Is Chennai ready for retail space boom?

Chennai

The dynamics of commercial spaces in Chennai is undergoing a change. For a city that has not seen a radical growth in terms of commercial rentals in the past five years, the shift may signify an emerging trend in the real estate. The volume of office space demand by IT and ITES companies may shrink in the times of come, impacting the commercial rentals in different locations of the city.

Prakash Challa, managing director, SSPDL Group, said, “The absorption of office spaces by the IT sector is beginning to taper and restrict itself to SEZs. On the other hand, non-IT requirements are drastically up. The demand is coming from engineering-led companies, educational institutions, hospitals and retail segment.”

According to Cushman and Wakefield the IT/ITES sector accounted for 67% of total absorption of office space in Chennai in 2011 and a majority of the space taken up by the sector is in the suburban markets of Perungudi, Taramani and Manpakkam. Listing out the key contributors to the demand for office spaces in the city during 2011, Hariharan, Chennai Director, Cushman and Wakefield said,“several industries including IT/ITES, banking, financial service and insurance (BFSI), manufacturing and construction contributed towards the spurt in demand for commercial spaces.”

Market observers feel that the rentals for IT driven office spaces grew by 5% to 8% in the last financial year. Rentals around OMR and Guindy remained stable at Rs 50-55 sq ft per month. The areas to have posted a marginal growth in commercial rentals are stretches along Ambattur.

“The situation is bad in OMR. There are not many takers for office spaces except in the earlier part of OMR. Ascendas is commanding premium over Tidal Park,” explained Ajit Chordia, CEO, Khivraj Tech Park, reiterating that IT led demand for office space is on the ebb.

Future hotspots

IT/ITES related trend, however, is not indicative of the overall market sentiment. Corporate entities posting even marginal growth are looking at expansion but supply crunch within the city restricts their choices. The micro-market from Tidal Park to toll gate continues to attract occupants. Office spaces in MRG Nagar, Guindy Industrial Estate, 100 ft, stretches along Raj Bhavan, Velachery and Greams Road are in demand. “CBD leads the tally of hot office destinations, followed by OMR and GST SEZ corridor,” said Challa, adding that there is lack of ‘A’ grade space within the city. CBD posted a maximum of 10% growth in rentals and is currently drawing Rs 80 per sq ft per month.

Connectivity and availability of parking space are the two deciding factors when it comes to rental values of office spaces. “The later parts of OMR and Ambattur have a long way to go. Infrastructure makes or mars the prospects of the office space. MRT connect to Ambattur is missing. This impacts the rental values in the area,” explained Chordia.

According to Cushman and Wakefield, office spaces in CBD and off-CBD locations have registered the maximum growth in rental values during 2011 followed by the suburban Guindy market. “The appreciation in CBD and off-CBD rentals can be attributed to the limited availability of Grade A space,” said Hariharan, adding that the two office markets are likely to remain most expensive office destinations in Chennai. Going forward, however, suburban markets of Taramani, Perungudi and Guindy will command higher rentals in the next five years span.

Boom or no boom

The other significant component of commercial space dynamics is mall/retail space. Chennai currently has around 2.89 million square feet (msf) of operational mall space. Fresh supply of around 0.49 msf of mall space was registered in 2011 taking overall vacancy in mall space during the fourth quarter of 2011 to 6.60%. According to Cushman and Wakefield the mall rentals during the year were impacted by subdued market sentiments. When compared to NCR and Bangalore, the mall penetration index (number of malls per million populations) is lowest in Chennai. While NCR scores with 2.08, Bangalore is slightly better at 2.76 on the scale. As against this, Chennai has 0.54 mall penetration.

Spelling out the intricacies of mall space rentals Hariharan said, “The success of a mall is primarily determined by zoning and pricing strategies. Malls in CBD locations have consistently witnessed low vacancy levels and are successfully drawing footfalls. However, it might be too early to determine the success of the malls in the suburban locations with several malls in these markets yet to become operational.”

Chordia said, “The city has a huge requirement for retail spaces. Even if it doubles or triples the retail space, the supply lag might still be visible. Except for the upcoming Phoenix mall, nothing much is in the offing in the near future.” Malls in CBD locations are quoting maximum rental value of Rs 265 per sq ft per month, followed by those in western suburbs that fetch Rs 230 per sq ft per month. Malls in peripheral Chennai (South) have the least rental value at Rs 200 sq per ft per month.

Oscar Braganza, ED, Marg, said, “The old model of city centric malls is losing its sheen as the working population is moving to suburbs of the city. Junction Mall located on OMR Road is positioned well to leverage both working and residential pockets.” Braganza feels Khader Nawas Khan Road and T Nagar will continue to be the most expensive retail space destinations in Chennai.

Meanwhile, the leasing strategies for retail spaces have evolved due to supply crunch clubbed with the impact of 2008-09 recession. The retail space rentals are now a function of the revenue generated by the retail outlet instead of flat rates. Zoning, traffic management, parking, customer flow or footfalls are some factors that determine retail space rentals. With projects such as Ampa Mall and Forum Mall in the pipeline, is Chennai poised for retail space boom?

Source: http://content.magicbricks.com/is-chennai-ready-for-retail-space-boom