Pradeep Jain is a property developer with a unique problem. The chairman of Parsvnath Developers Ltd, India’s second biggest listed real estate company, just can’t find space for a bigger office in India’s capital city. Jain wants to move to an office that is double the size of the 30,000-sq. ft one Parsvnath currently occupies in Connaught Place, Delhi’s central business district. The company did develop a building with 100,000 sq. ft of space in Delhi’s suburb of Gurgaon, but it was fully leased out even before it was completed.
Jain’s problem is unlikely to be solved anytime soon; a recent drive by Delhi’s local administration shut down businesses operating out of premises in residential areas. “There’s a big shortage and the demand is more,” says Jain. “You have to wait because no commercial land is available today in Delhi, Gurgaon, or Noida (another Delhi suburb).
In terms of the sheer unavailability of space, India’s capital and its suburbs have overtaken Mumbai which has traditionally been more strapped for the commodity. Mumbai can grow only to its north, while Delhi can in all directions, and has done that.
Yet, Mumbai has a 5-6% surplus of commercial space, largely in its suburbs. The corresponding number in Delhi is zero; in its suburbs, 1.4%. A 7% surplus is considered the ideal balance between demand and supply.
“The city of Delhi had a limited supply of good quality offices,” says Sanjay Verma, the executive managing director of real estate advisory Cushman and Wakefield, South Asia. “With the sealing drive, those options were reduced significantly. It also led to a rise of rental prices in the neighbouring markets of Noida and Gurgaon.” he adds.
In Delhi, about 2,600 offices were shut down during the municipal drive, which began on 8 November 2006, sending companies scrambling for space. Real estate consultants say about 10 million sq. ft of office space will be ready in Delhi, but only towards the end of year.
Most of the new construction is happening in Gurgaon. Most of “the buildings under construction in Gurgaon are already committed”, says Vivek Dahiya, associate director-global corporate services, DTZ India, a real estate advisory. “You can book space right now for a building that will be ready 12 or 15 months from now.”
Prices are rising in major cities throughout India primarily because of increasing demand for offices, especially from information technology and business process outsourcing companies, which require large blocks of space to operate. Office rentals for prime office space in central Delhi have shot up more than 113% in the past year to about Rs225 per sq. ft, according to property consultants Cushman & Wakefield. In Gurgaon, rentals for what the firm calls Class A office space have risen nearly 100% from a year ago to about Rs77 a sq. ft.
Still, Mumbai is more expensive. The average rentals are currently in the range of Rs 175 per sq ft to Rs 300 per sq. ft for five to seven year-old buildings located in Parel and Nariman Point, both tony locations for businesses. “The huge increase in rentals is an indication of short supply of office space,” in Mumbai , says Ramesn T Jogani, managing director and CEO, India Reit Fund Advisors Pvt Ltd.
In Delhi, companies that need offices immediately are paying a premium, settling for less luxurious digs, or signing leases for buildings constructed by lesser-known developers. “There are limited options, so you have to be on your toes if you’re looking for space,” says P. Sahel, national director for Jones Lang LaSalle.
“Even with temporary space, there aren’t too many options. If a company wants X number of seats and it is not able to find space, it might have to look at where it will be able to squeeze in, ” says Sahel.
Patu Keswani, owner of budget hotel chain Lemon Tree Hotels, says his employees are all over the place, literally. After the sealing drive in Delhi, he has shifted 20 workers to offices in a mall, in suburban Ghaziabad. Another 40 or so employees are now packed into two other offices in Gurgaon. The rest have spread out elsewhere. “I have no option,” says Keswani. “I’m looking in Gurgaon as there’s nothing available in Delhi.”
Real estate experts say the space crunch is temporary and lease rates will settle in a year or two once builders finish the projects they are planning. Developers simply didn’t anticipate the demand surge and new construction is lagging behind.
Advertising firm Ogilvy & Mather recently moved into temporary cramped quarters about five minutes from the company’s 40,000-sq. ft office in the Okhla Industrial Area that was closed during the sealing campaign.
The temporary space is functional but cramped, says Ogilvy & Mather president Sanjay Thapar. The company is now negotiating for space in Gurgaon where about 70% of its clients are now based. Until a couple years ago, the company’s clients were evenly split between Gurgaon, Noida and Delhi, he adds. Thapar says it isn’t the cost to the company’s profit that concerns him.
“Emotionally, it’s expensive,” Thapar says. “People expect a certain kind of environment and when they don’t get it … it does affect the mind.”
—With input from P. Manoj