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May 2014

Destination India - A Real Estate Journey for Corporate Occupiers

2 Destination India - A Real Estate Journey for Corporate Occupiers

Destination India - A Real Estate Journey for Corporate Occupiers 3

ForewordIndia, 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!


India - a billion opportunities waitingThe 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.

However, given all these hurdles, the economy’s underlying strength is 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.

Figure 1: weak Economic Scenario

Source: Oxford Economics

Figure 3: Growing Per Capita Income (PPP)

Source: IMF

Figure 2: Increasing Trade Deficit

Source: Oxford Economics


Source: UN population statistics

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).

Number of years

CHINAVIETNAMINDIAINDONESIA

41 years 36 years 16 years 1 year

Figure 4: No of years left for Dependency Ratio to bottom-out

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.

Improving LifestyleLow Penetration of Organised Retail

Low Penetration of Organised Retail

Higher Foreign Participation

Increasing PCI65% IN WORKING AGE BRACKET

Increase in Foreign Money Inflow

2nd Highest Population

Policy Level Clarity

Low Wages

HIGH INFLATIONIncreasing Trade Deficit

Weakening currency

Low GDP Growth


What does India offer to foreign corporates?Over the years, we have witnessed various MNCs setting up their offices in India and, despite the challenges; these companies have managed to grow. Various companies in IT & ITES, banking & financial services, retail, pharmaceuticals, telecom, food & beverage sectors have entered India and spread their presence across the country, expanded their staffing levels and grown their revenue multiple times.

Top five attractions for foreign corporates

New India Emerging India has the second largest population in the world, a high percentage (65%) of which are income earning. When combined with the growing urbanisation rate, an increasing number of nuclear families and an in-creasing focus on spending, the consumer market potential is clear. The diversity in spending patterns, eating habits and lifestyle changes (fo-cussed on higher spending) in various parts of the country offer a sizable market for a range of industries wanting to set up their office in India.

Figure 5: Growing Urbanisation

Figure 6: Dropping Savings Rate = Growing Spending

Easy talent availability Finding and retaining a workforce is not a big challenge for various 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. Across industries, manufacturing in particular, labour cost continues to be the focus area. India scores well on this, as it offers a wage cost that is lower than most comparable nations in the world (Figure 7). There is also a noticeable increase in labour mobility. A decade ago, the percentage of Indians ready to leave their city of origin was small. This has increased considerably, providing a lot of flexibility for employers.

Low cost real estate While the cost of real estate in India has grown over the past deca-de, it is still considerably lower than most other developed nations. A quick look at the cost of real estate in various cities around the world suggests that Delhi and Mumbai feature at number 10 and 11 in the list of the costliest office spaces in the APAC, and they are more than 55% cheaper than the table topper, Tokyo. Bangalore, one of the fastest growing office markets in the country, is at number 21 and is more than 85% cheaper than Tokyo. (Figure 8)

Figure 8: Top 21 Office CBDs (Rental) in APAC

Figure 7: Wages are lowest in India amongst comparable nations

Source: McKinsey India Awakening Report Source: International Labour Organisation

Source: World Bank Source: JLL


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, UNITED STATES

10:30 PM, MAY 14

UK 6:30 AM, MAY 15

SINGAPORE 1:30 PM, MAY 15

SYDNEY 3:30 PM, MAY 15


Fast transition from unorganised space to organised space India was traditionally categorised as an unorganised market. However, over the past decade, various industries transitioned from unorganised to organised. The retail, hospitality and real estate sectors are a few eminent examples of sectors that have undergone this shift. While during the past decade there was a keenness to move towards organised space, the next decade is expected to witness a fast pace shift.

Improvement in Transparency

Apart from these five factors, India’s improving transparency is also acting positively for foreign corporates and foreign investors. Every two years, JLL releases a transparency Index which covers 97 markets worldwide. A unique survey that covers 83 different factors across 13 transparency topics (mentioned below) provides a holistic score which indicates improvement or deterioration in any country’s transparency level. The Index aims to help real estate investors, 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 transparency in their home markets.

