Foreign Investment

India Calls

U.S. real estate companies pick up on the vast opportunities in this growing market.

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."