Feature on IT real estate in Tamil Nadu

Multi-tenanted buildings: the need of the hour

Ramesh Nair

A few years back, a number of multinational Information Technology (IT) and Business Process Outsourcing (BPO) companies, after considering Chennai as a base for their operations, finally decided on cities such as Bangalore, Hyderabad and Pune due to the lack of quality space in Chennai. This trend is fast changing with the entry of national developers and local developers, who are gearing up to meet the potential demand for space from IT companies which is expected to be in the range of 2 to 2.5 million sq.ft. per year. Other reasons for this trend is that companies have realised that Chennai also offers better infrastructure than many other Indian cities, has low attrition levels, and a large pool of qualified personnel.

Nearly 1.4 million sq.ft. of office space was absorbed in 2003, with more than 90 percent of the demand originating from the IT and BPO sectors.

Nearly 1.6 million sq.ft. of space has been absorbed in the Chennai office market during the first three quarters of 2004. Over the last two years more than 95 percent of the space absorbed has been by the IT and BPO sectors. This is an extremely healthy situation given the fact that the quality of buildings in Chennai is still not up to international standards. The city still needs to offer quality ready-built space and developed land, targeting technology and outsourcing companies of different sizes. The need of the hour is to have a healthy mix of multi-tenanted buildings such as Tidel Park, and business parks such as the Seruseri IT Park. There is tremendous opportunity for landlords owning land on and off the IT highway to come up with multi-tenanted buildings and mini-business parks targeting the big IT names. Most international occupiers would prefer to lease space as this would involve minimum capital commitment, maximum flexibility, easier exit strategy, and real estate being kept off the balance sheet. Unlike Bangalore, Chennai has not yet seen many leases of campus facilities by large occupiers. Some of the major leases signed during the last three quarters include Satyam leasing 140,000 sq.ft. on the IT Highway in a project developed by SKCL (the first fast-track built-to-suit leased facility in the city was completed and successfully handed over in July 2004), Philips leasing space in Anna Salai, Perot Systems leasing space in Ambattur, Astron leasing space in R A Puram, Office Tiger leasing 60,000 sq.ft. in Anna Nagar, Cognizant leasing 130,000 sq.ft. in Navallur, Syntel leasing 50,000 sq.ft., and TCS leasing 130,000 sq.ft. on the IT Highway. It is believed that there is currently demand for nearly 1.5 million sq.ft. of space from IT and BPO majors, and request for proposals have already been floated to various IT Park developers. It is expected that projects where the land has been acquired, concept has been frozen, plans approved by CMDA, and construction work started, have a better chance of winning these clients. Other notable transactions included Infosys buying 120 acres of land from Mahindra City to increase its presence in Chennai, TCS buying 70 acres in the Seruseri IT Park and, Wipro acquiring land on the IT Highway to expand its operations. The Infosys campus over a period of time will house 25,000 employees. Cognizant is also expanding its campus on the IT Highway. With supply increasing in the IT Highway, and competition coming from cities such as Bangalore, Hyderabad and Pune, rentals for Grade A facilities on the IT Highway is expected to be in the range of Rs 20 to Rs 30 per sq.ft. per month depending on the distance from the city and the facilities being offered. At least six leading Chennai developers have announced IT park projects on and off the IT Highway. A leading Singapore-based developer who has successfully completed projects in Bangalore and Hyderabad has commenced work on an IT Park in Taramani.

The state government on its part has also contributed to the improvement of quality office real estate supply. The stamp duty for purchase and lease of property has been reduced considerably. In addition, the government has set up a core committee which includes leading developers, architects and consultants to look into the various issues facing IT real estate in Chennai. The government has also announced the relaxation of FSI to the extent of 50 percent for IT Park projects subject to conditions, and 50 percent exemption of stamp duty and registration fees at the time of purchasing land/buildings for IT industries subject to certain conditions. The government will also offer around 500 acres of land in Sholinganallur as part of the first phase of the Knowledge Industrial Township. A number of local, national and international developers are expected to aggressively pitch for this land. The project, if executed effectively, could change the face of IT development in Chennai.

The state government needs to push for the implementation of a new master plan for the Chennai Metropolitan Area. The government also needs to look at reclassifying and allotting land at competitive rates to local, national and international developers to create mixed use facilities. Further, it should take steps to improve infrastructure in the Ambattur and Guindy Industrial Estates to attract IT companies. Mount Poonamallee Road, Pallavaram and Velachery, given their nearness to middle income catchment zones and the airport, should also be positioned as alternate IT corridors. On a macro level, the government needs to find a permanent solution to the water issue in Chennai before the situation gets out of hand. The biggest boost will come when the IT Highway will be converted to a six-lane expressway connecting Madhya Kailash and Seruseri. As per state government sources, this project, developed by TNRDC, is expected to be completed by the second quarter of 2005. Travel time between Tidel and Seruseri is expected to come down to 15-17 minutes once the Expressway is ready. The announcement of the widening of the road has led to a number of landlords quoting unrealistic and unviable land prices on the IT Highway. OMR is becoming the preferred destination for IT and BPO companies mainly because the prices are significantly lower than in the city. If the trend in land price increase continues, there will not be much of a difference between office rentals in OMR and the city, thereby making OMR a not-so attractive destination compared to other destinations which are closer to better employee catchment zones and have better road infrastructure. A good example of this could be Infosys deciding to move to GST Road rather than growing on OMR.

Developers of IT real estate space need to understand future trends from an occupier perspective, which includes a more strategic approach to real estate, ongoing search for more flexible solutions, greater focus on security and environmental issues, and global or regional input for decision making. Developers need to understand that large IT companies making an entry into the city will look for a mix of readily available space, incubation space, and built-to-suit space. As competition increases, it will become difficult for developers offering only built-to-suit space solutions to attract IT and BPO companies to their projects.

Ramesh Nair is an associate director with international real estate advisory firm Jones Lang LaSalle. He can be reached at ramesh.nair@ap.jll.com.