Depending upon their overall development, Indian cities are categorised 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

4,4004,5004,6004,7004,8004,9005,0005,1005,2005,3005,400

FY 05F Y 06 FY 07F Y 08 FY 09F Y 10 FY 11F Y 12 FY 13F Y 14

Figure 9: No of Companies Listed on BSE

Gradual growth in listed companies – result of shift from

unorganised to organised

Source: Bombay Stock Exchange


was transformed into home for major software and financial services firms. Expansion of big cities such as Mumbai and Delhi was confined due to their space saturation as development and growth came to them quite early. In such a scenario, it was the satellite towns –the peripheral locations – which gave the much-needed growth impetus by expanding the boundaries of these cities. Today, while the office corridors of Gurgaon and Noida give real character to the Delhi NCR zone, it is the Bandra-Kurla Complex and Lower Parel which dominate the commercial real estate market of Mumbai, leaving the traditional South Mumbai corridor behind.

It was on the back of these cities and their growth charts that a se-cond tier of cities emerged in the country when the need arose for set-ting up secondary offshoots at a more affordable cost. This gave rise to the manufacturing and IT hubs in Chennai, IT and biotechnology incubators in Hyderabad, and engineering and IT hubs in the erstwhile pensioners’ paradise of Pune. In the Eastern part of India, Kolkata too emerged as an attractive destination for few IT and manufacturing firms. These cities today contribute to over two-thirds of occupier driven office space leasing volumes in the country.

To put things in the right perspective, the chart below shows the incremental growth of Grade A office space from 2001 till date. It clearly brings out the difference in the pace and size of construc-tion across the seven cities mentioned earlier.

Indian Office market evaluation

Not only has the pace of construction picked up, but the quality of office space - optimal design, building specifications and overall work place environment - has undergone a transformation. Indian develo-pers are now able to churn out office spaces that match the level of international occupier expectations.

Hence, office take-up in terms of square foot leased per year has increased incrementally over the past decade.

The chart below gives annual absorption volumes for the top seven Indian cities from 2007 till end of 2013.

Key to effective business set-up in India - smart and efficient office spaceThe single most critical aspect for any corporate occupier when setting up operations is DOSE (Destination, Optimum space Size and Ex-penses). Whilst business locations are selected based on a range of parameters including ease of setting up business, policy framework, availability of technological resources and accessibility to the right kind of talent, the choice of the right office premises is also an imperative. Partnering with the right kind of developer who offers optimum building specifications and facilities are essential, given the space standards that all global occupiers have formalised over the years. The cost of running the facility, i.e. operating expenditure is also a key consideration in real estate planning and strategy decisions in India.

Over the past two decades, India has made a mark on the global map as the foremost offshoring and outsourcing destination. The country has managed to attract large multinational companies operating in the field of banking, manufacturing, hospitality, logistics, and also construction and warehousing. The growth of the services sector coincided with the explosion in construction of commercial offices to fulfil the need of such occupiers. The three biggest cities of Delhi, Bangalore and Mumbai attracted the largest share of occupiers in the services and outsourcing businesses.

Emergence of the top seven cities

Even during the 1980’s and 1990’s, whilst, Mumbai was already the financial capital of the country, being home to the stock exchange and the headquarters of various banking and financial institutions, Delhi was an attractive destination by virtue of being the seat of the government and hence the policy-makers. Bangalore’s attractiveness as a business destination was driven by its potential in terms of great talent pool, which blended well with the opportunities of work that came its way. It is today 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


The activity peaks of 2007 and 2008 reflect the pace of space take-up by corporates symptomatic of the pre-crisis euphoria around the world in terms of business growth and the potential of a country like India. Thereafter, when the Global Financial Crisis happened, the impact on the leasing volumes was profound. While the demand for office space had increased by the end of 2010, the trend amongst real estate occupiers has shifted towards adopting a more conservative space acquisition strategy.

As of end-2013, pan-India net absorption remained stable at 2012 level of 26.8 million sq ft. New completions have increased from 30.4 million sq ft in 2012 to 36.3 million sq ft as at end 2013, causing the vacancy rate to increase marginally by 130 bps in a stable demand scenario. Mumbai and Bangalore continued to be the major contributors to India’s total net absorption in 2013 while NCR-Delhi witnessed healthy pre-commitments in projects that were in the advanced stages of completion.

While the momentum in office leasing activity had resumed post the crisis during 2010-11, it was worth noting that the increases in rentals and capital values have still left them far from their peak levels before the crisis. In fact, 5 years after the GFC, office markets have still not reached their peak values. The office sector heat map table below highlights some of the latest dynamics.

