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India Calls

Foreign Investment
India Calls
U.S. real estate companies pick up on the vast opportunities in this growing market.
by Sara Drummond

U.S. commercial real estate companies have had India on the line for several years. CB Richard Ellis, Cushman & Wakefield, Jones Lang LaSalle, and Colliers International partnered with local commercial real estate professionals to set up Indian offices in the late 1990s along with their first corporate clients to help with offshore location decisions. CBRE now has offices in six Indian cities, employing more than 600 people. JLL has five offices and about 130 employees.

In the last two years, a second wave of U.S. real estate companies has booked passage to India. Along with tenant reps CRESA Partners and DTZ-Staubach, Dallas-based Mohr Partners, the Midwest company Exceed International, and Chicago-based Equis Corp. have established Indian offices or partnered with local companies. Last fall Trammell Crow Co. bought a 30 percent stake in a well-known Indian company that will operate under the name Trammell Crow Meghraj and manage 26 million square feet.

As with many corporate real estate companies, Trammell Crow made the jump because India is where its client base is operating. "Some of our best and deepest client relationships in outsourcing and brokerage have facilities and growth plans for India," says Robert Sulentic, Trammell Crow's chairman and chief executive officer.

But even real estate companies that don't have corporate clients see the writing on the wall. The upshot of offshoring may be that, if you're not in India today, you may be there in two years or five years because the opportunities are just too good to pass up.

For example, Exceed International is a real estate development company based in Antioch, Ill., about 25 miles north of Chicago. On its Web site, along with renderings of condominium and mixed-use development projects in Fox Lake, Ill., and Zion, Ill., are renderings of Bascon Software Technology Park and Kuppu Retail Arcade in Chennai, India, the first of six Indian construction projects for which Exceed holds contracts. "Exceed is near completion of the commercial projects in Chennai and anticipates delivery of more than 15 million sf of commercial and residential space by second-quarter 2007," says Charles V. Miles, Exceed's president and chief executive officer, who went to India in February 2004 and recruited an initial team of 25 employees. "Today Exceed is firmly established in the south Indian market and employs nearly 400 experts in various fields such as project management, development, architecture, engineering, construction, government relations, finance, and technology."

Exceed also plans to partner with companies to develop residential and mixed-use projects in India. The company is building to U.S. design and quality standards and using U.S. construction techniques to attract big players to its projects. "The untapped mass retail market is perfectly positioned for exponential growth and Exceed is well poised to deliver a 'soup-to-nuts' solution to international retailers," Miles says.

Markets on the Make

Demand from offshore companies anxious to set up Indian offices has pushed the country's economic growth rate past 7 percent and set off an office development and leasing boom. Currently most U.S. real estate firms in India focus on tenant representation for the U.S. and European offshore markets. "CRESA India represents mostly multinationals, software companies, biotech, banks, insurance, pharmaceuticals, and some of the large Indian corporations," says Askok Kumar, managing director of CRESA Partners' Mumbai office. DTZ-Staubach's clientele "primarily consists of U.S. and European-based IT/IT-enabled services and major financial services companies looking to establish a back-office presence," says Ankur Srivastava, managing director for DTZ-Staubach in India. "Most [corporate tenants] are seeking grade A properties in the established Indian outsourcing destinations, which include Bangalore, New Delhi, Chennai, Mumbai, Pune, and Hyderabad." Many of the companies locate in insular business parks "that provide a social infrastructure of cafés, restaurants, banks, and transportation," Srivastava adds.

Of course India's steel and glass corporate campuses stand in stark contrast to the country's ever-present poverty, overcrowded streets, and crumbling infrastructure. Congested roads, housing shortages, and an unreliable power grid are some of the challenges that face offshore space users.

