With the information technology and business process outsourcing companies facing an uncertain future following a recession in the US, some real estate players developing space for these companies are being forced to shelve their projects, while others are slashing their rentals and renegotiating lease agreements to stay afloat. For these real estate developers, already reeling under the impact of a crash in property prices and a severe credit crunch, the demand from IT-BPO sector is shrinking fast. The rentals for IT ready-office spaces have already crashed by up to 40%.
India’s IT-BPO sector, which was growing at a breakneck pace of about 30% in the past five years, is expected to be affected by the economic crisis in the US market. Work outsourced by the US firms accounts for about 65% of the revenues of the sector. Mumbai-based realty firm Housing Development and Infrastructure (HDIL), which is developing two IT SEZs in Kochi and Mumbai, has decided to go slow till the real estate and IT industries make a recovery. “Since rentals have crashed by 25-40%, there is no point developing these projects immediately,” said Ashok Kumar Gupta, a director of the company.
Some developers are offering lower prices to push their projects. Ganesh Housing, which is developing a 6 million sq ft SEZ in Gujarat, is negotiating with potential clients. “Gujarat can offer cheaper space compared with IT hubs like Pune and Bangalore,” said Bhavin Mehta, in charge of business development at the company. Several real estate players in India’s IT capital, Bangalore, are facing the harsh reality. Srinivas Reddy, who has developed some 18,500 sq ft space in Bangalore’s Electronic City, has been quoting a rent of Rs 40 per sq ft.
Finding no takers, Mr Reddy is now open to negotiations. Bangalore-based Ranka Group, which has developed 1 lakh sq ft at KR Puram, finds itself in a similar situation. “We are demanding a rent of Rs 45 per sq ft but potential clients are not willing to offer more than Rs 35 per sq ft,” said AK Shetdy, the group COO. Several real estate brokers are now doing the rounds of IT firms to renegotiate lease agreements. “Renegotiations on lease rentals are bound to happen now since the real estate prices have crashed considerably. The biggest problem for the realtors will be the projects that are under construction and those that have not yet been occupied,” said Raman Roy, CMD of Quatrro BPO Solutions.
Consultants say IT companies will increase pressure to reduce rentals when the date of renewal of the lease agreements comes near. “Typically, these lease agreements are signed for a period of three years and have an automatic rental escalation clause. Since rentals have crashed below the levels prevailed 2-3 years back, renegotiations will happen for sure,” said Anshuman Magazine who heads the South Asian operations of global real estate consultancy CB Richard Ellis.
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