Destination India - A Real Estate Journey for Corporate Occupiers - May 2014
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Destination India - A Real Estate Journey for Corporate Occupiers May 2014
2 Destination India - A Real Estate Journey for Corporate Occupiers
Foreword
India, as it stands today, is on the trajectory of becoming the world’s 3rd largest
economy by 2020. Real estate continues to form a key ingredient for the success of
India’s rising economy. However, one would need an association of true intellect and
expertise to unravel India’s true potential.
JLL, for years, has been a preferred partner for multinational and domestic
corporations to provide a seamless platform towards establishing or expanding their
footprint in India. This report aims to provide you with insights into how the Indian
office real estate is transforming amidst a dynamic operating environment.
This report is not only a culmination of both extensive data and research built over
a number of years in our Indian business, but also the result of thought provoking
discussions amongst industry experts aiming to decode the land of a billion
opportunities!
Destination India - A Real Estate Journey for Corporate Occupiers 3
India - a billion opportunities waiting
The second largest developing economy in the world, India, is in an interesting position. The Indian economy is trying to recover from the
after-effects of the global financial crisis (GFC) and at the same time waiting for the decision of an electorate of over 814 million. While the high
inflation, slowing GDP growth, trade deficit, external debt and depreciating currency are visible concerns, factors like lack of policy level clarity
and corporate governance are also affecting international interest in the country.
Figure 1: weak Economic Scenario Figure 2: Increasing Trade Deficit
Source: Oxford Economics Source: Oxford Economics
However, given all these hurdles, the economy’s underlying strength is Figure 3: Growing Per Capita Income (PPP)
undeniable. With a population of 1.3 billion – 65% in the working age
category – India offers a huge market for international corporations.
Talent, one of the key elements for any business, is plentiful and
available at a lesser cost compared to developing nations. In the past
decade, when the economy was in good shape, the manufacturing and
service sectors achieved a growth rate of 7.7% and 9.6% respectively.
The stock market index grew by more than 5½ times, indicating the
potential business growth the country can offer once the economy
recovers.
Source: IMF
4 Destination India - A Real Estate Journey for Corporate Occupiers
Figure 4: No of years left for Dependency Ratio to bottom-out
INDONESIA INDIA VIETNAM CHINA
41 years 36 years 16 years 1 year
Source: UN population statistics
Number of years Note: Dependency ratio indicates sum of population aged 0-14 and 60+
divided by number of people in the 15-59 (working age) age group.
A falling dependency ratio indicates faster rise in income as more number
of people are earning as opposed to merely spending (or dependents).
While we agree that the current situation is not the most
favourable, the problems appear to be short-term in
nature. A stable government at the centre with a clear
agenda can reduce the revival time. On the other hand,
long-term business opportunities are immense and are
capable of attracting international corporations and
investors into the country.
Policy Level Clarity
Increase in Foreign Money Inflow
n Pa r t ic ipation
oreig
Higher F
st Popu lation g currenc
y
2nd High
e Weakenin
R ACKET
G AGE B Growth
WO R K IN Low GDP
65% IN e Deficit
PCI L ow Wages Increasi ng Tr ad
e a si ng
Incr ganised R
etail
ATION
enet r at ion of Org HIGH INFL
Low P Lifestyle
Improving
Destination India - A Real Estate Journey for Corporate Occupiers 5
What does India offer to Easy talent availability
Finding and retaining a workforce is not a big challenge for various
foreign corporates? industries in India. Personnel are available to carry out each and
every job, from the execution of tough work in difficult conditions to
preparing country level business strategies sitting in a smart office.
Over the years, we have witnessed various MNCs setting up their offices
Across industries, manufacturing in particular, labour cost continues
in India and, despite the challenges; these companies have managed to be the focus area. India scores well on this, as it offers a wage
to grow. Various companies in IT & ITES, banking & financial services, cost that is lower than most comparable nations in the world (Figure
retail, pharmaceuticals, telecom, food & beverage sectors have entered 7). There is also a noticeable increase in labour mobility. A decade
India and spread their presence across the country, expanded their ago, the percentage of Indians ready to leave their city of origin was
staffing levels and grown their revenue multiple times. small. This has increased considerably, providing a lot of flexibility
for employers.
Top five attractions for foreign corporates
Low cost real estate
New India Emerging
While the cost of real estate in India has grown over the past deca-
India has the second largest population in the world, a high percentage
de, it is still considerably lower than most other developed nations. A
(65%) of which are income earning. When combined with the growing quick look at the cost of real estate in various cities around the world
urbanisation rate, an increasing number of nuclear families and an in- suggests that Delhi and Mumbai feature at number 10 and 11 in the
creasing focus on spending, the consumer market potential is clear. The list of the costliest office spaces in the APAC, and they are more
diversity in spending patterns, eating habits and lifestyle changes (fo- than 55% cheaper than the table topper, Tokyo. Bangalore, one of
cussed on higher spending) in various parts of the country offer a sizable the fastest growing office markets in the country, is at number 21
market for a range of industries wanting to set up their office in India. and is more than 85% cheaper than Tokyo. (Figure 8)
Figure 5: Growing Urbanisation Figure 7: Wages are lowest in India amongst comparable nations
Source: McKinsey India Awakening Report Source: International Labour Organisation
Figure 6: Dropping Savings Rate = Growing Spending Figure 8: Top 21 Office CBDs (Rental) in APAC
Source: World Bank Source: JLL
6 Destination India - A Real Estate Journey for Corporate Occupiers
IBM has grown its employee strength in India by more than 16 times in last decade. From just 9,000
in 2003 the head count has increased to 150,000 in 2014 which accounts for as high as 33% of the
overall employee strength.
Accenture employs 80,000 employees. This accounts for 28.5% of their global staff strength which is
highest across all the countries in which it is present. The Indian headcount has more than doubled
from 35,000 in 2007.
Ericsson India has an employee strength of 17,991 which accounts for 16% of its global workforce.
India accounts for 2nd highest head count after Northern Europe & Central Asia.
A UK based banking and financial service company has grown its employee strength by more than
1.3 x to 12,500. It plans to add financial services 16% in next 2 – 3 years.
A Germany based banking and financial services company grew at a fast pace and employed more
than 12,000 employees for their back office and offshoring activities in India in last 10 years over 4
locations in the country.
