How the Property Tax Hike Spells woes for IT Firms..!

by Mr. N. Hariharan, Chushman and Wakefield

If  Municipal Corporation of Chennai's (MCC) recent resolution to hike property tax for specialty buildings (buildings housing ITBPM companies) between 50 % to 200 % is approved by the state Government, it will add anything between Rs. 4 to 27 per square feet as additional operational cost for IT - BPM companies depending upon their location in the Chennai city.

Now, the existing property tax rates for such properties are in the range of Rs. 1.20 to 11.25 per square feet across different micro markets.This proposal comes at the most inopportune time when the occupier sentiments and the overall leasing activity is witnessing a new low and companies are shying away from any pre-commitments as they follow a cautious wait and watch approach with respect to their expansion and consolidation strategies.

 N. Hariharan, Chushman and Wakefield

 While the upward revision in property tax is estimated to bring in additional revenue for the Chennai Corporation,it will negatively impact the IT - BPM sector that is already reeling with a slowdown in growth for the sector,especially the small and medium sized companies. Further,in a city where power cuts are a daily norm,the increasing diesel costs have been increasing the financial burden on IT - BPM companies. This situation will make new IT - BPM companies looking at entering and/or expanding their base in Chennai a challenge.

Micro markets that will be the most affected will be in the CBD & Off - CBD as the proposed property tax hike is highest in locations such as Teynampet, Anna Nagar, Adyar and Kodambakkam at 200%.

 

As per the Chennai Municipal Corporation's reasoning,it is the building owner who reaps the benefits of increased rental values; the tax rate was not changed over the last few years & thus the benefits of increased rentals have not been shared with the local government. Though the logic is reasonable, unlike the past wherein landlords bore the burden of the property tax themselves, the steep hike may force them to pass it on to the tenants, which will push up the overall rentals or /  occupany costs. Given that currently IT - BPM companies are not doing too well in the current economic conditions, such a move will impact them adversely & they may be forced to reconsider expanding their operations within the city & in extreme cases, even operating in the city at all.

About a 100% hike is proposed for Sholinganallur, along the IT corridor or / Old Mahabalimpuram Road (OMR) which have a number of IT - BPM firms. Even though the percentage hike in this area is less than CBD &  Off-CBD, this will have the maximum impact on leasing activity &  occupancy levels in the near future as this area houses the maximum number of IT firms in the Chennai city and the IT - BPM sector has been the largest contributor to Chennai's overall office leasing activity in recent years with already about 40% of the total space being taken up by the sector since the beginning of this year.

About the author..!

Mr. N. Hariharan is Office Director at  Chushman and Wakefield, Chennai 

Cushman & Wakefield (India) Pvt. Ltd.

Paramount Plaza, 5th Floor, 7A/22, Nungambakkam High Road,

Chennai - 600 034

Tel: + 91 44 4299 5555 , Fax: +91 44 4299 5566

Amala Jose

+91 99529 59445

amalajose.j@ap.cushwake.com

Karthik Rajan

+91 97890 56165

karthik.rajan@ap.cushwake.com

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