“Rents Declining” “Decline Slowing” Rents Recovering

Rental Value 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 City -3.6% -34.3% 0.8% 1.1% 0.8% 0.5% 0.1% 62.1

DELHI City -3.8% -41.6% 2.2% 3.2% 1.3% 0.0% 0.0% 59.2

MUMBAI Suburbs -7.0% -34.3% 0.0% 7.4% 1.1% 2.1% 0.6% 68.3

GURGAON Prime 1.6% -31.1% 2.8% 11.8% 5.7% 5.0% 0.9% 80.9

GURGAON Off Prime -15.0% --38.2% -2.4% 9.8% 4.4% 2.1% 0.0% 66.7

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

While the city of Bangalore and Chennai have reached close to their historic peaks, all others are still heavily discounted. Another observation worth noting is that the cities which have shown the highest increases were historically relatively inexpensive office markets. Average rents in these cities have been sub USD 1 per sq ft per month since 2009 till date.

While the secondary business districts in Mumbai are thriving office markets, in Delhi NCR it is the suburban towns which are the primary drivers of office space supply and demand. The rental discounts currently available in both locations offer occupiers a window of opportunity to time the market. The key aspect of this opportune moment is that superior grade projects are likely to see higher occupier interest and hence likely to offer a relatively smaller window before rentals start to appreciate.

The combination of high vacancy and affordable rents that exist presently has created an occupier-friendly market, especially in the growth corridors of office developments.

It is however imperative to understand that most of the cities’ Central Business Districts (CBDs) are saturated in terms of office supply and their already high rental values have created a cap on their future growth, thereby causing them to grow slowly over the past five year period. This difference between the cities’ CBDs and their thriving

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


peripheral locations needs to be highlighted; as such the CBDs tend to remain relatively neutral markets and may not offer the negotiating flexibility to an occupier.

Occupiers’ space acquisition strategy

Key Trends

While the fundamentals of the India story in terms of its skilled workforce, its cost arbitrage and low-cost real estate remain intact, occupiers have shown greater maturity in evolving their real estate 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 coupled with the economic issues plaguing the European Union had most of the corporate occupiers, headquartered out of either one of the two, in a state of conservative growth. With the offshoring/outsourcing business contracts facing cost and growth issues, real estate space acquisition was directly impacted. In these times, occupiers were looking at improving their business margins by consolidating multiple office locations within city geography to control space occupancy costs. Portfolio rationalisation through consolidation contributed to much of fresh office demand over 2012-13. Also, relocations to lower-cost offices – either in upcoming office corridors or in certain cases to different sub-markets were being considered.

A subdued growth of the economy over the past two years also contributed to the reduction in consumer spending, lesser contracts from Indian firms and lower earnings estimates from domestic operations. All these factors combined to result in occupiers evolving their real estate strategy towards reducing occupancy costs during this period. A lot of forward thinking was also observed, especially from IT/ITeS occupiers, who were looking to expand by pre-committing in upcoming Special Economic Zones, which offered them longer fiscal incentives.

Green shoots of revival have been evident with the performance of the first quarter of 2014, giving rise to the opinion that the office demand is

beginning to increase. The first quarter of 2014, recorded about 6 million sq ft of office space absorption across the top seven cities, a healthy gain of 15.4% q-o-q for net absorption. Also, as a percentage of total absorption during 2013, while 1Q13 had contributed around 19.4%, the contribution of 1Q14 towards the predicted 2014 absorption has been slightly higher at 22.2%. In fact, the 1Q14 absorption as a percentage of total CY numbers has been second only to 2011 in the past 5 year analysis period. These indicators point towards increased occupier activity translating to higher absorption volumes during the quarter gone by.

India market forecasts

A look at the three year forecast at a pan India level and for the top seven cities indicates that the space acquisition is likely to take place at a slightly faster pace in 2014, due to the slowly improving global headwinds and the likely positive change in the investment and economic climate in India. Another important point for occupiers to understand, is demand polarisation based on asset quality. Superior grade office projects are likely to see faster space take-up with established office corridors likely to be preferred more compared to others. While a larger portion of demand is likely to emanate from the IT/ITeS sector, the banking and financial services industry is also likely to see faster growth. It is hence likely that the cities of Bangalore, Delhi NCR and Mumbai will remain the top three preferred cities for occupier growth. While, consolidation and relocation strategies will dominate in the short-to-medium term, expansion driven growth is expected over the long-term. A wider mix of corporate occupiers in terms of industry profile is also expected, as a proactive, investor friendly government at the helm is likely to enhance investments in the industrial and manufacturing sectors.