Central time zone
The geographical location of India puts it in almost a central time zone, which enables it to offer services across the regions of the world. While
an early start in India can match the timing of Singapore and Hong Kong, a late evening shift can service clients in the UK, and a night shift can
work well for corporates in the US. This helps corporates across the world to set up offices in India and provide seamless working across offices
in different countries.
INDIA
11:00 AM, MAY 15
CALIFORNIA, SINGAPORE SYDNEY UK
UNITED STATES 1:30 PM, MAY 15 3:30 PM, MAY 15 6:30 AM, MAY 15
10:30 PM, MAY 14
Destination India - A Real Estate Journey for Corporate Occupiers 7
Fast transition from unorganised space to organised space
Figure 9: No of Companies Listed on BSE
India was traditionally categorised as an unorganised market.
However, over the past decade, various industries transitioned from 5,400
unorganised to organised. The retail, hospitality and real estate 5,300
sectors are a few eminent examples of sectors that have undergone 5,200
5,100
this shift. While during the past decade there was a keenness to
5,000
move towards organised space, the next decade is expected to 4,900
witness a fast pace shift. 4,800
4,700
Improvement in Transparency 4,600
4,500
Apart from these five factors, India’s improving transparency is also 4,400
acting positively for foreign corporates and foreign investors. Every FY 05F Y 06 FY 07F Y 08 FY 09F Y 10 FY 11F Y 12 FY 13F Y 14
two years, JLL releases a transparency Index which covers 97 Source: Bombay Stock Exchange
markets worldwide. A unique survey that covers 83 different factors
across 13 transparency topics (mentioned below) provides a holistic Gradual growth in listed
score which indicates improvement or deterioration in any country’s companies – result of shift from
transparency level. The Index aims to help real estate investors, unorganised to organised
corporate occupiers, retailers and hotel operators understand
important differences when transacting, owning and operating in
foreign markets. The Index is also a helpful gauge for governments
and industry organisations who are interested in improving Depending upon their overall development, Indian cities are categorised
transparency in their home markets. as Tier-I, Tier-II and Tier III. While our current edition of the JLL
Transparency Index (2014) is under finalisation, its preliminary findings
suggest that India has improved in various aspects over 2012. On
several parameters, the improvement is better than even the Asia Pacific
average. Whilst it is in semi-transparent stage, the improvement is
encouraging.
DIRECT PROPERTY INDICES | LISTED REAL ESTATE SECURITIES INDICES
UNLISTED FUND INDICES | VALUATIONS
MARKET FUNDAMENTALS DATA | FINANCIAL DISCLOSURE
CORPORATE GOVERNANCE | REGULATION
LAND AND PROPERTY REGISTRATION | EMINENT DOMAIN
DEBT REGULATION | SALES TRANSACTIONS
OCCUPIER SERVICES
8 Destination India - A Real Estate Journey for Corporate Occupiers
Key to effective business was transformed into home for major software and financial services
firms. Expansion of big cities such as Mumbai and Delhi was confined
set-up in India - smart and due to their space saturation as development and growth came to
them quite early. In such a scenario, it was the satellite towns –the
efficient office space peripheral locations – which gave the much-needed growth impetus
by expanding the boundaries of these cities. Today, while the office
The single most critical aspect for any corporate occupier when setting corridors of Gurgaon and Noida give real character to the Delhi NCR
up operations is DOSE (Destination, Optimum space Size and Ex- zone, it is the Bandra-Kurla Complex and Lower Parel which dominate
penses). Whilst business locations are selected based on a range of the commercial real estate market of Mumbai, leaving the traditional
parameters including ease of setting up business, policy framework, South Mumbai corridor behind.
availability of technological resources and accessibility to the right kind It was on the back of these cities and their growth charts that a se-
of talent, the choice of the right office premises is also an imperative. cond tier of cities emerged in the country when the need arose for set-
Partnering with the right kind of developer who offers optimum building ting up secondary offshoots at a more affordable cost. This gave rise
specifications and facilities are essential, given the space standards that to the manufacturing and IT hubs in Chennai, IT and biotechnology
all global occupiers have formalised over the years. The cost of running incubators in Hyderabad, and engineering and IT hubs in the erstwhile
the facility, i.e. operating expenditure is also a key consideration in real pensioners’ paradise of Pune. In the Eastern part of India, Kolkata
estate planning and strategy decisions in India. too emerged as an attractive destination for few IT and manufacturing
Over the past two decades, India has made a mark on the global map firms. These cities today contribute to over two-thirds of occupier
as the foremost offshoring and outsourcing destination. The country has driven office space leasing volumes in the country.
managed to attract large multinational companies operating in the field To put things in the right perspective, the chart below shows the
of banking, manufacturing, hospitality, logistics, and also construction incremental growth of Grade A office space from 2001 till date. It
and warehousing. The growth of the services sector coincided with the clearly brings out the difference in the pace and size of construc-
explosion in construction of commercial offices to fulfil the need of such tion across the seven cities mentioned earlier.
occupiers. The three biggest cities of Delhi, Bangalore and Mumbai
Indian Office market evaluation
attracted the largest share of occupiers in the services and outsourcing
businesses. Not only has the pace of construction picked up, but the quality of
Emergence of the top seven cities office space - optimal design, building specifications and overall work
place environment - has undergone a transformation. Indian develo-
Even during the 1980’s and 1990’s, whilst, Mumbai was already the pers are now able to churn out office spaces that match the level of
financial capital of the country, being home to the stock exchange and international occupier expectations.
the headquarters of various banking and financial institutions, Delhi was
Hence, office take-up in terms of square foot leased per year has
an attractive destination by virtue of being the seat of the government
increased incrementally over the past decade.
and hence the policy-makers. Bangalore’s attractiveness as a business
destination was driven by its potential in terms of great talent pool, which The chart below gives annual absorption volumes for the top
blended well with the opportunities of work that came its way. It is today seven Indian cities from 2007 till end of 2013.
