Office space leasing is on the rise and rental values appear to have bottomed out.
As other real estate markets globally, the Chennai commercial real estate market has also seen periods of growth and decline. Commercial realty in Chennai came into prominence during the mid-1990s as demand for office space started picking up following the liberalisation of the economy. Despite the ups and downs in the past 15 years, the demand for quality real estate has outstripped supply most of the time.
The second half of the 1990s saw the completion of the earliest Grade A commercial projects in Chennai, such as ITC Centre, Spencer Plaza, Raheja Towers and Westminster. A few well-capitalised private real estate developers drove the commercial estate sector, which was constrained by lack of capital. The debt and private equity capital markets were nascent and financing was dominated by high net worth individuals.
Many local developers' ability to secure financing was limited, which, in turn, impacted their ability to exploit attractive investment opportunities quickly. Doing business in the commercial market was as much relationship-based as it was price-driven.
This period saw the arrival of international property consultants (IPCs) in the Chennai real estate market. Before their advent, the property consultancy sector was highly fragmented and rarely integrated, with a wide range of specialists. The IPCs brought in a range of professional services, such as tenant representation, brokerage, consultancy, valuations, project management, financing services and property management.
2000 to 2004
It was in the new millennium that the government promoted TIDEL Park. The pioneer IT park project showcased the advantages of Chennai as an IT destination to the world. Multi-storey buildings appeared on the skyline, developers realised the need for automation, safety and security features in their projects and the CBD (central business district) started shifting from north of Anna Salai to south of it.
The period also saw the repeal of the Urban Land Ceiling (Regulation) Act, enabling the development of larger land parcels. However, during 2001, the Chennai market experienced a slowdown due to the slowdown of the IT sector, and the post-9/11 impact. Interest rates increased dramatically and bank-lending became extremely tough. This led to a considerable drop in demand and supply of commercial space.
2004 to 2008
It was from 2004 that the major driver which changed the commercial landscape occurred, with Chennai emerging as an alternative IT destination to Bangalore. As a consequence, better Grade A projects with larger floor plates, higher efficiency, wider column spans and higher ceiling heights suiting the needs of large domestic and multinational IT and ITES companies were developed. The growing IT demand required buildings that could accommodate thousands of IT employees.
In order to drive more IT and ITES companies into Chennai, the State government announced a 50 per cent additional FSI (floor space index) for IT parks. This new legislation had a positive effect, resulting in a dramatic increase in commercial construction.
From 50,000 sq.ft in 1996, office space take-up reached a peak of 7.2 million sq.ft in 2007, increasing 144 times in just over a decade. The Grade A commercial stock, which in 1996 was less than 0.5 million sq.ft., stands at 38 million sq.ft. in 2010.
This emergence of Chennai as an IT destination also led to the emergence of peripheral growth corridors such as Old Mahabalipuram Road, GST Road and Mount Poonamalle Road. The year 2005 saw the arrival of several pan-India developers — Ascendas, RMZ, and DLF in Chennai. The market was further driven by the rise of a new class of entrepreneurial commercial developers who understood the market. Foreign Direct Investment in real estate was opened up in 2005 and this led to a number of real estate private equity funds such as Sun Apollo, Old Lane, Pacifica and IL&FS investing in the Chennai commercial market. 2006 also saw the establishment of the first of the IT SEZs, a measure intendedto boost investment, export growth and productivity.
2008 to 2010
2009 saw the commercial real estate markets hit the bottom. Losses of approximately 25 per cent were seen in real estate values from the mid-2007 peak. However from early 2010, underpinned by stronger economic fundamentals, activity levels improved in the Chennai office market over the last three quarters. Take-up of space has increased and rental values have bottomed out in most markets. The worst seems to be behind us.
Chennai will continue to attract interest from IT and ITES companies establishing a base or expanding operations. Increased home ownership in the periphery will lead to growth corridors emerging as commercial hubs.
One key lesson for developers is that one should build when there is demand and not build when the money is available. They need to improve efficiencies to cut long lead times between development and delivery. Chennai's commercial real estate geography will continue to be shaped by development in transportation infrastructure. In the next 10 years Chennai will need at least 50 million sq.ft. of office space and 200 million sq.ft of residential space. The growth will take place in the south and west of the city along corridors such as OMR, GST and MPR.
(The author is a managing director with Jones Lang LaSalle.)