The Hindu Business Line : Chennai short on office space

Chennai is facing a shortage of office space, specifically non-IT office space, but supply is not likely to improve in the near future despite a keen demand. Developers blame low margins and regulations that favour development of IT space.

Builders say Chennai, particularly, is facing the crunch because of the imbalance in the built-up area permitted for IT space as compared with other office space.

The State Government allows a 50 per cent higher Floor Space Index — the quotient of the total built-up area and the plot area — for IT buildings. The bigger the FSI, the bigger the building. Other cities do not provide this consideration for IT companies.

For example, in a plot of one acre, if a builder can construct 1.09 lakh sq.ft of non-IT building, the regulations allow the builder to construct over 1.63 lakh sq.ft of IT space.

Turning to old residences

According to Mr R. Sarabeswar, Chairman and CEO, Consolidated Construction Consortium Ltd, effectively, for developers to consider setting up office space they would need to get 50 per cent higher returns from lease or sales.

But in Chennai, office space does not command that kind of premium. Builders would have to look at a payback period of more than 10 years.

The problem is acute in Chennai because of the investments it has attracted in a number of areas.

Companies across various sectors including automobile, banks and multinational players are looking for quality office space but are forced to settle for less because of the lack of availability of grade-A buildings.

Lease rates of quality office space are on the increase because of shortage — for instance, in prime areas in Chennai, office space commands a lease rate of Rs 90-100 a sq.ft, a 50 per cent growth in the last one year — high for Chennai. In most other areas it is Rs 50-70. The rates cannot offset the benefit of higher FSI, say developers.

Meanwhile, companies facing a dearth of quality office space are renting or buying old residential buildings and refurbishing them to their needs.

Lack of clear zoning

Mr R.V. Shekar, Lancor Holdings Ltd, a leading developer in the city, blames the lack of clear zoning for office space. That is why there is no distinct downtown in Chennai, he points out. Office buildings stand cheek-by-jowl with residences.

His customers need over 1 lakh sq.ft of quality office space. But the economics simply do not work at the going land price. In prime areas such as Nungambakkam, land owners demand Rs 5 crore for a plot of 2,400 sq.ft. That would mean Lancor would have to lease out space at Rs 120 a sq.ft, which would represent a return of about 12 per cent — not a feasible or attractive option.

So office space would come up only in smaller places not demanded by IT companies. What Lancor is going to do is set up office space for relatively smaller projects. It is now building a 16,000 sq.ft project and will consider even smaller projects. Lease rents from these will give the company a steady income in the long term, he says.