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The quintessential image of India’s economic emergence was captured by Thomas Friedman in his popular 2005 book about globalisation, The World is Flat. Friedman starts with a visit to the 43-acre headquarters of Infosys, one of India’s premier information technology outsourcing companies, based in the southern city of Bangalore.
He travels down a rutted road crowded with motorcycles, rickshaws and beasts of burden, and arrives in what he calls “a different world”. He describes the ultra-modern Infosys campus, with its massive glass-and-steel buildings, housing more than 20,000 workers, and the supersized videoconference facilities for interacting with the company’s clients and partners from across the globe. He also notes amenities such as a large swimming pool, a putting green, a health club and numerous restaurants.
Almost a decade later, the Infosys headquarters, in Bangalore’s Electronic City, has not lost its ability to amaze and delight visitors, especially those from other parts of India who must deal with the country’s rickety public infrastructure and the dilapidated office buildings of its urban centres. But the campus is typical of the scale and calibre of commercial property that has been developed in Bangalore, a city that has doubled in size over the past decade.
Once dubbed a “pensioners’ paradise” for its temperate climate, Bangalore today has 100m sq ft of commercial office space, more than any other Indian city. Its vast ultra-modern business parks provide tracts of space to house tens of thousands of office workers in one place. The parks are buoyed by extensive infrastructure, such as back-up power and water systems, needed to ensure global companies can keep running 24 hours a day without interruption, in a country notorious for power cuts and other infrastructural deficiencies.
It is no surprise that many of India’s leading IT companies, such as Wipro, are based there, but Bangalore is also the destination of choice for the Indian operations of global companies such as Goldman Sachs, Hewlett-Packard, Cisco and Tesco. Now, as well as luring prestigious tenants, the city’s business parks are also attracting the attention of private equity firms, which have been taking stakes in completed, leased commercial property assets.
Over the past two years, Blackstone, the US-based private equity group, has invested about $800m to build up an Indian property portfolio of 28m sq ft. Of those funds, half have been invested in Bangalore commercial buildings, with its partner Embassy Property Developments, based in the city. The two companies are completing a $325m deal to take control of Vrindavan Tech Village, a 104-acre special economic zone with 2.1m sq ft of leased office space and 75 acres of undeveloped land.
Blackstone is not alone. Qatar’s sovereign wealth fund, the Qatar Investment Authority, has invested nearly Rs18bn ($289m) in a special-purpose vehicle set up by RMZ, southern India’s largest commercial property developer. Property companies owned by Singapore’s government are also looking for potential acquisitions, and some Indian players have begun to follow suit.
According to Cushman & Wakefield, the property services company, private equity investment in Indian property rose 25 per cent to Rs47bn in the first nine months of 2013, though much of that was driven by the Qatar deal.
Of the Rs30bn invested in Indian property in the third quarter of 2013, Bangalore was the top destination, with Rs18.8bn of investment, while India’s national capital region, Delhi (and its satellite city Gurgaon), and Mumbai came a distant second and third, attracting Rs3.8bn and Rs3.6bn respectively.
Private equity funds’ interest in Indian office space is good news for cash-strapped property developers, many of which urgently need new capital to fund future developments. “This is very encouraging,” says Anshuman Magazine, managing director of CBRE, the property services company, in south Asia. “One of the challenges in India has been an exit route for property developers. This will encourage more investment, as now they know there is a market. It brings more liquidity into the market.”
The new interest in Indian office space as an investible asset class comes despite an overall economic slowdown. India’s gross domestic product growth fell to a decade low of 5 per cent in the 2012-13 financial year, down from a peak of 9.6 per cent in 2006-07, and there are few convincing signs of a pick-up. Growth in GDP between April and June 2013, typically the slowest quarter, fell to just 4.4 per cent, then recovered slightly to 4.8 per cent in the subsequent quarter.
Bangalore’s overall vacancy rate for commercial property is about 14 per cent, and rents are relatively low – from Rs30 per square foot in the 1990s-era Electronic City to Rs50-Rs52 per sq ft in newer complexes along the outer ring road to Rs120 per sq ft for top-grade office space in the central business district.
But with demand picking up from western companies, and development of new properties slowing due to the difficulties of acquiring large parcels of land and securing finance, industry players believe rents are set to rise over time. In some of the more desirable new locations or “micro-markets”, vacancy rates have already fallen to just 5 per cent.
Tuhin Parikh, who heads Blackstone’s Indian property operations, says the private equity firm is confident that office rents in Bangalore will increase over time, given both the city’s inherent long-term demand for space and the sharply rising costs of construction. “We think rents over time will go up,” he says. “Demand may have dropped off modestly in the office market, but supply has dropped sharply, given the lack of capital.
“Given what has happened to land prices, construction costs and cost of debt, it is expensive to replicate these assets. [Compared with] what you built them for five or six years ago, it costs double to build them today.”
At the peak of India’s growth cycle, Bangalore saw a take-up of around 11m sq ft of office space a year, but that has now fallen to around 7.5m sq ft a year.
But Ram Chandnani, head of south India operations for CBRE, says Bangalore’s property market is churning, as companies such as Cognizant, Accenture and Hewlett-Packard, with employees scattered across multiple facilities, move into dedicated, purpose-built office parks. “Existing occupiers want to consolidate their operations, and most of it is built to suit transactions – corporate occupiers pre-arrange a deal with a developer,” he says. Such moves are freeing up older space for a new wave of occupiers.
Bangalore is not the only Indian city that offers ultra-modern office space. Gurgaon, near Delhi, and Mumbai’s Bandra Kurla Complex also have large tracts of land available. But Bangalore remains particularly attractive for companies, just as it is a magnet for young knowledge workers from all over the country.
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