the biggest exporter of IT services in India. From an army city, the region
Figure 10: India Office Stock (million sq ft) Figure 11: India Office Space Absorption and Supply
Source: JLL REIS Source: JLL REIS
Destination India - A Real Estate Journey for Corporate Occupiers 9
The activity peaks of 2007 and 2008 reflect the pace of space take- While the city of Bangalore and Chennai have reached close to
up by corporates symptomatic of the pre-crisis euphoria around the their historic peaks, all others are still heavily discounted. Another
world in terms of business growth and the potential of a country like observation worth noting is that the cities which have shown the
India. Thereafter, when the Global Financial Crisis happened, the highest increases were historically relatively inexpensive office
impact on the leasing volumes was profound. While the demand markets. Average rents in these cities have been sub USD 1 per sq ft
for office space had increased by the end of 2010, the trend per month since 2009 till date.
amongst real estate occupiers has shifted towards adopting a more
While the secondary business districts in Mumbai are thriving office
conservative space acquisition strategy.
markets, in Delhi NCR it is the suburban towns which are the primary
As of end-2013, pan-India net absorption remained stable at drivers of office space supply and demand. The rental discounts
2012 level of 26.8 million sq ft. New completions have increased currently available in both locations offer occupiers a window of
from 30.4 million sq ft in 2012 to 36.3 million sq ft as at end 2013, opportunity to time the market. The key aspect of this opportune
causing the vacancy rate to increase marginally by 130 bps in a moment is that superior grade projects are likely to see higher
stable demand scenario. Mumbai and Bangalore continued to be occupier interest and hence likely to offer a relatively smaller window
the major contributors to India’s total net absorption in 2013 while before rentals start to appreciate.
NCR-Delhi witnessed healthy pre-commitments in projects that were
The combination of high vacancy and affordable rents that exist
in the advanced stages of completion.
presently has created an occupier-friendly market, especially in the
While the momentum in office leasing activity had resumed post growth corridors of office developments.
the crisis during 2010-11, it was worth noting that the increases in
It is however imperative to understand that most of the cities’ Central
rentals and capital values have still left them far from their peak
Business Districts (CBDs) are saturated in terms of office supply and
levels before the crisis. In fact, 5 years after the GFC, office markets
their already high rental values have created a cap on their future
have still not reached their peak values. The office sector heat map
growth, thereby causing them to grow slowly over the past five year
table below highlights some of the latest dynamics.
period. This difference between the cities’ CBDs and their thriving
Rental
“Decline
“Rents Declining” Rents Recovering Value
Slowing”
Index
2008 2009 2010 2011 2012 2013 1Q14 1Q14
BANGALORE -0.9% -17.7% 3.3% 10.8% 5.3% -0.6% 0.3% 99.5
MUMBAI
-3.6% -34.3% 0.8% 1.1% 0.8% 0.5% 0.1% 62.1
City
DELHI
-3.8% -41.6% 2.2% 3.2% 1.3% 0.0% 0.0% 59.2
City
MUMBAI
-7.0% -34.3% 0.0% 7.4% 1.1% 2.1% 0.6% 68.3
Suburbs
GURGAON
1.6% -31.1% 2.8% 11.8% 5.7% 5.0% 0.9% 80.9
Prime
GURGAON
-15.0% --38.2% -2.4% 9.8% 4.4% 2.1% 0.0% 66.7
Off Prime
NOIDA -3.2% -16.6% -9.0% 3.3% 2.7% 3.6% 0.0% 77.7
CHENNAI -0.6% -22.4% 0.0% 6.4% 4.9% 4.4% 0.2% 93.2
PUNE -5.1% -20.7% 0.0% 3.4% 7.3% 6.8% 2.3% 83.9
HYDERABAD 3.1% -14.0% 0.0% 4.1% 5.1% 1.1% 0.0% 80.1
KOLKATA 9.3% -27.4% 0.0% 5.7% 8.2% -0.3% 0.0% 82.6
Note: Mumbai City includes CBD, SBD Central, BKC and SBD North. Mumbai Suburbs includes Eastern and Western Suburbs. Delhi City
includes CBD and SBD of Delhi.
Source: JLL REIS
10 Destination India - A Real Estate Journey for Corporate Occupiersperipheral locations needs to be highlighted; as such the CBDs tend beginning to increase. The first quarter of 2014, recorded about 6
to remain relatively neutral markets and may not offer the negotiating million sq ft of office space absorption across the top seven cities, a
flexibility to an occupier. healthy gain of 15.4% q-o-q for net absorption. Also, as a percentage
Occupiers’ space acquisition strategy of total absorption during 2013, while 1Q13 had contributed around
19.4%, the contribution of 1Q14 towards the predicted 2014
Key Trends absorption has been slightly higher at 22.2%. In fact, the 1Q14
absorption as a percentage of total CY numbers has been second
While the fundamentals of the India story in terms of its skilled
only to 2011 in the past 5 year analysis period. These indicators point
workforce, its cost arbitrage and low-cost real estate remain intact,
towards increased occupier activity translating to higher absorption
occupiers have shown greater maturity in evolving their real estate
volumes during the quarter gone by.
strategy. Over the past two years, the net absorption volumes on a pan
India basis remained stable (Chart 2). The slowdown in the US economy India market forecasts
coupled with the economic issues plaguing the European Union had
A look at the three year forecast at a pan India level and for the
most of the corporate occupiers, headquartered out of either one of the
top seven cities indicates that the space acquisition is likely to take
two, in a state of conservative growth. With the offshoring/outsourcing
place at a slightly faster pace in 2014, due to the slowly improving
business contracts facing cost and growth issues, real estate space
global headwinds and the likely positive change in the investment
acquisition was directly impacted. In these times, occupiers were
and economic climate in India. Another important point for occupiers
looking at improving their business margins by consolidating multiple
to understand, is demand polarisation based on asset quality.
office locations within city geography to control space occupancy costs.
Superior grade office projects are likely to see faster space take-
Portfolio rationalisation through consolidation contributed to much of
up with established office corridors likely to be preferred more
fresh office demand over 2012-13. Also, relocations to lower-cost offices
compared to others. While a larger portion of demand is likely to
– either in upcoming office corridors or in certain cases to different sub-
emanate from the IT/ITeS sector, the banking and financial services
markets were being considered.
industry is also likely to see faster growth. It is hence likely that
A subdued growth of the economy over the past two years also the cities of Bangalore, Delhi NCR and Mumbai will remain the top
contributed to the reduction in consumer spending, lesser contracts from three preferred cities for occupier growth. While, consolidation and
Indian firms and lower earnings estimates from domestic operations. All relocation strategies will dominate in the short-to-medium term,
these factors combined to result in occupiers evolving their real estate expansion driven growth is expected over the long-term. A wider mix
strategy towards reducing occupancy costs during this period. A lot of of corporate occupiers in terms of industry profile is also expected,
forward thinking was also observed, especially from IT/ITeS occupiers, as a proactive, investor friendly government at the helm is likely to
who were looking to expand by pre-committing in upcoming Special enhance investments in the industrial and manufacturing sectors.