An example of potential occupier activity over the coming 6-18 month period is encapsulated in the next page, to evidence increasing occupier activity anticipated in the market:


OCCUPIER 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


Telecom Europe NCR-Delhi 250,000 Expansion/Consolidation

Insurance USA NCR-Delhi 350,000 Relocation

IT/ITeS USA NCR-Delhi 100,000 Relocation/Consolidation


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


This 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.

Bangalore Outer Ring Road Corridor and North Bangalore

Pune

Delhi NCR

Hyderabad

Chennai

Mumbai Secondary Business Districts – North, Eastern Suburbs

The Outer Ring Road connectivity and new international Airport in North Bangalore

Improved road connectivity and accessibility to the main city; social infrastructure development

Expressways (Noida-Greater Noida; NH-8 connecting Gurgaon-Delhi), Metro Rail connectivity

Proactive industrial and development policy, better road network connectivity, state-driven SEZ development will further enhance connectivity

OMR road connectivity; GST Road development and upcoming Metro Rail connectivity

Upcoming Metro connectivity; existing JV Link Road

the corridor around the Airport

4.5 million sq ft in the East and West corridors,

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

Presence of campus style developments by Ascendas, L&T, DLF and presence of Fortune 500 companies such as Google, Accenture, GE, IBM, Oracle, Deloitte Consulting, Motorola, Dell, Convergys among others

campuses; SEZ corridor development in Guindy; sharp 42% increase in capital values in the CBD based on upcoming metro connectivity

increased absorption, new supply and possible rent appreciation

Reasons

Reasons

Reasons

Reasons

Reasons

Reasons

Kolkata emerged as a destination in the last 3-4 years

Extensive new road network and expressways providing enhanced connectivity with the South & Central, Airport. Upcoming Airport Metro Corridor will further enhance connectivity

Zero space availability with developers. Extensive investor activity

Reasons

Outcomes

Outcomes

Outcomes

Outcomes

Outcomes

Outcomes

Outcomes


Occupier sectors driving demand for Indian Real Estate

An analysis of the leasing volumes data from 2009 till end of 2013 reveals that IT/ITeS has been the biggest contributor to space take-up across the top seven cities. It is to be noted that locations such as Bangalore, Hyderabad and Gurgaon (Delhi NCR) are considered as laboratories for outsourcing experiment by global firms. The share of IT/ITeS has remained the largest, though it has shown marginal downward slope recently as outsourcing contracts were being reviewed and business environment remained sluggish. The manufacturing/industrial sector was the second biggest contributor followed by the financial services sector. The top three sectors are the ones where India has shown its distinct advantages in terms of talent pool availability, opportunity for business through increased industry penetration and the large unrepresented population offering the critical mass for financial services based firms.

An interesting trend was captured while studying occupiers’ profiles when we classified them according to their country of origin.

US firms were the most dominant throughout the period studied, significantly more than the share of domestic Indian business. The European Union’s share contributed less than one-sixth of the total which can, perhaps, be attributed to the economic and recessionary climate hovering over the continent over the last four to five years.

When considering India as a business destination and establishing a footprint here, the current rental values of under USD 12 per sq ft

Figure 12: Leasing Classification by Industries Figure 13: Leasing Classification by Country

annually offer the benefit of affordable business operations. As per the JLL City Index Research 2014, Delhi and Mumbai figure among the top 31 cities out of a universe of 300 global cities in terms of commercial attraction index based on the economic and real estate market size. However, both are near the 100th rank and lower, in terms of real estate investment, which points towards the growth potential these cities behold. With new construction offering smarter and socially responsible office space at attractive valuations, corridors within the Indian top cities are primed for an increased level of engagement with European companies.

Key considerations for acquiring space in india

Choosing the right development partner As an occupier it is imperative that the right developer is chosen based on his financial strength, delivery capability, development track record and quality. During the current times, most of the developers are struggling with stressed balance sheets. As such, timely delivery is the biggest concern. At this juncture, choosing the developer who is focused on commercial office projects and has a proven track record is essential to mitigate risks. It is also relevant to look at projects which have seen some levels of pre-commitments or likely to see interest from other occupiers, as they will probably be completed at a faster pace.

