Multiplying seats

Ankur Srivastava

The National Capital Region has seen explosive growth in the bsorption of office space.

So, Bangalore has had its day? And the National Capital Region (NCR, consisting of Delhi along with Gurgaon and Noida/ Greater Noida, but also including Ghaziabad, Sahibabad and Faridabad in its arc) are suffering from chronic fatigue?

There's nothing more wrong than perceptions that solidify into "truth", because the largest commercial projects in the country are still coming up in these two metro zones, and Chennai is at third place. Nor are developers and multinational companies looking out for alternatives "" not just yet.

"The NCR," says Ankur Srivastava, managing director of international property advisers DTZ Debenham Tie Leung, "has experienced the highest office space absorption in its history during the first seven months of 2006."

Already, according to the DTZ study, absorption has crossed 5.1 million sq ft, and if the trend continues, the forecast is that it could cross 8 million sq ft by the end of 2006.

And to put that into perspective, take Delhi, which has a total land area of (approximately) 16 million sq ft. Already, therefore, the new absorption in the NCR has been about a third the size of Delhi, and will equal half the size of the city by the end of the year.

Imagine then, beyond the potholes and the poor roads and poorer infrastructure, tier upon tier of construction activity that is creating mega project spaces that will (at the same pace) equal the size of Delhi in two years, and double it in four years.

Phew!

For all that scorching pace of property development, it isn't the NCR but Bangalore that is leading as the leasehold commercial office space absorption volumes in the first seven months of this year have touched 7 million sq ft, which should easily match last calendar year's total absorption volume of 9.28 million sq ft. Chennai, at third place, had an absorption level of 4.1 million sq ft last year, according to the DTZ study.

Internationally, Bangalore occupies the third slot in office space absorptions, ahead of Delhi, with only Tokyo (at 12.33 million sq ft) and London (9.96 million sq ft) ahead of the Garden City.

With the supply-demand situation running to scarcity, it's hardly surprising that rentals, last year, rose by an astonishing 44 per cent in the NCR. And while a market correction to the tune of 30-35 per cent is expected in some residential sectors in the NCR, "we're unlikely to see similar price corrections on the commercial office space front", argues Srivastava.

While some micromarket corrections may, in fact have occurred, as, say, in Bangalore's Whitefield which has experienced a situation of oversupply, in most cases "office space rentals have been inching up in almost all major cities across the country, and in some of the newer properties in Mumbai and Delhi unprecedented rental highs have been achieved", says Srivastava.

"This is primarily driven by the absolute dearth of good quality buildings in all major CBDs (central business districts)."

In a sense, that is why global companies like DTZ Debenham Tie Leung have set up base in India, and in its advisory capacity it is already negotiating or transacting over 1 million sq ft of A-grade commercial space in the NCR alone.

Interestingly, most realtors and realty advisers agree that as much as 70-75 per cent of this demand (both in the region as well as across the country) is being driven by IT/ ITES companies.

"This is a very price sensitive market," says Cushman & Wakefields's Sanjay Verma, "and so rents will firm up around 10-20 per cent, and when the market achieves scale, it will correct itself. If it doesn't, the business will simply flee to the Philippines or elsewhere."

Interestingly, since the Delhi Development Authority controls land for commercial development in the city and auctions it at very high value for (mostly) retail development, it's virtually impossible to find land for commercial development at reasonable rates, or with contiguous floor plates, says S K Sayal, CEO of G Alpha Corp, which has recently tied up with Morgan Stanley for investment in the company. "In terms of its development, though, NCR is nowhere close to Shanghai," he points out.

But the NCR's incipient growth is based on a few valid premises, says Sanjay Verma. For one, in their second phase of growth, companies based in the south have started to diversify in search of human resources, and the NCR offers immense opportunities there.

"Another trend is an increase in supply, and with the augmentation of infrastructure, it's becomingly increasingly popular."

In the NCR, therefore, with Delhi unable to feed the supply side "" exceptions such as the Eros Corporate Towers are leasing at Rs 115-250 per sq ft as against the usual Rs 30-40 per sq ft in Gurgaon and Noida "" the largest growth has been in Gurgaon, which accounted for 63 per cent of commercial space absorbed (3.2 million sq ft in 2006, to date), the largest of the companies utilising those spaces including IBM, SAP, Satyam and PWC.

Noida absorbed 1.4 million sq ft and prominent companies making forays into office space include Hewitt Associates, Momentum Technologies, Fiserv, HCL Technologies and Freescale.

Within Delhi, the central business district or Connaught Place absorbed 2 per cent of office space, while the secondary business district (Nehru Place, Bhikaji Cama Place, Basant lok and Saket) absorbed 4,06,850 sq ft.

The reason the industry does not see any price correction setting in any time soon is because commercial office supply is demand led (unlike residential supply, where there is definitely speculation), and because a major thrust is being provided to special economic zones in the region.

"Gurgaon in definitely ahead in the curve," says Verma, "but because developers' interest has been caught by Noida/ Greater Noida, that has corrected itself."

Interestingly, DTZ's Srivastava points out that the growth (185 per cent in the NCR alone over last year) isn't going to be arrested in a hurry. "As the IT/ ITES sector is expected to grow by 30-35 per cent in the next 3-5 years, that can also be used as a benchmark for estimating the growth of commercial office space in the real estate sector," he says.

"With a conservative average of 75 sq ft of office space per employee, if the IT/ ITES industry adds another 1.5 million staff till 2010, we are talking about at least 110+ million sq ft of IT/ ITES category space being added in the next four years."

That growth will occur, almost without exception, in Bangalore, Chennai, Hyderabad, NCR, Mumbai-Pune and Kolkata. The highest spurt? "The NCR and Chennai," claims Srivastava.

And part of that explosion will be managed by international companies like DTZ that, says Srivastava, "will see higher standards of disclosures and information sharing" on the one hand, and a "major change in the overall quality of construction and project management practices".

Shanghaied to Delhi, did anyone say?