Economic Zones, which offered them longer fiscal incentives.
An example of potential occupier activity over the coming 6-18 month
Green shoots of revival have been evident with the performance of the period is encapsulated in the next page, to evidence increasing
first quarter of 2014, giving rise to the opinion that the office demand is occupier activity anticipated in the market:
Destination India - A Real Estate Journey for Corporate Occupiers 11OCCUPIER INDUSTRY OCCUPIER HQ CITY LOCATION SPACE REQUIREMENT REAL ESTATE STRATEGY
Banking & Financial Services Europe Mumbai 180,000 Consolidation
Diversified Business USA Mumbai 120,000 Renewal
Banking & Financial Services Europe Mumbai 450,000 Relocation
Diversified Business Group Japan Pune or Hyderabad 100,000 Expansion
Banking & Financial Services USA Mumbai 330,000 Renewal
Market Consulting Services Europe Pune or Hyderabad 100,000 Expansion
Banking & Financial Services Europe Mumbai 300,000 Consolidation
Banking & Financial Services USA Mumbai 175,000 Expansion
Banking & Financial Services India Mumbai 200,000 Expansion
Banking & Financial Services India Mumbai 500,000 Expansion/Consolidation
Banking & Financial Services Europe NCR-Delhi 175,000 Expansion
Consulting Services USA NCR-Delhi 800,000 Expansion/Consolidation
IT/ITeS USA NCR-Delhi 800,000 Expansion
IT/ITeS USA NCR-Delhi 10,000,000 Consolidation
IT/ITeS India NCR-Delhi 250,000 Expansion
IT/ITeS Europe NCR-Delhi 300,000 Relocation
IT/ITeS USA NCR-Delhi 175,000 Expansion
Telecom Europe NCR-Delhi 250,000 Expansion/Consolidation
Insurance USA NCR-Delhi 350,000 Relocation
IT/ITeS USA NCR-Delhi 100,000 Relocation/Consolidation
IT/ITeS USA NCR-Delhi 450,000 Expansion
Consulting Services USA NCR-Delhi 125,000 Expansion
IT/ITeS USA NCR-Delhi 150,000 Relocation
Banking & Financial Services India NCR-Delhi 150,000 Relocation/Renewal
Ratings USA NCR-Delhi 100,000 Expansion/Consolidation
Consulting Services USA NCR-Delhi 100,000 Relocation
~ 16.7 mn sq ft
12 Destination India - A Real Estate Journey for Corporate OccupiersThis is based on the improvement in physical and
the attractiveness of some existing ones. Infrastructure development acts as a magnet for attracting real estate investments. Enhanced
connectivity, uninterrupted power and water supply, associated social infrastructure development and capacity building are combined together
completion projects lead to commercial project development. Occupiers in India continue to be focused on connectivity, accessibility and overall
infrastructure quality.
Kolkata Hyderabad
emerged as a destination in the last 3-4 years
Proactive industrial and development policy,
Extensive new road network and expressways Reasons better road network connectivity, state-driven SEZ
Reasons providing enhanced connectivity with the South & development will further enhance connectivity
Central, Airport. Upcoming Airport Metro Corridor
will further enhance connectivity Presence of campus style developments by
Outcomes Ascendas, L&T, DLF and presence of Fortune 500
Outcomes Zero space availability with developers. Extensive companies such as Google, Accenture,
investor activity GE, IBM, Oracle, Deloitte Consulting, Motorola,
Dell, Convergys among others
Bangalore Outer Ring Road Corridor and North Bangalore Chennai
Reasons The Outer Ring Road connectivity and new Reasons OMR road connectivity; GST Road development
international Airport in North Bangalore and upcoming Metro Rail connectivity
Outcomes Outcomes campuses; SEZ corridor development in Guindy;
the corridor around the Airport sharp 42% increase in capital values in the CBD
based on upcoming metro connectivity
Pune Mumbai Secondary Business Districts – North, Eastern Suburbs
Reasons Improved road connectivity and accessibility to the Reasons Upcoming Metro connectivity; existing JV Link Road
main city; social infrastructure development
Outcomes 4.5 million sq ft in the East and West corridors, Outcomes increased absorption, new supply and possible rent
appreciation
Delhi NCR
Reasons Expressways (Noida-Greater Noida; NH-8 connecting Gurgaon-Delhi), Metro Rail connectivity
Outcomes
peak within 3 years rising by nearly 200% from 2006; DLF Cybercity in Gurgaon saw rents rise by 100% in 3 years from 2006 and
again have recovered to 80% of peak values in 2013
Destination India - A Real Estate Journey for Corporate Occupiers 13Occupier sectors driving demand for Indian Real Estate annually offer the benefit of affordable business operations. As per
the JLL City Index Research 2014, Delhi and Mumbai figure among
An analysis of the leasing volumes data from 2009 till end of 2013 the top 31 cities out of a universe of 300 global cities in terms of
reveals that IT/ITeS has been the biggest contributor to space take- commercial attraction index based on the economic and real estate
up across the top seven cities. It is to be noted that locations such market size. However, both are near the 100th rank and lower, in
as Bangalore, Hyderabad and Gurgaon (Delhi NCR) are considered terms of real estate investment, which points towards the growth
as laboratories for outsourcing experiment by global firms. The share potential these cities behold. With new construction offering smarter
of IT/ITeS has remained the largest, though it has shown marginal and socially responsible office space at attractive valuations, corridors
downward slope recently as outsourcing contracts were being reviewed within the Indian top cities are primed for an increased level of
and business environment remained sluggish. The manufacturing/ engagement with European companies.