The commercial office development scene is currently playing host to a few global players as well. Some of them come with development capability credentials, while others are using their investments experience to become development partners. A prime candidate is

Source: JLL REIS

Source: JLL REIS


Figure 14: Foreign PE Investment (USD mn)

Ascendas, which is a global office development and investment firm and has been present in India for over a decade, partnering multiple developments across Hyderabad, Bangalore, Pune and NCR-Delhi. Other firms such as Tishman Speyer and Hines are leveraging on their development experience to create superior quality office projects. It will be amiss to not mention Blackstone, which through strategic acquisitions is today the second biggest developer in India, both in terms of developed and under-construction stock.

This brings us to the point that selecting the right development partner is also to be seen in the perspective of how attractive the developer is to private equity and global players. It is an indicator of the confidence when a developer is able to attract investments or potential investor interest in his commercial office projects.

The year 2008, which attracted the highest private equity investment from global players in commercial office development, was followed by a significant fall as interest waned in this asset class with focus shifting to the faster liquidating and return generating residential sector. Recently, there has been a renewed interest in the office sector, with funds focusing on income generating assets which matches with their investment philosophy.

The chart below shows the global private equity investment in commercial office asset class from 2007-2013.

The sector has seen upheavals in investment volumes, but the activity is reflective of the cautious play of equity participants as they look to invest in rent-yielding assets, or those, which are part complete and have seen good occupancy levels. For occupiers, as such, the developer’s track record and capability can be gauged by the extent of private equity participation in its commercial assets or at an entity level.

Having mentioned Blackstone, which currently holds 28 million sq ft of office space in collaboration with its Indian partners, who are incidentally, well-known Indian developers, there are other players such as IDFC (domestically raised private equity fund), IL&FS, Milestone Advisors, ICICI Ventures among others who have invested in built-up office projects. A key feature of their investment philosophy has been buying distressed and under-performing assets or from developers who are struggling with cash flows. Most of such asset acquisitions are largely IT Parks or well-known commercial developments in the large Indian cities, which are preferred by global occupiers. A major incentive of such equity participation is that occupiers can derive immense confidence from such private equity-owned assets in terms of commercial negotiations, asset quality and long-term asset management practices.

JLL’s Transparency Index puts added weightage to regulatory and legal reforms while putting emphasis on availability of data on commercial real estate debt. Data on the amount of outstanding real estate debt by market, and knowledge about whether local regulators can prevent the overextension of credit in the future, helps investors and corporate occupiers better assess risks in markets where they operate. This allows for increase in inward capital flows and hence India’s Tier1 and Tier 2 cities at the 47th and 48th position as per the 2012 Index give cause for positive movement going forward. The participation of private equity players in commercial office assets is also likely to bring greater transparency in Green Building benchmarking and energy efficiency, which are critical aspects for occupiers as property sustainability characteristics play an increasingly important role in the leasing and investment decisions.

What happened to third tier cities’ growth?

The real estate growth story of the third tier cities hit a roadblock 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


The 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.


Is it the right time to enter India?

Figure 16: Cost comparison – Just launched vs. lease earning properties

Challenges for new land acquisition in India

Requirement of in depth scrutiny of documents

Unreasonable demand from land owners

No insurance available on land acquisition

High dependency on agents

Multiple approvals (X) multiple agencies

Completion after at least

3 years

Lease earning

commercial property

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

Source: JLL


Foreign 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%

Minimum Number of Stockholders 100 None 100

Public float* for the REIT units shall be minimum 25%

at all times

REIT Income Not less than 75% from rents or mortgage interest

Not more than 10% of its revenue from sources other

than rents or mortgage interest

At least 75% of gross income from rents or

mortgage interest

At least 75% of gross income from rents or 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

Make or Break condition

Source: JLL


Facility ManagementThe business organisations globally have been looking to achieve a mix of growth and productivity. Towards this end, they are looking at rationalising their business in mature markets while expanding strategically in the emerging markets. This is giving rise to a new and more evolved generation of multinational companies which are transcending their national geographies.

Transparency in the emerging real estate markets is an indicator of the inherent strengths and concerns which are bound to concern occupiers. Those occupiers which are looking to primarily self-own their office premises are likely to look more closely at the sale transaction practices, high-quality, reliable presale information assembled by the seller and fairness of the bidding and negotiating process. However, issues concerning facility management practices, service charges they pay and professional standards of agents also remain paramount. As part of JLL’s Transparency Index spanning 97 office markets, the Indian Tier 1 cities are categorised in the semi-transparent stage with a ranking of 47.

