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Web Exclusive | IT/ITeS to drive office space growth in ‘08

Web Exclusive | IT/ITeS to drive office space growth in ‘08
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First Published: Fri, May 02 2008. 12 17 PM IST

Kaustuv Roy, director,  transaction services, Cushman & Wakefield
Kaustuv Roy, director, transaction services, Cushman & Wakefield
Updated: Fri, May 02 2008. 12 17 PM IST
New Delhi: Analysts were right when they predicted that real estate companies were unlikely to take a hit in earnings just yet. One of India’s leading real estate companies, DLF Ltd, boosted net profit for the year ended March by as astounding four times. Its net profit for fiscal 2008 was Rs7,856 crore, compared with Rs1,934 crore a year ago. Sales rose more than three times to Rs14,494 crore.
Kaustuv Roy, director, transaction services, Cushman & Wakefield
However, Kaustuv Roy, director, Transaction Services, Tenant Strategies Solutions, Cushman & Wakefield feels that either price correction is already happening or is round the corner. In an interview with Lipi Mohapatra of Livemint, Roy comments on the office space scenario in 2008. Edited excerpts:
Q: How is the office space segment in real estate poised to grow in 2008 and is the overall sentiment positive or negative?
A: Demand for office space has traditionally been driven by the IT/ITeS sectors, comprising of software development and processing centres. This is expected to be the largest demand driver in 2008 as well. Likewise, supply follows a similar pattern. Of the total expected supply of 82.8 million sq.ft. 2008, IT specific developments would constitute the maximum share.
We are noticing pockets of over supply in certain micro-markets, and price corrections are either happening or are around the corner. Uncertainty of the STPI extension has further compounded the issue. Hence, while IT/ ITES SEZs seem to be doing very well, IT Parks will face a challenge in absorption.
The global economic slowdown led by the U.S. sub prime crisis, has had an impact on India leading to a marginal slowdown in the rate of growth across all segments of real estate.
Q: What potential does South India hold in the realm of IT office space?
A: Expected supply for 2008 in the three southern cities is expected to be as below:
Bangalore: 14.7 million sq. ft
Chennai: 12 million sq. ft.
Hyderabad: 6 million sq. ft.
Rental values in these cities and more specifically in certain micro-markets have seen marginal increase over the last quarter. In Bangalore, average increase in rental value in CBD and Peripheral Outer Ring Road (Hebbal - Sarjapur) was of 7% and 9%, respectively, since Q4 2007. Suburban and peripheral locations of Whitefield and Electronics City have witnessed an increase of 5% and 7%, respectively, while Peripheral Outer Ring Road increased by 9% due to the increasing preference of the location by IT/ITES firms in comparison to other peripheries (Whitefield and Electronics City).
Rental values in Hyderabad saw a quarterly rise of 2-6% across most micro markets mostly due to healthy demand and very low supply of Grade ’A’ projects. Chennai too saw only marginal movement in rental values, especially in the corporate office space sector due to stronger demand.
Q: What are the other upcoming IT destinations?
A: Apart from traditional IT destinations like Bangalore, Hyderabad, Mumbai, Pune and NCR, certain Tier 2 cities are also being promoted for IT/ITeS supply.
Prominent amongst them are Kolkata where the government is actively promoting STPI and SEZ developments which have seen a lot of interest owing to improvement in infrastructure and high quality human capital. Coimbatore and Kochi in South India have also seen interest being generated from the IT/ ITeS sector.
Ahmedabad and Nagpur too are being promoted heavily by their respective state governments and are expected to come up as viable options for IT/ITeS, given the quality of their infrastructure and lower rentals.
Q: What are the benefits of these new IT destinations apart from their competitive rates?
A: Supply of good quality human capital is an important factor that most IT/ITeS companies consider while finalizing their location/s. Emerging IT /ITeS destinations provide for a good talent pool as also for viable options for migratory talent to settle here.
Many of them are promoted with tax benefits and incentives by their State Governments to develop these IT/ITeS destinations, thereby bringing down rentals/ capital costs. Also infrastructure development in most of these cities remnains geared towards benefiting the technology sector.
Q: Any cues for the small IT firms looking for office space?
A: Small to medium enterprises are often unaccounted for while creating office spaces, whether in Tier I cities like Mumbai, NCR, Bangalore or in upcoming SEZ / IT Park development in alternate locations. Most SME’s require cost effective and small space packets which new developments are unable to provide. Thus, currently they are relegated to older Grade B or C structures, with smaller floor plates. Alternatively, they are operated from either retail or residential spaces.
Q: Sebi has paved the way for real estate funds. What will be the overall effect of this scheme on the real estate market?
A: If the minimum ticket size for real estate funds is small and if entry loads are comparable to normal mutual funds, it will reduce the entry barrier for smaller investors, enabling them to participate more actively in this sector.
However, investors need to realize that these will be close-ended funds. On the developer side, while big developers have already become corporatized, mid-rung ones will push to reach that level too and this will inevitably prop them up as attractive investment destinations.
On supply side, we have seen improvement in quality of new real estate projects/ locations. For developers, their performance on pricing and marketability of products will be keenly followed by these real estate funds. In times to come, there will be a rationalization in pricing, as cash inflows turn critical.
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First Published: Fri, May 02 2008. 12 17 PM IST