CHENNAI Market on The PATH TO RECOVERY Post The Covid Disruption

Over the past few decades, Chennai has gained in prominence as a key manufacturing/ industrial city in India, hosting globally renowned automobile and electronics manufacturers. Its rapidly developing ecosystem supporting the IT/ITeS industry and tech start-ups, has added another feather in the city's cap. The city is blessed with good physical infrastructure including three seaports, one international airport, well established rail and road connectivity, major submarine telecommunication cable networks that have paved way for its rapid growth. A virtuous combination of a large pool of tech professionals and favourable government policies have enabled businesses to flourish and the city has become one of the preferred destinations for IT companies such as IBM, Infosys, TCS, Cognizant, Renault Nissan, Ford, Capgemini, etc.

Tamil Nadu is the second-largest state economy in the country with a GSDP of Rs 13.13 trillion (FY 2019-2020) and an annual growth rate of 8%. The manufacturing sector predominantly contributed to the state's GDP, holding a share of 22% in FY 2019-2020. The state is also a preferred IT destination with a share of 11% of total IT investments in the country. 

The state government is pursuing corridor-based development models to spatially converge investment growth and infrastructure development. Proposed greenfield airport and upcoming Chennai-Bengaluru Industrial Corridor are expected to increase manufacturing output and business travels to the city. Chennai's real estate market has a unique characteristic in the sense that various asset classes complement each other and the slack in one is picked up by another, thus keeping the market activity buzzing.

Office Sector

In recent years, Chennai had been adversely affected by natural disasters such as floods and cyclone but 2020 brought the worst in the form of the Covid-19 pandemic. However, the city's resilience was exemplified with the bounce back that the real estate sector exhibited once the peak of the pandemic was crossed. Over the last two quarters, Chennai office market activity witnessed steady recovery post the Covid-19 induced lockdown with the city performing fairly well. The year 2020 wrapped up with a total leasing activity of 4.75 million sqft. In Q3'20, a phase when all cities were stumbling with Covid, Chennai recorded pre-leasing of 2.15 million sqft by Bank of New York Mellon, Amazon and Standard Chartered GBS, the highest among all other Indian cities. Exits have been comparatively low in Chennai, city level rentals remained stable and vacancy levels by end 2020 remained in the 11-12% range, which depicted a normal trend. Growth of Global Capability Centers (GCC) has accelerated over the last four years, which in turn has been driving the engineering R&D segment in the city. Engineering & manufacturing sector tops the list with the largest share of 42% in the GCC footprint followed by IT-BPM and BFSI with shares of 23% and 14%, respectively. Prominent captive centers in the Engineering & Manufacturing sector includes Renault Nissan, Microchip, Caterpillar, etc., while Bank of New York Mellon, Barclays and World Bank in the BFSI sector and Astra Zeneca, Dow Chemicals in the Health and Pharmaceuticals sector have established R&D centers in the city as well. Chennai continues to attract leading developers who are willing to invest and develop office projects in the city. The city has a healthy supply of more than 10 million sqft in the next three years from prominent developers such as RMZ Corp, Embassy, Gateway Office Parks, Prestige, DLF, etc. L&T Realty has recently launched a mixed-use development of 6.5 million sqft named L&T Innovation Campus which will be developed in four-five phases; 1.05 million sqft of this project will be developed in the first phase over the next three years.

Retail Sector

Chennai's retail activity has generally been dominated by local retailers at prominent high streets in the city. The market has opened to national brands over the last ten years and due to good reception among the local populace, these brands have increased their footprint over the last five years. However, consumers in the city are usually driven by 'value for money' purchases. This has facilitated growth of local retailers and lowered the demand for shopping malls. Unlike other metro cities, Chennai has only few superior malls acting as magnets for neighbouring catchments, such as Express Avenue in the CBD region, Phoenix Market City and The Palladium for southern suburbs and Forum & VR Mall for western suburbs. There has been no drastic change in the mall rentals over the last few years and this may be attributed to lower availability of good quality mall developments and steady occupancy levels. Mall vacancy has also remained around 8-8.5% over the last few years. With footfalls in the malls reaching around 60-65% and consumption rate ranging between 50-55%, the post COVID retail market recovery has been relatively slow given the subdued consumer sentiments. Retailers with considerable business losses remained in a wait and watch mode for store count growth and hence the retail leasing activity was adversely affected during the Q2-Q4 period of 2020. However, the retail sector has been resilient in the past as well in the face of natural calamities and is expected to recover this time as well, though it is likely a long road despite consumption parameters improving steadily.