Post the global financial crisis (GFC), the elevation of Corporate Real Estate decision making is needed to keep pace with broader demands of business and that has brought about a change in the mandate, structure and positioning of CRE. While the CRE decision making is becoming

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 made on in-house CRE causing an increased shift towards CRE outsourcing, there is a focus towards seeking strategic relationships and delivering best practices.

As per JLL’s Global Corporate Real Estate Trends 2013, the top five challenges are:

1. Expectations and pressures build, heightening the risk of underperformance

2. Increased demand is leading to faster-paced evolution of CRE outsourcing

3. Workplace transformation is the key to unlocking worker productivity and optimising portfolios

4. CRE must become a collaborative change agent

5. Failure to deliver in emerging markets will become one of CRE’s greatest reputational risks

As an aside, 38% of the respondents in the above study anticipated a net portfolio growth in the next three years in India.

In 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

WIPRO

BACS

9 have consolidated pan India providers for IFM

TCS

INFOSYS HCL

CAPGEMINI

CSC

DELOITTE COGNIZANT

5 fragmented ones are moving towards

regionalising

Fragmented out tasking Regionalised



Hospitality industry well placedBase is set

There are two key factors that any business needs to focus on, to grow: demand for the product or services, and structural and policy level cla-rity. While the hospitality industry, along with other businesses in India, is currently facing the effects of an economic slowdown, from the policy angle, it does enjoy certain benefits. Unlike other real estate classes, the hospitality industry enjoys industry status, which provides it access to easy and cheaper funding. Further, it is permitted to bring in funding via the 100% FDI under automatic route. Incentive FSI is another benefit that the industry enjoys, where the Floor Space Index (FSI) increases in line with the class of property (a luxury hotel enjoys higher FSI compa-red to a budget hotel). Furthermore, the government recently granted infrastructure status to hotel projects valued at more than INR 200 crore and convention centres valued at more than INR 300 crore, allowing these projects to have access to funding at lower interest rates and longer tenures.

The smooth entry process and the high level of clarity on policies have attracted various international hotel chains to enter India. While domestic players such as Taj, Oberoi, ITC, EIH, Leela, Sarovar and Lemon Tree have laid a strong base over the years, the entry of leading international operators such as Marriot, Hyatt, Accor, Starwood, the Intercontinental Hotel Group and Carlson has added depth to the industry.

Shift and expansion – drivers for growth

A quick look at the Indian hospitality industry reveals that existing operators have started offering their services across segments, with the introduction of other brands under the same group. As the hospitality market matures, we are seeing the entry of more midscale and budget brands into India, and this has opened up the industry and increased options across the categories. Some of the newer brands who have just entered, or are looking to enter into the Indian Hospitality market, are Rotana Hotels, Menninger Hotels, Hotusa Hotels, Caesars Hospitality, MGM Hospitality, Centara Hotels & Resorts, Movenpick Hotels, Tune Hotels, Six Senses and Trump Hotels.

COMPANY BRANDS COUNTRY CATEGORYDOMESTIC

Indian Hotels Company Taj Luxury, Taj Vivanta, Gateway, Ginger India Luxury, Upper Upscale, Midscale, Economy

East India Hotels Oberoi, Trident India Luxury, Upper UpscaleITC Hotels ITC Luxury Collection, My Fortune, Fortune, WelcomHeritage India Luxury, Upscale, Midscale

Hotel Leela Venture Leela, Essence by The Leela India Luxury, UpscaleSarovar Hotels Sarovar Premier, Sarovar Portico, Hometel India Upscale, Midscale, Economy

Lemon Tree Hotels Lemon Tree Premier, Lemon Tree, Red Fox India Upscale, Midscale, Economy


Another shift, that has been witnessed, is the entry of hotel operators into Tier II and Tier III cities, including industrial towns and religious and tourist destinations. Hotel operators, including Marriot, Hyatt and Carlson, have taken their brands to cities such as Bhopal, Kochi, Katra and Hampi, which were not on the radar a decade ago. Currently, we expect 68,000 hotel rooms to become operational over the next few years, of which at least 35% will be in Tier II and Tier III cities. During the past decade, the organised hotel industry has extended to various new markets, increasing the reach to the target audience.

