After the recovery of the last two years in the residential space, the Chennai real estate market appears to be showing some activity in the commercial space with retail space supply and demand picking up and office space supply, particularly in non-IT segment, on the increase. But the market balance will favour tenants rather than owners for some time to come. In the next three years, the supply of office space in Chennai will reach approximately 60 million square feet, which will equal that in present day Mumbai, according to a study by the international property consultants Jones Lang LaSalle (JLL). This is good for prospective tenants looking for quality office space, says the study, titled ‘Chennai Real Estate, a closer look'.

Typically, for Chennai, commercial office space supply has seen an addition of approximately 20 million square feet, in the three years since 2006, with IT office space dominating the supply and demand. Between the third quarter of 2011 and the end of 2015, more than 17 million square feet of office space will be added, bringing the total availability on par with that in Mumbai, the commercial capital.

COMMERCIAL OFFICE SPACE

Though the IT space continues to be the primary driver of the market, in the current year there has been interest in office space leasing activity in the non-IT segment, as firms relocate offices to quality buildings.

Also, this dovetails with the dearth of high quality office space in the central areas, with new supply happening in the suburbs. The lease rates in the suburbs, along with the quality space, are driving the demand in the fringes of the city, accounting for the pattern that is being seen, says the study.

The rent for office properties in Chennai, after remaining stable for the last 6-7 quarters, is now on the increase in some of the secondary business districts. In the central business districts, the rent ranges around Rs 65-85 a square foot; in the secondary business districts it is Rs 45-55; and in the peripheral business districts, space is available for Rs 20-40. The attractive rentals will drive the cost-sensitive clients to peripheral areas along the Old Mahabalipuram Road (OMR), the IT corridor to the south of Chennai. But the demand is restricted to areas closer to the city's fringes and is contributing to rental values firming up.

According to JLL statistics, of the available 55 million square feet of office space, net absorption in 2011 was approximately 36 million square feet. Next year, the supply is expected to increase to approximately 58 million square feet, with a net absorption of approximately 39 million square feet. In 2013, the gap between demand and supply is expected to close, with supply at 44 million and absorption at 41 million. Office space vacancy is expected to peak in 2012, at around 23 per cent, and drop subsequently.

However, IT and ITES continue to account for the lion's share of the market, contributing to approximately 60 per cent of the leases in 2010, with banking and financial services accounting for 9 per cent, and manufacturing 14 per cent, and others, the balance.

However, with the slowdown in the US and Europe, the IT industry could dampen the market during the coming year. The property consultant estimates that till 2015, office space uptake could range around 4 million square feet a year.

The huge supply of residential space anticipated during the next three-four years, estimated at approximately 71,000 units in the suburbs, is driving the supply of plaza space in the city's periphery, in anticipation of the demand that is bound to happen.

RETAIL SPACE AND PLAZAS

During the next three years, half a dozen plazas are likely to commence operations. New supplies are happening within the city and the periphery. The supply in plazas follows the initial focus on high streets, says the report. In terms of residential supply, there is a bias towards increased supply of high-end projects in the city, while there is a good mix of high and mid-end offerings in the suburbs.

The study categorises residential units of Rs 40-60 lakh as mid-end, and those less than Rs 40 lakh as value housing. But with new projects being offered at higher price points, the share of value housing, which was approximately 97 per cent in 2009, has dropped to approximately 4 per cent in 2011. This indicates the buoyancy in the market for residential space, which was the first to recover from the slowdown three years ago.

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