Destination India - A Real Estate Journey for Corporate Occupiers. May 2014

Transcription

1 Destination India - A Real Estate Journey for Corporate Occupiers May 2014

2 2 Destination India - A Real Estate Journey for Corporate Occupiers

3 Foreword India, as it stands today, is on the trajectory of becoming the world s 3rd largest economy by 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! Destination India - A Real Estate Journey for Corporate Occupiers 3

4 India - a billion opportunities waiting The 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. Figure 1: weak Economic Scenario Figure 2: Increasing Trade Deficit Source: Oxford Economics Source: Oxford Economics 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 3: Growing Per Capita Income (PPP) Source: IMF 4 Destination India - A Real Estate Journey for Corporate Occupiers

5 Figure 4: No of years left for Dependency Ratio to bottom-out INDONESIA INDIA VIETNAM CHINA 41 years 36 years 16 years 1 year Number of years Source: UN population statistics Note: Dependency ratio indicates sum of population aged 0-14 and 60+ divided by number of people in the (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). Policy Level Clarity Increase in Foreign Money Inflow Higher Foreign Participation 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. 2nd Highest Population 65% IN WORKING AGE BRACKET Increasing PCI Low Wages Low Penetration of Organised Retail Improving Lifestyle Weakening currency Low GDP Growth Increasing Trade Deficit HIGH INFLATION Destination India - A Real Estate Journey for Corporate Occupiers 5

6 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 increasing focus on spending, the consumer market potential is clear. The diversity in spending patterns, eating habits and lifestyle changes (focussed 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. 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 decade, 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 5: Growing Urbanisation Figure 7: Wages are lowest in India amongst comparable nations Source: McKinsey India Awakening Report Source: International Labour Organisation Figure 6: Dropping Savings Rate = Growing Spending Figure 8: Top 21 Office CBDs (Rental) in APAC Source: World Bank Source: JLL 6 Destination India - A Real Estate Journey for Corporate Occupiers

7 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 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 SINGAPORE 1:30 PM, MAY 15 SYDNEY 3:30 PM, MAY 15 UK 6:30 AM, MAY 15 Destination India - A Real Estate Journey for Corporate Occupiers 7

8 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. 5,400 5,300 5,200 5,100 5,000 4,900 4,800 4,700 4,600 4,500 4,400 Figure 9: No of Companies Listed on BSE FY 05F Y 06 FY 07F Y 08 FY 09F Y 10 FY 11F Y 12 FY 13F Y 14 Gradual growth in listed companies result of shift from unorganised to organised Source: Bombay Stock Exchange 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 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 8 Destination India - A Real Estate Journey for Corporate Occupiers

9 Key to effective business set-up in India - smart and efficient office space The single most critical aspect for any corporate occupier when setting up operations is DOSE (Destination, Optimum space Size and Expenses). 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 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 second tier of cities emerged in the country when the need arose for setting 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 construction 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 developers 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 Figure 10: India Office Stock (million sq ft) Figure 11: India Office Space Absorption and Supply Source: JLL REIS Source: JLL REIS Destination India - A Real Estate Journey for Corporate Occupiers 9

10 The activity peaks of 2007 and 2008 reflect the pace of space takeup 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 , 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. 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 Rents Declining Decline Slowing Rents Recovering Rental Value Index Q14 1Q14 BANGALORE -0.9% -17.7% 3.3% 10.8% 5.3% -0.6% 0.3% 99.5 MUMBAI City DELHI City MUMBAI Suburbs GURGAON Prime GURGAON Off Prime -3.6% -34.3% 0.8% 1.1% 0.8% 0.5% 0.1% % -41.6% 2.2% 3.2% 1.3% 0.0% 0.0% % -34.3% 0.0% 7.4% 1.1% 2.1% 0.6% % -31.1% 2.8% 11.8% 5.7% 5.0% 0.9% % % -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 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 10 Destination India - A Real Estate Journey for Corporate Occupiers

11 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 Also, relocations to lower-cost offices either in upcoming office corridors or in certain cases to different submarkets 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 takeup 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: Destination India - A Real Estate Journey for Corporate Occupiers 11

12 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 IT/ITeS USA NCR-Delhi 175,000 Expansion Telecom Europe NCR-Delhi 250,000 Expansion/Consolidation Insurance USA NCR-Delhi 350,000 Relocation IT/ITeS USA NCR-Delhi 100,000 Relocation/Consolidation IT/ITeS USA NCR-Delhi 450,000 Expansion 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 12 Destination India - A Real Estate Journey for Corporate Occupiers

