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Apr 02 2009


Over the past six months, a realization of the extent of the economic turmoil seems to be settling in and the impact of the global economic downturn on the Indian real estate markets is becoming more evident. The focus of this essay is on the commercial office space market in India and how it is being impacted by the current slowdown.

The primary markets in the context of commercial real estate in India are the National Capital region of Delhi (NCR), Mumbai, Bangalore, Hyderabad and Chennai (based on transaction size and volume). It would be interesting to see how these markets cope with the change in the economic landscape as each has its own set of strengths and weaknesses.

The NCR is probably the most well diversified commercial office real estate market in India, with Noida and Gurgaon giving it significant diversification in terms of tenant profile. For example, Noida has successfully established itself as a premier location for IT and back office services. Supply of cheap real estate, connectivity to Delhi and a captive manpower base has led to companies such as Exl Service and HCL setting up their biggest operations in the country in Noida. On the other hand, Gurgaon has established itself not just as an IT/Back office destination but also as a corporate office destination. The typical tenant in Gurgaon could be a Convergys or IBM-Daksh on the one hand and a Nestle or Pepsi on the other. The office market of Delhi, which primarily comprises of Central and South Delhi, is the location of choice for marketing and sales offices, banks and other firms that have regular dealings with the government. This healthy mix of tenant profiles suggests that the NCR market outlook is more stable as compared to some of the other markets in the country. Another factor in favor of the NCR is the Commonwealth Games in 2010. As a result, there is a lot of new development in anticipation of this event and the momentum should continue going forward.

The Mumbai office market is skewed towards the financial services industry. Most of the IT/Back office centers in Mumbai are also part of the financial industry. JPMorgan Chase, Morgan Stanley, Barclays etc. all have their front as well as back offices in Mumbai. Apart from the banks, private equity funds, asset management funds, hedge funds etc. typically set up their first office in India in Mumbai. No doubt, the current economic slowdown has led to a significant drop in leasing activity in the city. Arguably, Mumbai will continue to get a fair share of corporate office deals in India, as it is also the commercial capital of the country (not just the financial). The difference being that corporate office occupiers will be far more rational in terms of rent payouts as compared to how some of the financial services firms have been in the last couple of years. A decrease in demand combined with the shift in tenant profile in Mumbai may put downward pressure on rents.

The Bangalore office market is heavily dependent on the IT/Back office sector. Over the last few years, Bangalore has moved away from being the cheapest IT/back office location in the county to a higher end software development/IT services hub. Cisco, HP, Texas Instruments, Sun Microsystems, Microsoft, Oracle etc. have a significant presence in the city. The fate of the Bangalore office market is completely tied to the performance of the IT sector. Unfortunately, the city does not have any counter balancing factors (unlike Delhi and Mumbai) that will give it a sustained share of the office market in India. Unless Bangalore is able to position itself as more than just an IT hub it will be difficult for it to show the pace of growth that it has been showing over the last few years. The silver lining is that this quiet period could be an excellent time for Bangalore to improve its heavily strained infrastructure and prepare itself for future recovery.

In the past, the Chennai and Hyderabad office markets have always been overshadowed by Bangalore. However, the current state of the global economy works in favor of these destinations (in relative terms) as they are both low-cost locations and could come into greater play as companies across the world increase their exposure to low cost outsourcing companies. The tenant profile in Chennai and Hyderabad is not as high profile as Bangalore. The typical functions carried out in Hyderabad are the lower-end voice and data functions where cost arbitrage is the primary driver. For example, companies such as Genpact, ADP, and Wells Fargo are continuing to expand in the city and add headcount. On the other hand, Chennai has positioned itself well as a counter to Bangalore with skilled manpower available at a relatively lower cost. As a result, Chennai has managed to overcome its late start and has picked up significant business in the last couple of years from companies such as Accenture (from Bangalore), Fidelity (from Gurgaon) and Computer Sciences Corporation (from Noida).

Outlook: From a commercial office space standpoint, look for Delhi, Chennai and Hyderabad to be the strongest markets in the country in 2009 and 2010. The Bangalore and Mumbai office markets will have a tougher time in countering the current down cycle. Hence, developers in these markets may be expected to cut rents more aggressively and slowdown the pace of future projects. While Mumbai has sufficient room for rent rationalization, Bangalore has already seen a correction over the last 12 – 18 months. From a macro perspective, 2009 and 2010 will be extremely challenging years for the real estate sector. Tenants will surely have a much stronger say in negotiations and there will be a shift in deal structuring wherein rents, security deposit amounts, escalation, lock-ins etc. will all be reduced, while the rent free periods can be expected to increase.

About the Author

This article was written by Vikram Kohli '09.