Property rent rates missing BPO boom

Mushrooming call centres in commercial districts across the country are yet to impact rentals.

Real estate developers lament that in spite of the boom in the IT-enabled services sector, commercial real estate rentals in the suburbs of cities like Mumbai and Delhi have been stagnating at around Rs 30 per square foot per month for over a year.

Moreover, experts say rentals are unlikely to rise in the next 12-18 months.

To begin with, developers blame it on the thin margins ITES companies operate on. Owing to competition from foreign as well Indian firms, ITES companies have been forced to take business at very low prices. This causes companies to operate at very low costs. "Beyond a certain price band, it becomes unviable for these companies to take space," says Balaji Rao, a director with TCG Urban Infrastructure Holdings. Balaji has come to the conclusion that commercial real estate has become a high volume, low margin business. Thus, his company is developing a one-million square feet property in Chennai and another 600,000 square feet property at Gurgaon.

Ansal Properties & Industries, which has leased out nearly 114,000 sq ft to three IT firms, says competition from other players have kept rentals in check. "There are around 40 to 50 projects coming up in Delhi alone. It is a buyers' market as the companies have a wide range of developers to choose from. So, we have to keep the rents competitive and at par with the market prices," a company spokesperson says.

Adds Anshuman Magazine, managing director of real estate consultancy CB Richard Ellis, "Demand is still less than supply which is one reason why the prices have not escalated much. In fact, prices and rents have declined on increased supply."

The country is witnessing commercial real estate construction of 8.5 million square feet per annum. ITES companies now account for almost 80 per cent of the new commercial real estate taken on rent.

According to real estate analysts, developers are coping with low rentals and higher construction costs by dipping into their "land bank" as against buying land afresh. "Several businessmen are also converting factories and mills into commercial real estates. This also helps keep costs under check," says one analyst.

Others, like DLF Universal, are counteracting this pressure on margin by being cost effective and working on economies of scale.

"We have a larger portfolio and try to keep our operating cost of maintenance lower than our competitors. Our operating costs are about Rs 10 while other developers operate at Rs 14," a DLF official said. DLF which has leased out nearly 1 million square foot space to ITES services is looking at adding another 1.8 million square foot of commercial space in the coming months.