industrial sector was the second biggest contributor followed by the
Key considerations for acquiring space in india
financial services sector. The top three sectors are the ones where India
has shown its distinct advantages in terms of talent pool availability, Choosing the right development partner
opportunity for business through increased industry penetration and the As an occupier it is imperative that the right developer is chosen
large unrepresented population offering the critical mass for financial based on his financial strength, delivery capability, development track
services based firms. record and quality. During the current times, most of the developers
are struggling with stressed balance sheets. As such, timely delivery
An interesting trend was captured while studying occupiers’ profiles is the biggest concern. At this juncture, choosing the developer who is
when we classified them according to their country of origin. focused on commercial office projects and has a proven track record
is essential to mitigate risks. It is also relevant to look at projects
US firms were the most dominant throughout the period studied, which have seen some levels of pre-commitments or likely to see
significantly more than the share of domestic Indian business. The interest from other occupiers, as they will probably be completed at a
European Union’s share contributed less than one-sixth of the total faster pace.
which can, perhaps, be attributed to the economic and recessionary The commercial office development scene is currently playing host to
climate hovering over the continent over the last four to five years. a few global players as well. Some of them come with development
When considering India as a business destination and establishing capability credentials, while others are using their investments
a footprint here, the current rental values of under USD 12 per sq ft experience to become development partners. A prime candidate is
Figure 12: Leasing Classification by Industries Figure 13: Leasing Classification by Country
Source: JLL REIS
Source: JLL REIS
14 Destination India - A Real Estate Journey for Corporate OccupiersAscendas, which is a global office development and investment firm Having mentioned Blackstone, which currently holds 28 million
and has been present in India for over a decade, partnering multiple sq ft of office space in collaboration with its Indian partners, who
developments across Hyderabad, Bangalore, Pune and NCR-Delhi. are incidentally, well-known Indian developers, there are other
Other firms such as Tishman Speyer and Hines are leveraging on players such as IDFC (domestically raised private equity fund),
their development experience to create superior quality office projects. IL&FS, Milestone Advisors, ICICI Ventures among others who have
It will be amiss to not mention Blackstone, which through strategic invested in built-up office projects. A key feature of their investment
acquisitions is today the second biggest developer in India, both in terms philosophy has been buying distressed and under-performing assets
of developed and under-construction stock. or from developers who are struggling with cash flows. Most of such
asset acquisitions are largely IT Parks or well-known commercial
This brings us to the point that selecting the right development partner
developments in the large Indian cities, which are preferred by
is also to be seen in the perspective of how attractive the developer is
global occupiers. A major incentive of such equity participation is that
to private equity and global players. It is an indicator of the confidence
occupiers can derive immense confidence from such private equity-
when a developer is able to attract investments or potential investor
owned assets in terms of commercial negotiations, asset quality and
interest in his commercial office projects.
long-term asset management practices.
The year 2008, which attracted the highest private equity investment
JLL’s Transparency Index puts added weightage to regulatory
from global players in commercial office development, was followed
and legal reforms while putting emphasis on availability of data on
by a significant fall as interest waned in this asset class with focus
commercial real estate debt. Data on the amount of outstanding real
shifting to the faster liquidating and return generating residential sector.
estate debt by market, and knowledge about whether local regulators
Recently, there has been a renewed interest in the office sector, with
can prevent the overextension of credit in the future, helps investors
funds focusing on income generating assets which matches with their
and corporate occupiers better assess risks in markets where they
investment philosophy.
operate. This allows for increase in inward capital flows and hence
The chart below shows the global private equity investment in India’s Tier1 and Tier 2 cities at the 47th and 48th position as per
commercial office asset class from 2007-2013. the 2012 Index give cause for positive movement going forward.
The sector has seen upheavals in investment volumes, but the activity is The participation of private equity players in commercial office
reflective of the cautious play of equity participants as they look to invest assets is also likely to bring greater transparency in Green Building
in rent-yielding assets, or those, which are part complete and have seen benchmarking and energy efficiency, which are critical aspects
good occupancy levels. For occupiers, as such, the developer’s track for occupiers as property sustainability characteristics play an
record and capability can be gauged by the extent of private equity increasingly important role in the leasing and investment decisions.
participation in its commercial assets or at an entity level. What happened to third tier cities’ growth?
The real estate growth story of the third tier cities hit a roadblock
Figure 14: Foreign PE Investment (USD mn) since the 2008-09 real estate market slowdown in India. The year
2008 saw all the top Indian cities record their rental and capital value
peaks. In such a scenario, occupiers were also looking at analysing
if the next tier of cities can provide them access to less expensive
real estate with the added benefit of cost savings and lower cost of
employees in line with these cities’ lower cost of living index, without
compromising on the employee skill levels.
The slowdown forced the occupiers to rationalise their headcount and
business growth projections, with the planned expansion into the next
tier being curtailed or put on hold. Besides, the correction seen in the
overall rents during 2008-2010 allowed occupiers to achieve nearly
same occupancy costs in the Tier 1 cities. The cost arbitrage was
rendered negligible.
Over the past two years, though rents have rebounded, they are still
trading at a discount to their peak values. Also, newer office corridors
have sprung up in the bigger cities, offering competitive rents and the
comfort of the presence of established office developers and access
to the same skilled workforce.
Source: JLL
Destination India - A Real Estate Journey for Corporate Occupiers 15The Tier 3 cities, while having lost a significant portion of their cost arbitrage, also tend to be riskier in terms of the flight of human capital which tends to gravitate towards the larger Indian metros for better employment opportunities. For occupiers, while real estate quality remains essential, quality and employability of available talent pool assumes much more significance for business continuation. The available talent pool is not only limited in the tier 3 cities, but with its inherent risk of moving to bigger cities, can further reduce this restricted pool. In such a scenario, occupier growth has remained restricted in Tier 3 cities. However, some cities such as Jaipur and Chandigarh (North India), Ahmedabad (West India), Kochi and Coimbatore (South India) have seen occupiers setting up base. Global occupiers here include Genpact, Nagarro Software, Affiliated Computer Services, Cognizant and Convensys among others. There are largely IT/ITeS firms which have located their low-cost operations in these cities. It remains, however, relevant that the existing potential in the Tier 1 cities provides enough incentives in terms of quality. 16 Destination India - A Real Estate Journey for Corporate Occupiers
Is it the right time to enter India?
Office assets available below replacement cost
Indian real estate had seen a strong northward movement
in the period before the GFC. However, just after the GFC,
prices crashed. While residential property prices witnessed
a sharp bounce back and crossed the earlier peak attained
in 3Q08 across the top seven cities in the country, office
markets are yet to regain their peak (Figure 15). Bangalore,
currently the best office market in the country, has regained
99% of the previous peak, while the peak in Mumbai and the
National Capital Region (NCR) is still very distant.