But tapping into the labor pool is probably the greatest challenge, and offshore companies rely heavily on experienced Indian commercial real estate professionals for guidance. "The identification of strategic locations with the right talent pool is the key factor in the success of a new entrant," Kumar says. For example, a ready supply of software development and engineering graduates has turned Bangalore, once a sleepy retirement town, into India's Silicon Valley, now home to U.S. companies such as Cisco, IBM, Motorola, Hewlett-Packard, Microsoft, Oracle, and Google. "The most preferred [Bangalore] location for IT is near the suburbs, since that is where the labor pool is," Srivastava says.

Delhi and Mumbai attract financial services and other call center operators, drawn by an accent-neutral labor force. American Express, Fidelity Investments, Prudential, British Airways, Morgan Stanley, and Citibank are located in these markets, Srivastava says. Hyderabad is challenging Bangalore's IT prominence. ITES business led the real estate demand in Hyderabad, according to Cushman & Wakefield's 2Q05 report. Oracle, Microsoft, and Dell have facilities there. IT/ITES companies also are moving to Chennai, which has a large number of trained financial professionals. Standard Chartered, Citibank, World Bank, and EDS are in Chennai. Pune is an up-and-coming location attracting telecom, IT/ITES, manufacturing, and financial services companies.

Future Opportunities

Since offshoring is a large volume business, the biggest advantage for U.S. companies is the ability to build up a scalable operation at a fraction of the cost, Srivastava says. "We have seen some of the large offshoring firms build up a portfolio of almost 1 million sf in less than 24 months."

But rising real estate costs are pushing companies into smaller cities, Kumar says. "Existing IT/ITES and telecom tenants are showing interest in locating in tier-two and tier-three cities. These are being explored by companies that are striving to achieve further efficiency in the value chain."

Srivastava agrees, noting that secondary cities offer lower costs and significant government subsidies and concessions. "The state governments of Chandigarh [both a state and city], West Bengal (Kolkata), Kerala (Thiruvanathapuram, Kochi), Madhya Pradesh (Bhopal, Indore), Andhra Pradesh (Vizag), Karnataka (Mangalore), Gujarat (Ahmedabad, Gandhinagar) are aggressively positioning themselves to capture this second wave and are willing to offer substantial incentives to potential occupiers," he says.

 

 

 

 

 

 

Srivastava sees significant opportunities for U.S. commercial real estate companies in India in the next decade. "India is expected to add another two million T/ITES workers to its labor pool in the next four to five years. At an average of 100 sf per person, the real estate demand from the IT sector alone will be a staggering 150 to 200 million sf," he says. "The average grade A absorption in the top six Indian cities is expected to be 25 million sf this year. Leveraged internal rates of return on tenanted properties could be in the range of 18 percent, and in the case of greenfield properties, this IRR number could be in excess of 25 percent."

"India is moving toward a position where a company will not be there despite the real estate, but because the real estate offering is an attraction itself," Kumar adds. "More corporate developers are entering into development and property management, and returns on commercial properties are in the range of 10 percent to 12 percent per year. The entry of foreign operators into the infrastructure, commercial, and retail sectors will go along with paving the way for the development of real estate mutual funds and investment trusts."

Srivastava also thinks that U.S. capital funding will improve "the quality of real estate product. There will be more instances of build-to-suits where a U.S. tenant will pair up with a U.S. investor to secure a cost-effective solution to their property needs."

Despite the spectacular growth of the last four years, "The real estate business is in its infancy in India," Kumar says. "The supply of grade A office and retail only emerged in the last seven to nine years, and central management of premium real estate started accelerating only in the last couple of years," he adds. "There is still a shortage of good trained real estate professionals. The quality of space and service standards along with improvement in urban infrastructure are critical for success."

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Sara Drummond is senior editor of Commercial Investment Real Estate.

The Outsourcing Reality
Backlash against outsourcing to India has diminished, primarily because corporate America stopped talking about it. But it hasn\'t stopped doing it. Today, experts estimate that one-half to two-thirds of Fortune 500 companies have sent jobs to India because they can\'t afford not to do so.