INTERNATIONALHyatt Park Hyatt, Grand Hyatt, Hyatt Regency, Hyatt, Hyatt Place, Hyatt House USA Luxury, Upper Upscale, Midscale

Intercontinental Hotels & Resorts InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express United

KingdomLuxury, Upper Upscale, Midscale,

EconomyCarlson Rezidor Hotel

Group Radisson Blu, Radisson, Park Plaza, Park Inn, Country Inns & Suites USA/ Belgium Luxury, Upper Upscale, Midscale

Starwood Hotels Luxury Collection, St. Regis, Méridien, W, Westin, Sheraton,Four points, Aloft USA Luxury, Upper Upscale, Midscale

Marriott Hotels & Resorts

Ritz Carlton, JW Marriott, Marriott, Courtyard by Marriott, Fairfield by Marriott USA Luxury, Upper Upscale, Midscale

Accor Sofitel, Pullman, Novotel, Mercure, Ibis France Luxury, Upper Upscale, Midscale, Economy

Hilton Conrad, Hilton, Double Tree by Hilton, Hilton Garden Inn, Hampton Inn USA Luxury, Upper Upscale, MidscaleFour Seasons Four Seasons Canada Luxury

Whitbread PLC Premier Inn United Kingdom Midscale/Economy

Fairmont Raffles Hotels International Raffles, Fairmont, Swissotel Canada Luxury, Upscale

HOTELIER BRANDS TIER II & III CITIES

Carlson Radisson, Park Plaza, Country Inns & Suites

Mysore, Katra (Vaishno Devi)

Marriott Courtyard & Fairfield Ahmedabad, Bhopal, KochiHyatt Hyatt Place Hampi

Starwood Hotels Four Points by Sheraton, Aloft

Jaipur, Pune, Vishakapatnam, Chandigarh

Lemon Tree Lemon Tree Aurangabad, Ahmedabad, Indore, Chandigarh, Pune

Sarovar Hotels Sarovar, Hometel Gangtok, Baddi, Lucknow, Manali, Nashik, Shirdi

Domestic demand continues to grow; the revival of international demand will take time

The weak economic scenario has affected various businesses across the globe; while some countries have joined the revival path, others will take time to join. This has affected growth in the number of foreign travellers visiting India, currently at a marginal 4%, a considerable drop from the 27% growth witnessed in 2004. We believe it will take time to grow back 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 will have a positive effect over the longer term.

The Indian real estate sector is witnessing a new trend with the introduction of branded residences managed by luxury hospitality players, primarily as a part of larger mixed-use developments or residential townships. Prominent luxury hospitality brands, including Four Seasons, Trump, Hyatt, Starwood, Marriott and Leela, have entered this space by joining hands with reputed real estate players to lend their brand to high-end luxury residential developments. By combining the branding and service of a luxury hotel chain with a high quality residential product, developers aim to provide a differentiator for potential 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


Industrial and WarehousingIndustrial – 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%

17%

66%

20%

49%

31%

Industry

Agriculture

Services

Source: CIA, JLL


Stable contribution in challenging environment

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 22: Contribution to ExportsFigure 21: Manufacturing Growth Rate

Source: Ministry of Statistics and Programme ImplementationSource: Director General of Commercial Intelligence and Statistics

OUR INDUSTRIAL TRANSACTIONS FOOT PRINT

GURGAONDELHI

LUDHIANA

NOIDAGHAZIABAD

UTTARANCHAL

JAIPUR

PUNE

GOA

MYSORE

COCHINCOIMBATORE

VIZAG

BHUBANESHWAR

RANCHI

PATNA

GUWAHATI


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

2011 10-25 12-22 13-18 10-14 18-20 18-20 10-14

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

The rental range varies depending upon quality of

supply

Though occupancy percentage has reduced over the years; with high supply growth, occupancy

has remained healthy

Figure 24: Healthy demand supply in warehousing space

Source: JLL

1.00 USD = 59.9 INR Source: JLL

Grade A & Grade B for top seven cities in India

New look warehousing sector – from unorganised to organised

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 various phases of growth cycle - enjoyed high growth phase and witnessed negative growth years as well. Going forward, the sector is expected to enjoy more focus from the government. As per per the Ministry of Commerce and Industry, government aims to grow its share in GDP to 25% by 2022 from 17% currently. 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.


