This is a good time for small firms to acquire that coveted office space they always wanted

 

Every problem presents an opportunity. And a number of small and medium sized Indian companies have spotted the opportunity this time in real estate’s. For many of these companies high rentals had been a stumbling block to expansion when the going was good. Now that real estate costs have rationalised this maybe the right time to buy or lease office space. Compared to a year ago, rentals are down 25-30% on average across the top eight cities of India. Some areas have been affected worse than others. According to real estate consultant Cushman & Wakefield, rentals in Mumbai’s Lower Parel are down 39%, Worli has seen a 38% dip and Andheri rentals have been impacted by 33%. In the Delhi NCR, Gurgaon is down 26%, Noida is 20% lower and Jasola, an emerging business district, is down 24%. Even capital value of office space is down 20-25% on an average.

  

Tecpro Systems is in the material handling business, and the company grabbed the opportunity to buy a new office in Mumbai’s Malad suburb. The 4,000 sq ft office came at a 25% discount compared to rates in the same area around eight months ago. The company will now be shifting from its 2,000 sq ft rented premises to this new location, which will cater to future expansion as well. “Looking at the real estate market this is just the right time to buy,” says Amul Gabrani, managing director of Tecpro Systems. “We are getting feelers from the market that this is pretty much the bottom. If we wait, prices might start to go up.” He was referring to his search for another 10,000 sq ft of space in Gurgaon to add to the existing 16,000 sq ft in the city.

  

“Rentals and capital values are close to the bottom. There might still be a little correction in the future. But there will be never a better time to start

looking or to close deals at these decreased prices,” says Kaustuv Roy, executive director, Cushman & Wakefield India.

  

This is also a good opportunity for companies to move out of space they had rented out during the peak of the real estate boom. A prominent financial services firm in Kolkata recently finalised a deal to buy 14,000 sq ft of space to replace their rented premises of a similar size. “We rented the space in 2007-end when the rentals were touching the roof. The high rental was a constraint for us. Today, there is an opportunity to buy and so we are,” says a spokesperson for the company. This means that there will be no immediate reduction in cost for the company but the previous rental amount will pay for the EMI in the new property. “In the bargain we are creating an asset for the company. In 7-8 years, this property will break even.”

  

“Companies, both big and small that are still growing, are looking at relocating to cheaper office space options to take advantage of the slump in the real estate market. This is a good time as rentals are at the lowest levels,” says Prashant Kaura, founder and director of Gen-Real, a property consultancy firm.

  

It has always been difficult for SMEs to set up offices in prominent locations in cities, primarily due to the high cost of renting or buying space. The slowdown has definitely changed the scenario. Today, developers who were concentrating on leasing larger spaces because of the huge demand from international companies as well as large Indian corporates are changing tack. They are now willing to lease out much smaller spaces in their buildings. “In some of our buildings where we have floor plates of medium sizes, we are willing to break them into smaller offices and lease them out,” says Juggy Marwaha, VP-leasing at RMZ Corporation.

  

Landlords, too, are becoming more flexible when it comes to lease terms. The lock-in period for leases has been a standard three years for a long time now but today, a company can bargain and get it down to even one year. One can get a longer rent-free period for finishing their fit-outs and most importantly save on capital expenditure by giving lower security deposits. “Landlords are showing flexibility in taking security deposits as well. The standard was six months earlier but one can manage by paying three months today,” says Kaura.

  

With lower rentals, there is an option today for companies to relocate to cheaper office spaces and landlords know that. In a bid to reduce the chances of tenants leaving, landlords are coming around to the idea of rental re-negotiations. Many companies have successfully managed to renegotiate rentals and achieve savings in the range of 15-30% in their operating expenditure.

 

Landing A Good Deal

 

New telecom players like Etisalat, Datacom, Shyam Sistema and Aircel have got good deals owning to the slump in the real estate market. According to industry sources, Etisalat recently leased 30,000 sq ft in Malad West in Mumbai. The deal, say sources, has been fixed at Rs 80 per sq ft, which is about 30% lower than the rent prevailing in the area six months back. In another deal, the same telecom operator has leased 45,000 sq ft in Vatika Business Park on Sohna Road, Gurgaon for Rs 40-45 per sq ft. The rental here was close to Rs 85 per sq ft a year back. Similarly, Aircel has signed up for 60,000 sq ft of space in DLF Cybercity in Gurgaon for Rs 50-55 per sq ft. The rentals here have dipped considerably from Rs 100-110 per sq ft a year ago.

 

Building up real estate assets is on the agenda of every company. Now that the opportunity has presented itself, it will be seen who manages to aggressively improve their asset portfolio and take the lead.

 

Courtesy:- ET dt:- 29-06-09