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Real Estate OpportunitiesViews: 327
Feb 18, 2009 10:27 am Firms shifting to SEZs to cut cost

Ravi Padmanabhan (padmania@gmail.com)
Special Economic Zones are preferred for their tax and rental advantage


losing sheen: With many IT companies looking at SEZs to consolidate their operations, preferred hubs such as those along Rajiv Gandhi Salai are likely to become less popular.

CHENNAI: The economic downturn is compelling IT companies in Chennai to renegotiate the rent they are paying and pushing some to consolidate their operations and relocate to Special Economic Zones (SEZs).

Industry sources say that some of the clients are moving out of premium IT parks such as Tidel since the monthly rentals there are pitched at Rs. 50 to Rs.55 per sq ft. The companies prefer to settle down in buildings that charge Rs.20 to Rs.25 . When contacted, CB Richard Ellis, the international real estate consultants, who manage Tidel Park, was not willing to comment.

Chennai hosts about 200 IT companies that employ about 2.5 lakh persons. As the downturn affects their operational costs, the companies not only seek State government help in terms of tax incentives, but are cutting cost to save to remain competitive.

“Large IT players in Chennai have started to consolidate their operations spread over various IT parks and are moving to SEZs,” says K.Purushothaman, Regional Director, NASSCOM, Chennai. “The medium-sized players are getting together to negotiate with SEZ promoters to share a common floor plate and cut cost,” he adds.

Industry sources say that IT majors such as TCS and Hexaware, which employ 70 per cent of the IT employees in Chennai, have started to consolidate their operations . The SEZs are increasingly preferred for their tax and rental advantage, say the industry experts.

Four kinds of shifts

“Four kinds of shifts are happening,” explains Ramesh Nair, Managing Director, Jones Lang LaSalle Meghraj, Chennai.

“IT companies are considering new leases in lesser grade buildings such as Grade A or Grade B as opposed to Grade A+ buildings.

Some of them are delaying relocations through short-term extensions. Second buildings are leased than bought.

A few companies are also looking at more density - accommodating more people per available space - to reduce occupancy costs. IT companies that are holding real estate assets are selling them and the money is ploughed into their core business. The bottom line is IT companies now prefer a ‘no frills and cost-effective’ building”, says Mr.Nair.

Tax incentives extension

The IT industry awaits to know whether tax incentives for software parks will be extended beyond March 2009. Even if it is done, as many expect, the companies are still under compulsion to reduce their overheads and establishment charges.

“Rental, travel and other administrative cost constitutes about 20 to 25 per cent of the companies operations and any reduction on this front is seen as a necessity. IT industry is also turning green implementing energy saving measures”, explains Mr.Purushothaman.

Even SEZs are not immune to economic slowdown. Some of the promoters of the SEZs are finding it difficult to meet the condition of building a minimum of one million sq ft of built-up area within three years as the offtake of IT built-up space is reducing. Real estate consultants say that such promoters are seriously considering de-notifying their SEZ status.

The Jones Lang LaSalle Meghraj third quarter report of 2008 showed that the stock of IT space in the SEZs was 3.9 million sq ft and the stock in the non-SEZ IT space was 19.6 million sq ft. Of this, only 100,000 or 0.1 million sq ft was absorbed, leaving 23.4 million sq ft vacant.

Happy Investing

My Opinion - Real estate Investments around Mahindra World City SEZ which is almost 100% booked would be a good bet for the next 5 years time.

Private Reply to Ravi Padmanabhan (padmania@gmail.com) (new win)

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