"The offshoring trend is not a real estate initiative, it\'s a labor initiative," says Paul A. Waters, CCIM, SIOR, senior vice president of Staubach Co.\'s national sales group. Staubach has an alliance with DTZ, which opened a Bangalore, India, office in 2004. "India labor is about one-third the cost of U.S. labor. U.S. corporate leadership owes it to their stakeholders to reduce costs and maximize value. The offshoring remains a huge step in that direction," Waters says.

Money talks and U.S. corporations have walked - to Bangalore, Mumbai, Delhi, and several other subcontinent locations. In the past year, India\'s offshore information-technology and business-process outsourcing industries employed 695,000 people and that number will grow to around 1.5 million in the next two years, according to the McKinsey Global Institute.

At the same time, relaxation of foreign direct investment rules have placed India front and center on the global real estate investment stage. As a result, India\'s foreign private investment is expected to top $15 billion in 2005, triple 2004\'s figure, according to Ernst & Young.

And it\'s not all for call centers, says Ashok Kumar, managing director of CRESA Partners\' Mumbai office. "The IT sector is likely to be the key demand driver in the next decade by occupying 20 million sf of commercial space each year. But the demand for pharmaceutical, software development, and biotechnology for research and development is likely to increase."

Outsourcing also remains a "strong option within the U.S. financial industry," Waters says. Currently about 20 percent of financial services companies outsource jobs to foreign countries, according to the Economist Intelligence Unit; Deloitte Research predicts nearly 1 million financial services jobs will be in India by 2009.

Outsourcing\'s long-term effect on the U.S. economy remains to be seen. Short term, it\'s lowering demand for U.S. call center space by about 1 percent a year, affecting mostly second- and third-tier cities in the South and West, according to a Jones Lang LaSalle study. But other effects are less negative. For example, for every dollar offshored to India, return to the United States is between $1.12 and $1.14, McKinsey estimates. Companies saving 70 percent on labor costs can stay competitive without raising the price of their services; some experts predict harnessing India\'s labor force will help ease the coming U.S. workforce shortage when the baby boom generation retires.

India\'s Huge Demand
Demand for real estate investment in India may reach more than $50 billion in the next five years, with nearly two-thirds predicted to come from foreign capital. And the opportunities extend beyond the office sector. Global retailers are eyeing India\'s youthful middle class, the fastest growing in the world, according to Primary Real Estate Advisors. The country of 1.1 billion people has only 40 malls - that number will grow to 250 by 2010; however, 75 percent of new retail space is concentrated in five major cities. India has 67 cities of more than 500,000 people. Best Buy, Starbucks, and Wal-Mart already have expressed interest in establishing an Indian foothold, according to CBRE.

India\'s manufacturing sector grew by 11 percent last year, and it is fast becoming the world\'s primary exporter of auto parts. General Motors expects to source $1 billion annually in auto parts from India by 2008, up from $120 million in 2005. In addition, increased investment in infrastructure will lead to growth in construction-related industries such as cement and steel manufacturers.

In other sectors, residential experts predict a shortfall of 22.7 million housing units by 2007, requiring an investment of $25 billion in the next five years, according to PREA. The hospitality market is largely undeveloped, with only 79,000 rooms in the entire country according to Knight Frank\'s 2Q05 India retail review.

Development in all sectors may ramp up quickly due to fewer foreign investment restrictions. The new foreign direct investment rules allow foreign companies to bid on construction projects without Indian partners; they also lower the minimum development size from 100 acres to 25 acres, "a more manageable size for a first-time foreign investor," says Scott Farb, CPA, managing principal of Gumbiner Savett\'s national real estate practice. "The liberalized FDI guidelines will lead to more than 1 billion U.S. dollars annually invested into India\'s development and construction industry," he adds.

Already, GE Commercial Finance Real Estate is investing $63 million in the India IT Parks Fund, and Tishman Speyer has invested $250 million in a joint venture with India\'s largest venture capital company. Last fall Nevada-based Royal Indian Raj International Corp. announced a partnership with New York-based real estate investment finance company Greenwich Group International to raise $1 billion to finance commercial and residential projects.

"Given the positive outlook for the Indian economy, this may just be the tip of the iceberg," Farb says.

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