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South cities score in office occupancy cost

Ravi Teja Sharma, New Delhi, The Economic Times

May 22, 2012


Hyderabad, Chennai and Pune are among the top five cities in the world with the lowest office occupancy cost, according to a recent report by global property consultancy firm DTZ.

The three Indian cities are ranked third, fourth and fifth respectively in DTZ's fifteenth annual survey titled "Global Occupancy Costs: Offices", which covered 124 business districts in 49 countries. They were placed ninth, tenth and eleventh a year ago.

The total occupancy cost per workstation per annum in Chennai is down 12% to $2,570, from $2,920 a year ago. For the same period, it is down 15% in Hyderabad and 11% in Pune.

Total occupancy cost includes real estate price, infrastructure and efficiency of buildings, but does not include cost of manpower. Costs have come down because of depreciation in the rupee and a marginal increase in rentals over the last 12 months.

"Large financial institutions continue to move their back-office operations to cities in south India," said Aniruddh Wahal, director at DTZ. "Contrary to perception, India is moving upwards in the chain of back-office processes."

While there have been fears that Indian cities are loosing their cost advantage to cheaper destinations in China and other parts of Asia, such as the Philippines, some Indian cities continue to offer cheaper options to occupiers.

"This is good news for the IT and ITeS industry, as there is a perception that prices in India are on their way up," said Pankaj Arora, director at Protiviti Consulting. "This shows that some cities in the country still offer an attractive opportunity as outsourcing destinations, as real estate costs have been in control," Arora added.Rentals in most Indian cities have increased in the last one year, but Chennai, Hyderabad and Pune have seen only marginal increases in rentals. "New outsourcing business is coming into the country and is being helped by the fact that in dollar terms, setting up an office in India is cheaper today for international companies," said Ram Chandnani, deputy-managing director, south India, CBRE South Asia.

According to property consultancy firm Jones Lang LaSalle, demand for office space take up in India in 2012 is expected to slip to 32.1 million sq ft from 36.7 million sq ft last year. Ashutosh Limaye, head of research at JLL India, pointed out that most big companies are adopting a wait and watch policy when it comes to expansion.

"But there is new business being outsourced by tier-II US companies that have traditionally not been in India," Limaye said.

In 2011, about 48% of the total take-up of office space in India came from US-headquartered companies, 14% from European firms and 27% from domestic companies. Firms from other regions accounted for the rest.

Wahal said there will be a pickup in the outsourcing move towards India, as an oversupply situation in most cities in the country will keep the pressure on office rentals.