Residential Sector

Chennai's residential market has been witnessing an average of 4-5% y-o-y increase in the unit launches over the last five years. Despite the Covid-19 imposed lockdown restricting approvals and bringing activity to a standstill, residential unit launches were still up by 2% on a y-o-y basis in 2020. With an average construction period of 3-4 years for a typical residential project in the city, Chennai remains a market where buyers can enter with a healthy confidence in term of project delivery timelines. This signals the steady demand scenario that prevails in the city. Post the unlocking phase, construction has resumed in full swing with developers focused on near-term completions. With launches increasing in Q4'20 after a sharp slowdown in Q2'20, and sales also showing similar momentum, we expect that 2021 will build on this trend and exhibit an improvement in terms of market activity compared to 2020.

There has been an increase in rental apartment market availability in recent quarters with a large number of employees and students returning to their native locations. This has resulted in minor rental corrections along the OMR, ECR, Perungalathur, Guduvanchery, Singaperumalkovil, etc. While residential capital values have largely remained stable over the last two years, in 2020 on a y-o-y basis a minor dip of 0.5-1% on headline prices in the mid segment was witnessed. To drive sales, developers continued to offer various incentives and schemes to attract buyers. Development of infrastructure projects has also been driving the demand for residential realty. A slew of proposed infrastructural projects such as Metro Rail Corridor Phase II, flyovers at various congested junctions, Multi-deck elevated transport corridor along the OMR and road widening initiatives would help in easing off the traffic bottlenecks and reduce the travel time within the city thereby fuelling real estate growth in these areas. While "work from home" has picked up significantly in recent quarters, going forward, "working closer to home" would be given importance by employees and employers alike, which would drive demand for residential projects closer to the primary office corridors.

Warehousing & Industrial

Chennai, also known as the Detroit of India, is home to more than one-third of India's automobile industry. The city is an industrial powerhouse with a strong and diverse industrial base. Chennai boasts of a position in the top 10 automobile hubs globally, with an installed capacity to produce 1.4 million cars per year, which means it has the capacity to produce three cars every minute. The prominent industrial corridors and clusters are Sriperumbudur – Oragadam, Irungattukottai, Maraimalai Nagar, Gummidipoondi, Ambattur, etc. The industrial ecosystem of Chennai is diverse and global companies like Hyundai, Ford, BMW, Caterpillar, Renault-Nissan have set up their manufacturing facilities in Chennai. The state's proactive industrial policy has attracted investors for projects such as manufacturing of commercial vehicles, windmill equipment, semiconductor chips, etc. over the past several years. The Government is determined to further accelerate entry of industries to the state.

Recently, the state government has announced an exclusive e-vehicle park at Manallur on the outskirts of Chennai to establish e-vehicle and its component manufacturing industries and an Active Pharmaceutical Ingredients (API) Park in Cheyyar SIPCOT with an investment of around Rs. 770 crore. This is likely to boost demand for warehousing spaces substantially over the medium to long term and incentivize investments by global PE funds. TIDCO along with TIDEL is establishing an Advanced Computing and Design Engineering Centre (ACDEC) for Aerospace and Defence Manufacturing & Design Industries in the Sriperumbudur Aerospace Park. The proposal is to 1 msf of built up space and facilities for Advanced Computing and Design Engineering Centre comprising Avionics Complex, Centre of Excellence, Skill development Centre and Warehouse facility. Further, housing facilities have been planned for nearly 1.5 lakh workers of the industrial parks over the next five to ten years on the outskirts of Chennai under the state government's industrial housing programme. This initiative has been started with the industries department preparing a detailed project report to build the state's first industrial housing facility near Oragadam industrial park. The project will accommodate skilled migrant labour in order to drive the state's industrial and economic growth. In the long run, it is expected that the proposed investments supported by enabling industrial regulations will drive the steady growth in Chennai's industrial sector, especially for modern warehousing facilities.

Conclusion

Chennai looks set to build on its inherent resilience and its multi-dimensional industry growth to emerge stronger and create cross-linkages which will enable growth across all real estate asset classes over the next few years.

Sridhar V S

Managing Director, Chennai Cushman & Wakefield India

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