With an average rent of under INR 45 per sq ft (capital value
of INR 4,900), five out of the top seven cities offer lease-
earning office properties below replacement cost (Figure
16). For an investor, this provides an excellent investment
opportunity, as these properties have reduced all the key
risks – land acquisition risk, approval risk, construction risk
and marketing risk – and are already lease-earning
Figure 15: Distance from previous peak
Source:JLL REIS
Figure 16: Cost comparison – Just launched vs. lease earning
properties
Challenges for new land acquisition in India
Completion
after at least Requirement of in depth scrutiny of documents
3 years
Unreasonable demand from land owners
Lease No insurance available on land acquisition
earning
commercial High dependency on agents
property
Multiple approvals (X) multiple agencies
Source: JLL
Destination India - A Real Estate Journey for Corporate Occupiers 17Foreign exchange – a double-edged sword
Between August 2011 and August 2013, the Indian rupee depreciated by a massive 47% against the US dollar, thereby wiping out the majority of
gains arising from attractive entry valuations. However, the Indian rupee has since strengthened and regained some of its losses, but the future
remains very uncertain; and while the weak Indian rupee adds to the attractiveness of investment options in India, there is the possibility of a
further slide continuing to work against it. This situation will remain until a government that can attract foreign money does not occupy the centre
stage.
REITs – another positive in the waiting
The Congress Government has shown keen interest in setting up REITs in India and the Securities Exchange Board of India released draft
guidelines for the proposed REIT structure in India. While the timing of the start of operations is uncertain, the occurrence will provide a much-
needed funding option for developers and an exit option for investors, resulting in a reduction in cap rates and an improvement in valuations.
USA SINGAPORE UK INDIA
System REIT S-REIT UK-REIT -
Date Established 1960 1999 2007 In Draft stage (Oct 2013)
Listed/Unlisted Both Both Only Listed Only Listed
Closed-end or Open-end Closed Closed Closed Closed
Fund Vehicle Corporation, Trust Corporation, Trust Corporation Corporation
Investment in Real Estate At least 75% At least 70% At least 75% At least 90%
Public float* for the REIT units
Minimum Number of
100 None 100 shall be minimum 25%
Stockholders
at all times
Not more than 10% of its At least 75% of gross
Not less than 75% from At least 75% of gross income
REIT Income revenue from sources other income from rents or
rents or mortgage interest from rents or mortgage interest
than rents or mortgage interest mortgage interest
Distribution of REIT income At least 90% At least 90% At least 90% At least 90%
Conduit Structure Pass through Pass through Tax Exempt Not yet finalised
Source: JLL
Make or Break
condition
18 Destination India - A Real Estate Journey for Corporate OccupiersFacility Management more centralised, client buying preferences have evolved with the
conversation of facilities management outsourcing shifting towards
creating efficient value creation. With the complex demands being
The business organisations globally have been looking to achieve
made on in-house CRE causing an increased shift towards CRE
a mix of growth and productivity. Towards this end, they are looking
outsourcing, there is a focus towards seeking strategic relationships
at rationalising their business in mature markets while expanding
and delivering best practices.
strategically in the emerging markets. This is giving rise to a new
and more evolved generation of multinational companies which are As per JLL’s Global Corporate Real Estate Trends 2013, the top five
transcending their national geographies. challenges are:
Transparency in the emerging real estate markets is an indicator of the 1. Expectations and pressures build, heightening the risk of
inherent strengths and concerns which are bound to concern occupiers. underperformance
Those occupiers which are looking to primarily self-own their office
2. Increased demand is leading to faster-paced evolution of CRE
premises are likely to look more closely at the sale transaction practices,
outsourcing
high-quality, reliable presale information assembled by the seller and
fairness of the bidding and negotiating process. However, issues 3. Workplace transformation is the key to unlocking worker
concerning facility management practices, service charges they pay and productivity and optimising portfolios
professional standards of agents also remain paramount. As part of JLL’s
4. CRE must become a collaborative change agent
Transparency Index spanning 97 office markets, the Indian Tier 1 cities
are categorised in the semi-transparent stage with a ranking of 47. 5. Failure to deliver in emerging markets will become one of CRE’s
greatest reputational risks
Post the global financial crisis (GFC), the elevation of Corporate Real
Estate decision making is needed to keep pace with broader demands of As an aside, 38% of the respondents in the above study anticipated a
business and that has brought about a change in the mandate, structure net portfolio growth in the next three years in India.
and positioning of CRE. While the CRE decision making is becoming
Destination India - A Real Estate Journey for Corporate Occupiers 19In the above given scenario, integrated facilities management assumes critical importance for corporates looking to enter India or increase
their geographical footprint here. While, choosing the suitable real estate remains essential, the next step of managing the upkeep and daily
operational needs of a facility remain equally vital. The timeline below tracks the evolution of the facility management function in India.
Global corporates have evolved their facility management functions in India. This is in line with an increased efficiency and adapting global
industry standards in terms of engineering services, energy and sustainability. As occupiers demand implementation of global standards, the
standardisation of industry service by the providers has led to more occupiers gravitating towards the industry leaders in this space. This has also
led to consolidation of business among the various players in this field.
The table below shows how major occupiers are moving towards a more integrated and strategic partnership with their facility management
providers. This is an indicator of improved industry practices fostering occupier confidence to outsource their facility management function more
and more, going forward.
