their complexes agree that they have escaped the fallout of the excess space build-up but see pressure down the road.
Arihant Housing, which developed about 1.5 lakh sq.ft on the Old Mahabalipuram Road, says the complex is fully occupied thanks to the project having been completed in 2006. In 2008, the firm does not expect demand in the area to be in excess of supply, causing rental prices to come under pressure.
“Rentals and prices along Old Mahabalipuram Road will fall by 30% this year,” predicts M Murali, CEO of Shriram Properties Private Ltd, whose company is developing office space in Chennai though not on the Old Mahabalipuram Road. Shriram’s project is coming up along a highway not far from the the local offices of Infosys Technologies, the country’s second largest software services company. For now, Murali is hoping that having sought-after neighbours will help keep prices up.
— Archana Rai in Bangalore contributed to this story.