Though, passing through a challenging phase of

high inflation, low GDP, increasing trade deficit

and weakened currency, India offers immense

growth opportunities in the long term

Large population with changing lifestyle, easy talent availability, low cost real estate, fast transition of various industries (including real estate) towards organised space and favourable geographic location are the key attractions for foreign corporates

Delhi, Mumbai and Bangalore have been the most attractive destinations, accounting for over 60% share of occupier activity across all industries over the past year

Post GFC, despite recovery in office market

absorption, consolidation and relocations of

offices to lower-cost offices put pressure on office

rentals; opportunity still exists

Five years after the GFC, office markets are

still trading at a discount to their peak values;

Bangalore and Chennai reached close to their

previous peak, others are still heavily discounted

Improvement in physical and social infrastructure helped in creating new office corridors along with enhancing the attractiveness of some existing ones

Annual rental of less than USD 129 per sq mtr becomes one of the key puller of foreign corporates; companies headquartered in USA occupy almost half of the office supply in India; Europe based corporates occupy 14%

Growth in TIER 3 cities remained limited post GFC; largely due to limited talent availability and reduced pricing benefit compared to TIER 1 & 2

Choosing correct development partner is one of the most important factor for foreign corporates; healthy balance sheet, proven track record and confidence of investors (especially global private equity) are key aspects to be considered

Various lease earning Grade A properties available below replacement cost; mitigating all development and marketing related risks; Are you still waiting for better time to occupy?

Hoteliers expanding their geographical presence;

at least 35% of upcoming 68,000 hotel rooms are

in TIER 2 & 3 cities

Warehousing sector becoming more organised; rentals are considerably cheaper across top 7 cities in the country

India’s long term growth prospects and current

lucrative entry points are not hidden from

corporates; contribution of 1st quarter’s absorption

in 2014 increased by approx. 300 bps compared

to previous year

IT & ITES continue to demand more than 1/3rd of office supply; followed by manufacturing and BFSI space

Key takeaways

Authors

For subscription details and research enquiries contact

Ashutosh LimayeHead - Research & REISJLL, India+91 22 [email protected]

Akshit ShahManager - Capital Markets ResearchJLL, [email protected]

Rohan SharmaSenior Manager - ResearchJLL, India [email protected]

JLL India Offices Ahmedabad +91 79 40150000

Bangalore tel +91 80 41182900 Chandigarhtel +91 172 3047651

About JLLJLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual fee revenue of $4 billion, JLL has more than 200 corporate offices and operates in 75 countries worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion square feet and completed $99 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $48.0 billion of real estate assets under management. JLL has over 50 years of experience in Asia Pacific, with over 27,500 employees operating in 80 offices in 15 countries across the region.The firm was named ‘Best Property Consultancy’ in three Asia Pacific countries at the International Property Awards Asia Pacific 2013, andwon nine Asia Pacific Awards in the Euromoney Real Estate Awards 2013.For further information, please visit our website, www.jll.com. About JLL IndiaJLL is India’s premier and largest professional services firm specializing in real estate. With an extensive geographic footprint across 11 cities (Ahmedabad, Delhi, Mumbai, Bangalore, Pune, Chennai, Hyderabad, Kolkata, Kochi, Chandigarh and Coimbatore) and a staff strength of over 6800, the firm provides investors,developers, local corporates and multinational companies with a comprehensive range of services including research, analytics, consultancy, transactions, project and development services, integrated facility management, property and asset management, sustainability, industrial, capital markets, residential, hotels, health care, senior living, education and retail advisory. The firm was named the Best Property Consultancy in India (5 Star Winner) at the International Property Awards - Asia Pacific for 2012-13. For further information, please visit www.joneslanglasalle.co.in

Anuj PuriChairman & Country HeadJLL, Indiatel +91 22 3985 [email protected]

Nitish BhasinManaging Director – Office BrokerageJLL, Indiatel +91 124 [email protected]

Chennaitel +91 44 42993000

Coimbatoretel +91 422 2544433

Delhitel +91 11 33141000

Gurgaon tel +91 124 4605000

Hyderabad tel +91 40 40409100

Kochitel +91 484 3018652

Kolkata tel +91 33 22273294

Mumbai tel +91 22 66207575

Pune tel +91 20 40196100

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