Verticalised - pan India Strategic Alliance Partnership
HSBC
ERICSSON ACCENTURE
IBM
BACS
9 have consolidated pan
WIPRO India providers for IFM
DELOITTE 5 fragmented ones
CAPGEMINI
COGNIZANT are moving towards
CSC regionalising
INFOSYS
TCS
HCL
Fragmented out tasking Regionalised
20 Destination India - A Real Estate Journey for Corporate OccupiersHospitality industry well The smooth entry process and the high level of clarity on policies
have attracted various international hotel chains to enter India.
placed While domestic players such as Taj, Oberoi, ITC, EIH, Leela,
Sarovar and Lemon Tree have laid a strong base over the years,
Base is set the entry of leading international operators such as Marriot, Hyatt,
Accor, Starwood, the Intercontinental Hotel Group and Carlson
There are two key factors that any business needs to focus on, to grow: has added depth to the industry.
demand for the product or services, and structural and policy level cla-
Shift and expansion – drivers for growth
rity. While the hospitality industry, along with other businesses in India,
is currently facing the effects of an economic slowdown, from the policy A quick look at the Indian hospitality industry reveals that existing
angle, it does enjoy certain benefits. Unlike other real estate classes, operators have started offering their services across segments,
the hospitality industry enjoys industry status, which provides it access with the introduction of other brands under the same group. As
to easy and cheaper funding. Further, it is permitted to bring in funding the hospitality market matures, we are seeing the entry of more
via the 100% FDI under automatic route. Incentive FSI is another benefit midscale and budget brands into India, and this has opened up
that the industry enjoys, where the Floor Space Index (FSI) increases in the industry and increased options across the categories. Some
line with the class of property (a luxury hotel enjoys higher FSI compa- of the newer brands who have just entered, or are looking to enter
red to a budget hotel). Furthermore, the government recently granted into the Indian Hospitality market, are Rotana Hotels, Menninger
infrastructure status to hotel projects valued at more than INR 200 crore Hotels, Hotusa Hotels, Caesars Hospitality, MGM Hospitality,
and convention centres valued at more than INR 300 crore, allowing Centara Hotels & Resorts, Movenpick Hotels, Tune Hotels, Six
these projects to have access to funding at lower interest rates and Senses and Trump Hotels.
longer tenures.
COMPANY BRANDS COUNTRY CATEGORY
DOMESTIC
Luxury, Upper Upscale, Midscale,
Indian Hotels Company Taj Luxury, Taj Vivanta, Gateway, Ginger India
Economy
East India Hotels Oberoi, Trident India Luxury, Upper Upscale
ITC Hotels ITC Luxury Collection, My Fortune, Fortune, WelcomHeritage India Luxury, Upscale, Midscale
Hotel Leela Venture Leela, Essence by The Leela India Luxury, Upscale
Sarovar Hotels Sarovar Premier, Sarovar Portico, Hometel India Upscale, Midscale, Economy
Lemon Tree Hotels Lemon Tree Premier, Lemon Tree, Red Fox India Upscale, Midscale, Economy
Destination India - A Real Estate Journey for Corporate Occupiers 21INTERNATIONAL
Hyatt Park Hyatt, Grand Hyatt, Hyatt Regency, Hyatt, Hyatt Place, Hyatt House USA Luxury, Upper Upscale, Midscale
Intercontinental Hotels United Luxury, Upper Upscale, Midscale,
InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express
& Resorts Kingdom Economy
Carlson Rezidor Hotel USA/
Radisson Blu, Radisson, Park Plaza, Park Inn, Country Inns & Suites Luxury, Upper Upscale, Midscale
Group Belgium
Luxury Collection, St. Regis, Méridien, W, Westin, Sheraton,Four points,
Starwood Hotels USA Luxury, Upper Upscale, Midscale
Aloft
Marriott Hotels & Ritz Carlton, JW Marriott, Marriott, Courtyard by Marriott, Fairfield by
USA Luxury, Upper Upscale, Midscale
Resorts Marriott
Luxury, Upper Upscale, Midscale,
Accor Sofitel, Pullman, Novotel, Mercure, Ibis France
Economy
Hilton Conrad, Hilton, Double Tree by Hilton, Hilton Garden Inn, Hampton Inn USA Luxury, Upper Upscale, Midscale
Four Seasons Four Seasons Canada Luxury
United
Whitbread PLC Premier Inn Midscale/Economy
Kingdom
Fairmont Raffles Hotels
Raffles, Fairmont, Swissotel Canada Luxury, Upscale
International
Another shift, that has been witnessed, is the entry of hotel operators Domestic demand continues to grow; the revival of international
into Tier II and Tier III cities, including industrial towns and religious demand will take time
and tourist destinations. Hotel operators, including Marriot, Hyatt and
Carlson, have taken their brands to cities such as Bhopal, Kochi, Katra The weak economic scenario has affected various businesses across the
and Hampi, which were not on the radar a decade ago. Currently, we globe; while some countries have joined the revival path, others will take
expect 68,000 hotel rooms to become operational over the next few time to join. This has affected growth in the number of foreign travellers
years, of which at least 35% will be in Tier II and Tier III cities. During the visiting India, currently at a marginal 4%, a considerable drop from the
past decade, the organised hotel industry has extended to various new 27% growth witnessed in 2004. We believe it will take time to grow back
markets, increasing the reach to the target audience. to a steady 12-14% range. However, the number of domestic travellers
has grown at a healthy pace of 14% (average between 2004 and 2012).
Coupled with hotel operators widening the offering and geographies, this
HOTELIER BRANDS TIER II & III CITIES will have a positive effect over the longer term.
Radisson, Park Plaza, Mysore, Katra The Indian real estate sector is witnessing a new trend with the
Carlson
Country Inns & Suites (Vaishno Devi) introduction of branded residences managed by luxury hospitality
Marriott Courtyard & Fairfield Ahmedabad, Bhopal, Kochi players, primarily as a part of larger mixed-use developments or
Hyatt Hyatt Place Hampi residential townships. Prominent luxury hospitality brands, including Four
Four Points by Sheraton, Jaipur, Pune, Seasons, Trump, Hyatt, Starwood, Marriott and Leela, have entered
Starwood Hotels
Aloft Vishakapatnam, Chandigarh this space by joining hands with reputed real estate players to lend
Aurangabad, Ahmedabad, their brand to high-end luxury residential developments. By combining
Lemon Tree Lemon Tree
Indore, Chandigarh, Pune
the branding and service of a luxury hotel chain with a high quality
Gangtok, Baddi, Lucknow,
Sarovar Hotels Sarovar, Hometel residential product, developers aim to provide a differentiator for potential
Manali, Nashik, Shirdi
customers and command a premium over non-branded developments.
Figure 17: Growth of Foreign Travellers in India Figure 18: Growth of Domestic travellers in India
22 Destination India - A Real Estate Journey for Corporate OccupiersIndustrial and Warehousing
Industrial – One of the key sectors for Indian economy
The Industrial sector in India is critical for two reasons. One, it generates 17% of the output in India while employing 20% of its labour force.
