1. Chennai office vacancy levels at 17 per cent; which are the areas to invest in?

Chennai office vacancy levels at 17 per cent; which are the areas to invest in?

Chennai currently has an office stock of approximately 67.8 mn sq ft, with vacancy levels at 17%. This is vastly different from 2013, when the vacancy levels were alarmingly high at 26%.

Published: September 13, 2016 1:50 PM
Chennai office vacancy levels at 17 per cent; which are the areas to invest in? Chennai currently has an office stock of approximately 67.8 mn sq ft, with vacancy levels at 17%. This is vastly different from 2013, when the vacancy levels were alarmingly high at 26%.

Yashwin Bangera, assistant vice-president – research, Knight Frank India

Chennai’s rapid progress over the past decade as an industrial hub in South India due to the emergence of various manufacturing industries such as auto & auto ancillary, electronic hardware, apparel and engineering has resulted in the development of a dynamic office space market in the city. This has been further supported by the robust growth in the IT/ITeS sector, as favourable government policies, excellent infrastructure and the availability of a talent pool drew a large number of companies to set up their global delivery centres here. The growing demand from this sector led to the emergence of suburban and peripheral business districts, where the availability of large tracts of land helped in the development of office space and encouraged occupiers to look for cheaper and more viable office spaces further away from the city centre.

Chennai currently has an office stock of approximately 67.8 mn sq ft, with vacancy levels at 17%. This is vastly different from 2013, when the vacancy levels were alarmingly high at 26%. Taking cognizance of the weak market conditions, developers almost put a stop to further office supply over the next two years, causing the market conditions to normalise as absorption remained steady and occupier sentiment began to improve. Currently, there is very little good quality viable office space in the market, as developers have been very cautious in adding new supply.

In the meanwhile, some locations, such as Guindy and Mount Poonamallee High Road in the Secondary Business District (SBD), have witnessed prolific growth in occupier interest due to the high quality of office space and the specific niches that they cater to. Guindy has less than 3 mn sq ft of office space, with vacancy levels at 13%. The office buildings here are characterised by their high quality construction and amenities, and comparatively smaller floor plates, ranging from 8,000–20,000 sq ft. Properties in these locations have attracted banking, media and consulting companies looking to move from the higher priced and more congested Central Business District (CBD) areas to better quality office spaces in the SBD. This micro-market comfortably commands rentals of Rs 65 per sq ft, as it provides a similar corporate office environment as the CBD locations, such as Nungambakkam and T. Nagar, but at 20–30% discounts compared to these locations.

Mount Poonamallee High Road is a 7-km stretch that connects Guindy to Porur, and has established itself as a practical alternative for IT/ITeS companies. It currently has approximately 10 mn sq ft of office space, largely dominated by the 7 mn sq ft DLF IT Park, which is almost fully occupied, and will be adding another 1 mn sq ft in the near future. Characterised by large floor plates, integrated leisure amenities such as eateries, and large open spaces tailor-made to suit the requirements of the young IT employee, this stretch is now a viable alternative to the much more established Old Mahabalipuram Road. Vacancy rates in this location are currently at 15% and most of these are concentrated in lower grade properties that do not really form viable office stock for the IT/ITeS sector. Both these locations are expected to sustain and grow occupier interest as new supply gets infused. Guindy, especially could see a lot of commercial office space development as the existing industrial spaces get shifted to the city’s periphery and get converted to much more lucrative office properties.

Metro Boost to North Chennai
North Chennai has evolved primarily as an industrial area dotted with locomotive workshops and port-related activities. Two major ports, namely Chennai Port and Ennore Port, are located in this region. The lack of transport connectivity to the CBD and other employment hubs, along with the dearth of adequate social infrastructure, has restricted the white-collar homebuyer from exploring residential options in this part of Chennai. A few destinations, such as Ennore, Tondiarpet, Madhavaram and Perambur, are the primary residential locations in these areas, with large under-construction projects. The residential demand in North Chennai is driven by business/trading communities and public sector employees.

The Central Government’s recent decision to support the 9-km extension of the Chennai Metro from Washermanpet to Wimco Nagar will boost the residential viability of the area. The move is aimed at providing better access to public transport in the densely populated area dominated by industrial workers and helping them travel to the central business district of the city for work. Travelling from North Chennai to other parts of the city will also be a lot easier and an estimated 1.6 lakh commuters are expected to use the metro every day. The bulk of the residential inventory in this zone is currently priced at Rs 2,800–4,800 per sq ft – less than half of the prices prevailing in Central Chennai which is the closest established residential zone and significantly lower than the west and south of Chennai. A greater emphasis on the creation of social infrastructure, such as educational institutions and hospitals, will go a long way in attracting the attention of the upwardly mobile IT workforce to these locations. A drastic reduction in commute time and the resulting ease of commute that the modern metro provides will also have a favourable impact on the residential attractiveness and viability of this zone. This will eventually result in increased interest from homebuyers and motivate developers to explore development opportunities in the northern locations.

The acceptability of the metro by the general population was perceived as an obstacle, as the Alandur–Koyambedu phase that was inaugurated early last year took longer than expected to gain popular acceptability. However, passenger traffic has been increasing steadily, as people travelling to Velachery take the metro till Alandur. This metro line is being extended to St. Thomas Mount, which also houses the soon to be commissioned MRTS station. This will enable residents to switch lines seamlessly from the metro to the MRTS and vastly improve rail connectivity to the OMR and Central Chennai. The metro has also proved to be especially reliable, as it continued to be operational even during the floods that battered the city during the latter part of last year and has definitely been a strong driver for the real estate market in the south. We expect that northern locations such as Ennore will also see a similar pick-up in real estate activity due to the commissioning of the metro.

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