13 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. Kolkata emerged as a destination in the last 3-4 years Reasons Outcomes 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 Bangalore Outer Ring Road Corridor and North Bangalore Hyderabad Reasons Outcomes Chennai Proactive industrial and development policy, better road network connectivity, state-driven SEZ development will further enhance connectivity 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 Reasons The Outer Ring Road connectivity and new international Airport in North Bangalore Reasons OMR road connectivity; GST Road development and upcoming Metro Rail connectivity Outcomes the corridor around the Airport Outcomes campuses; SEZ corridor development in Guindy; sharp 42% increase in capital values in the CBD based on upcoming metro connectivity Pune Mumbai Secondary Business Districts North, Eastern Suburbs Reasons Improved road connectivity and accessibility to the main city; social infrastructure development Reasons Upcoming Metro connectivity; existing JV Link Road Outcomes 4.5 million sq ft in the East and West corridors, Outcomes increased absorption, new supply and possible rent appreciation Delhi NCR Reasons Expressways (Noida-Greater Noida; NH-8 connecting Gurgaon-Delhi), Metro Rail connectivity Outcomes 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 Destination India - A Real Estate Journey for Corporate Occupiers 13

14 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 takeup 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 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 Figure 12: Leasing Classification by Industries Figure 13: Leasing Classification by Country Source: JLL REIS Source: JLL REIS 14 Destination India - A Real Estate Journey for Corporate Occupiers

15 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 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. Figure 14: Foreign PE Investment (USD mn) 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 equityowned 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 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 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 Destination India - A Real Estate Journey for Corporate Occupiers 15

16 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. 16 Destination India - A Real Estate Journey for Corporate Occupiers

17 Is it the right time to enter India? 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 leaseearning 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 Figure 16: Cost comparison Just launched vs. lease earning properties Completion after at least 3 years Lease earning commercial property 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 Source: JLL Destination India - A Real Estate Journey for Corporate Occupiers 17

18 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 muchneeded 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 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 Source: JLL Make or Break condition 18 Destination India - A Real Estate Journey for Corporate Occupiers

19 Facility Management The 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. Destination India - A Real Estate Journey for Corporate Occupiers 19

20 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 TCS INFOSYS HCL CAPGEMINI CSC WIPRO BACS DELOITTE COGNIZANT 9 have consolidated pan India providers for IFM 5 fragmented ones are moving towards regionalising Fragmented out tasking Regionalised 20 Destination India - A Real Estate Journey for Corporate Occupiers

21 Hospitality industry well placed Base 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 clarity. 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 compared 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 CATEGORY DOMESTIC Indian Hotels Company Taj Luxury, Taj Vivanta, Gateway, Ginger India Luxury, Upper Upscale, Midscale, Economy East India Hotels Oberoi, Trident India Luxury, Upper Upscale ITC Hotels ITC Luxury Collection, My Fortune, Fortune, WelcomHeritage India Luxury, Upscale, Midscale Hotel Leela Venture Leela, Essence by The Leela India Luxury, Upscale Sarovar Hotels Sarovar Premier, Sarovar Portico, Hometel India Upscale, Midscale, Economy Lemon Tree Hotels Lemon Tree Premier, Lemon Tree, Red Fox India Upscale, Midscale, Economy Destination India - A Real Estate Journey for Corporate Occupiers 21

22 INTERNATIONAL Hyatt Park Hyatt, Grand Hyatt, Hyatt Regency, Hyatt, Hyatt Place, Hyatt House USA Luxury, Upper Upscale, Midscale Intercontinental Hotels & Resorts Carlson Rezidor Hotel Group Starwood Hotels Marriott Hotels & Resorts InterContinental, Crowne Plaza, Holiday Inn, Holiday Inn Express Radisson Blu, Radisson, Park Plaza, Park Inn, Country Inns & Suites Luxury Collection, St. Regis, Méridien, W, Westin, Sheraton,Four points, Aloft Ritz Carlton, JW Marriott, Marriott, Courtyard by Marriott, Fairfield by Marriott United Kingdom USA/ Belgium USA USA Luxury, Upper Upscale, Midscale, Economy Luxury, Upper Upscale, Midscale Luxury, Upper Upscale, Midscale 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, Midscale Four Seasons Four Seasons Canada Luxury Whitbread PLC Premier Inn United Kingdom Midscale/Economy Fairmont Raffles Hotels International Raffles, Fairmont, Swissotel Canada Luxury, Upscale 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. HOTELIER BRANDS TIER II & III CITIES Carlson Radisson, Park Plaza, Country Inns & Suites Mysore, Katra (Vaishno Devi) Marriott Courtyard & Fairfield Ahmedabad, Bhopal, Kochi Hyatt Hyatt Place Hampi Starwood Hotels Lemon Tree Sarovar Hotels Four Points by Sheraton, Aloft Lemon Tree Sarovar, Hometel Jaipur, Pune, Vishakapatnam, Chandigarh Aurangabad, Ahmedabad, Indore, Chandigarh, Pune 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 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 22 Destination India - A Real Estate Journey for Corporate Occupiers