Secondly, it is the only sector that has the potential to upgrade livelihood of people at the bottom-end of the income pyramid. That’s because the
sector has the capability to absorb large amount of unskilled labour in India, who currently throng the agriculture sector for employment. With
increased focus of the Indian government in pushing manufacturing share to higher levels, we can expect this sector to gain share in GDP as well
as employment in the medium-to-long term.
Figure 19: Composition of GDP Figure 20: Composition of labor force
17% 20%
31%
Industry
17% Agriculture
Services
66%
49%
Source: CIA, JLL
Destination India - A Real Estate Journey for Corporate Occupiers 23OUR INDUSTRIAL
TRANSACTIONS FOOT PRINT
LUDHIANA
UTTARANCHAL
NOIDA
DELHI GHAZIABAD
GURGAON
GUWAHATI
JAIPUR
PATNA
RANCHI
BHUBANESHWAR
PUNE
VIZAG
GOA
MYSORE
COIMBATORE
COCHIN
The manufacturing sector is the most critical component within the Industrial sector. Going by the official Index of Industrial Production (IIP) data,
the segment has a 75% weight in the overall industry sector. Over the years, the manufacturing space has matured and various industries have
set up their base in different regions.
Manufacturing industry has been a major contributor to export revenue, indicating importance of the sector in bringing in foreign money. While
the current challenging economic situation has affected the manufacturing industry and as a result of it, the contribution to overall exports has
come down from 76% in 2001 to 61% in 2012, it still is a major contribution. Once the economy turns around, the share is expected to stabilise at
higher levels.
Figure 21: Manufacturing Growth Rate Figure 22: Contribution to Exports
Stable contribution in Source: Director General of Commercial
Source: Ministry of Statistics and Programme Implementation
challenging environment Intelligence and Statistics
24 Destination India - A Real Estate Journey for Corporate OccupiersNew look warehousing sector – from unorganised to
organised Figure 24: Healthy demand supply in warehousing space
A decade ago, warehousing sector was fairly unorganised which to
a certain extent affected foreign manufacturing companies in India.
However, during the last decade, with the FDI opening-up in real
estate, focus has shifted towards warehousing sector as well.
Supply is increasing gradually with adequate level of absorption.
Barring past two years, the occupancy has always remained
healthy at 80%+ levels. Due to high occupancy and improving
quality of warehouses, rentals too have witnessed a rise across top
7 cities in India.
Over the years, manufacturing industry in India has passed through Source: JLL
various phases of growth cycle - enjoyed high growth phase and
witnessed negative growth years as well. Going forward, the Though occupancy percentage has reduced over
sector is expected to enjoy more focus from the government. As the years; with high supply growth, occupancy
per per the Ministry of Commerce and Industry, government aims has remained healthy
to grow its share in GDP to 25% by 2022 from 17% currently.
Grade A & Grade B for top seven cities in India
This is expected to create 100 million jobs by then. The sector
is ably supported by warehousing with adequate supply and high occupancy. While the manufacturing and warehousing are still far from being
called matured, one can unquestionably say that the base is set for foreign manufacturing companies to enter India and start operations without
worrying about acquiring and developing warehousing space for their business.
Warehousing Rent Range (INR / sq ft / month)
MUMBAI PUNE BANGALORE HYDERABAD CHENNAI DELHI NCR AHMEDABAD
2007 10-18 6-12 9-11 9-11 10-12 18-16 9-11
2008 10-20 8-14 10-12 10-12 12-14 18-17 10-12
2009 10-22 10-16 11-13 10-13 14-16 18-18 10-13
2010 10-24 11-19 12-16 10-14 16-18 18-19 10-14 The rental range
varies depending
2011 10-25 12-22 13-18 10-14 18-20 18-20 10-14 upon quality of
supply
2012 11-27 13-24 13-22 10-16 20-22 18-21 10-16
2013 11-27 14-25 14-26 10-18 22-24 18-22 10-18
1.00 USD = 59.9 INR Source: JLL
Destination India - A Real Estate Journey for Corporate Occupiers 25keaways
Key ta
ase of
g h a c h a llenging ph it
u c
assing thro increasing trade defi
Though, p lo w G D P, m e n s e
on, offers im
high inflati c y, In d ia
ned curren rm
and weake unities in the long te
th o p p o rt
grow
Growth in TIER 3 cities remained limited post
GFC; largely due to limited talent availability and
Large population with changing lifestyle, easy reduced pricing benefit compared to TIER 1 & 2
talent availability, low cost real estate, fast
transition of various industries (including real
estate) towards organised space and favourable Annual rental of less tha
n USD 129 per sq
geographic location are the key attractions for mtr becomes one of
the key puller of foreig
corporates; compan n
foreign corporates ies headquartered in
occupy almost half of USA
the office supply in Ind
Europe based corpor ia;
ates occupy 14%
Delhi, Mumbai an
d Bangalore have
most attractive de been the
stinations, accoun
over 60% share ting for
of occupier activ IT & ITES continue to demand more than 1/3rd of
industries over th ity across all
e past year office supply; followed by manufacturing and BFSI
space
et Choosing corr
Post GFC, despite recovery in office mark ect developm
ent partner is
cons olida tion and reloc ation s of the most impo one of
absorption, rtant factor fo
r foreign corp
on office healthy balanc
offices to lower-cost offices put pressure e sheet, proven or ates;
confidence of track record an
rentals; opportunity still exists investors (esp
ecia
d
equity) are ke
y aspects to be lly global private
considered
and current
te rm g ro w th prospects om Various lease earning Grade A properties
India’s long ot hidden fr available below replacement cost; mitigating all
a tiv e e n tr y points are n q uarter’s abso
rption
lucr n o f 1 st d development and marketing related risks; Are you
contributio bps compare
corporates; d b y approx. 300 still waiting for better time to occupy?
e a se
in 2014 incr
year
to previous
ical presence;
ing their geograph
rkets are Hoteliers expand tel rooms are
, office ma coming 68,000 ho
after th e G F C
eak values
; at least 35% of up
Five years a discount to their p e to their in TIER 2 & 3 citie
s
at ched clos
still trading C hennai rea eavily discounted
re a n d
Bangalo are still h
eak, others
previous p Warehousing sector becoming more organised;
rentals are considerably cheaper across top 7
cities in the country
Improvement in physical and social infrastructure
helped in creating new office corridors along with
enhancing the attractiveness of some existing
ones
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