Slowdown in IT space hits commercial real estate sector

Slow uptake of office space by information technology firms in India is beginning to cast a shadow over the country's commercial real estate sector, data from property consultancy firms indicate.

Figures provided by two property consultants — Cushman & Wakefield and DTZ — show that absorption of office space in 2012 across the top eight Indian cities stood at 29.05 million sq ft, a 23% decline over the previous year. Of this, the share of the IT sector, which accounted for 64% of the commercial space absorbed in 2009, dropped to 44% in 2012 at 13.22 million sq ft. It was 16.08 million sq ft in 2011.

Some experts attribute this drop to the economic uncertainty in the West, which accounts for over 85% of the revenues of India's IT companies. A slowdown in these economies has forced several firms to go slow on their expansion plans, including taking up of office space.

"With growth in the Euro zone and the US likely to be restrained in the short term, demand from the IT sector is likely to remain subdued in 2013," said Rohit Kumar, head of research at DTZ India.

The lower demand has started to impact supply of office space across the country. According to Cushman & Wakefield, developers launched 35 million sq ft of new office space in 2012, representing a 10% year-on-year decline. For the fourth quarter of 2012, the figure was about 7.8 million sq ft, down almost 30% from the third.

"Margins are under pressure. Companies are moving into the just-intime model, rather than blocking additional space for future growth and pay extra rental," said N Venkatraman, CFO of Bangalore-based Sonata Software, a technology solutions provider. "Companies are using money effectively and not spending huge amount on real estate."

According to the National Association of Software and Services Companies, the country's $100-billion IT services sector is expected to grow at 11% in the current fiscal, compared with 17% in the last.

Besides slower hiring, the last few quarters have also seen IT firms merging and re-aligning leased office spaces to curtail expenditure. The companies that consolidated office space include Mahindra Satyam, EMC, Sonata Software, Mphasis, Persistent Systems and Nokia-Siemens.

"In the case of consolidation and relocation exercises, occupiers are also able to able to negotiate and get better deals from office space owners and developers, as the overall space requirement becomes large," said Sanjay Dutt, executive managing director -south Asia, Cushman & Wakefield. According to the property consultant, real estate and transport of staff together account for about 24% of an IT company's total costs, and consolidation of offices could translate into a 15-22% saving for firms.

For instance, Mphasis, a unit of HP, is looking to move into special economic zones after the software technology parks scheme is phased out of.

Sonata recently closed its facility in Bangalore's central business district. It now occupies 1,15,000 sq ft in the Global Village Tech Park. The company also owns a campus in Hyderabad besides the corporate headquarters in Bangalore.

DTZ India's forecast of subdued demand in 2013 is backed by CBRE South Asia, another property services firm. "Large-scale expansion will continue to witness delays in approvals, as companies have to maintain a healthy balance between cost, efficiency and expansion," said Ram Chandnani, deputy-managing director for the company's south India operations. "This is expected to result in subdued absorption levels across most cities, particularly in IT hubs such as NCR and Bangalore."

Bangalore-based developer RMZ Corp said builders are tailoring their plans accordingly. "The incremental growth for IT/ITeS space requirement has slowed down and realty developers have been adjusting downward to this new reality since last year," said MD Raj Menda.



Keywords:information technology , commercial real estate sector,Cushman , Wakefield , DTZ,India's IT companies,Euro zone,Sonata Software, Software ,Services Companies, Mahindra Satyam, EMC, Mphasis, Persistent Systems , Nokia-Siemens, technology parks, Global Village Tech Park, CBRE South Asia,NCR , Bangalore, developer RMZ Corp,Business news