IT parks spell bright prospects for realtors and investors.
About 10 years ago, office space in Kharadi - then an emerging IT hub in Pune´s eastern corridor - was leasing at Rs 29 to 37 per sq ft per month; you could buy office property for within Rs 3,000 per sq ft and upmarket residential property for Rs 1,800 to Rs 2,200 per sq ft. Between then and now, about 12-15 million sq ft of office space has been absorbed, primarily by IT and ITeS companies in Kharadi, Hadapsar and Fursungi. In fact, recent leasing transactions at Kharadi boast rental rates of about Rs 100 per sq ft per month (as against the vicinity average of Rs 60-70) while ´A´-grade office property capital values have shot up to Rs 5,000 to Rs 7,000 per sq ft. Premium housing currently fetches Rs 6,000-6,500 per sq ft.
Narrating this, Ravi Ahuja, Executive Director, Colliers International, makes his point: ´IT corridors across India´s top six to eight cities have provided significant job creation, unfolding robust growth in real-estate demand and firm long-term pricing for office and residential housing.´
Industry voices affirm this growth story. ´India has shown consistent demand for space in IT parks serving the domestic IT industry as well as in IT SEZs,´says Ashutosh Limaye, National Director Research, JLL India.
Today, Ahuja reckons that the IT and ITeS sector accounts for 75 per cent of office space demand in India, an annual net absorption of roughly 35 million sq ft in the top eight cities. Leasing demand has shown steady improvement since the slump of 2009, with steady year-on-year growth in the past three years, growing expectations that net absorption will touch the pre-2008 high of 40 plus million sq ft per annum.
´IT parks in India have bright prospects,´ says Sandeep Chadha, Partner, Milestone Capital Advisors. ´India has a huge base of talented qualified IT professionals that no other country can replicate in the near to medium future. Also, IT park rentals are low at present compared to other Asian and western countries, with margins to increase. With demand for IT office space increasing 40-50 per cent in the past three years in major micro markets across India, investor interest û especially overseas institutional investors such as Blackstone, Brookfield, GIC, Ascendas, etc, looking for cash-flow generating assets - in IT office space has picked up significantly, and in the current falling interest rate regime, this product is likely to find greater acceptability.´
´We saw the current time as opportune to enter the IT park segment because we expect good demand to continue,´ says Rohit Gera, Managing Director, Gera Developments.
However, pricing growth in terms of capital values will be gradual. ´Investors need to exercise caution and keep a five to eight-year investment view,´ says Ahuja. For instance, Phase-I at Udyog Vihar in Gurgaon is currently perceived as a relatively weaker location to DLF´s Cyber City but its striking proximity to Cyber City makes it a worthwhile destination. Investors may make relatively higher returns should they invest in prime locations such as Golf Course Road. While the Golf Course Extension Road corridor currently witnesses oversupply, it will be a good investment in the long term.
So far, IT parks have been created in leading metros, with good reason. ´Sufficient local talent is essential for the success of an IT park, and the right sort of people are attracted to live in key metros,´ says Limaye.
Space absorption continues in IT parks across Pune, Bengaluru, Kolkata and Hyderabad, with employees´ requirements even driving up demand for residential and commercial real estate in close proximity, says Amit Grover, National Director, Offices, DLF. ´We see potential for further absorption as these cities have skilled manpower.´
´Watch out for the Thane-Belapur Road in Mumbai; revival of Whitefield, accelerated demand for ORR moving northwards leading to greater acceptability for locations such as Yelakanka and Hebbal in Bengaluru; Perungudi, Taramani, and deeper into Old Mahabalipuram Road in Chennai; Madhapur and Gachibowli in Hyderabad; Noida Expressway and Gold Course Extension in NCR,´ suggests Ahuja.
What about the rest of India?
´So far, IT parks have been confined to specific cities, but there is scope for taking this concept to smaller cities and for IT companies to reduce their spending on rent or lease,´ responds Grover.
Should developers looking to create IT parks invest in land designated for the purpose or develop any seemingly suitable location?
According to Grover, ´Development should ideally take place as per ´land usage´ defined by the government - developers must evaluate the merits of developing on land earmarked for IT and take a decision. Likewise, developers may evaluate the merits of developing an IT park on non-designated land.´
´We have chosen to develop our first IT SEZ at Kharadi, Pune, jointly with K Raheja Corp, on freehold non-designated land, as against on freehold designated land - which would have been slightly cheaper - or on land obtained on long lease from the MIDC,´ shares Gera. ´It is up to a developer to evaluate the impact of the price differential of different kinds of land on the project viability. We see the absence of any restriction on land use as translating into higher property value.´
Mixed use vs standalone
IT parks developed within an integrated development spanning residential, IT office space, recreational and other amenities offer a unique selling proposition û the walk-to-work concept for the perfect work-life balance and cutting travel costs. Examples of mixed-use IT parks are Mindspace in Mumbai; Magarpatta City in Pune; and Manyata Embassy Tech Park in Bengaluru. However, so far, India has seen more standalone IT parks mostly because many have been created with government incentives and few companies own big land parcels - minimum 100 acre in size, say experts - justifying a township.
´To develop the IT industry and generate employment, a number of states had rolled out incentives such as tax breaks or higher FSI for developers,´ says Limaye. ´Obviously, developers taking on such IT park projects got bound by conditions like the development of only office space for IT companies.´
With residential real estate in the vicinity of standalone IT parks doing well because a high percentage of employees - working in shifts or otherwise - opt to live in close proximity to their workplace, Gera Developments is developing an IT SEZ in Kharadi on land adjacent to which it owns another land parcel, ´that we will tap for residential development´, says Gera.
´We preferred Kharadi, Pune´s eastern corridor, over the city´s western corridor because development here has happened organically. With the city limits moving forward, IT company tenants as well as employees buying into nearby residential schemes get a better value proposition. IT parks in Pune´s western corridor (Hinjewadi) came up when no nearby residential development was happening, causing commuting nightmares for early employees.´
In Maharashtra, Ahuja partially attributes the paucity of mixed-use development IT parks to a government ruling limiting the development of housing on MIDC-owned industrial plots. A positive move is the relaxation of this rule under the Development of Integrated IT Township Policy, which allows 40 per cent of development on land measuring a minimum of 25 acre towards support services, service apartments, other commercial activities, schools and colleges. To further brighten the prospects of developers, Ahuja reckons the government could consider allowing 20 per cent affordable housing under the Industrial Park-IT Policy, especially as many of these developments are situated in the suburban and peripheral locations of the cities. ´
As things stand, developing Grade A office space with 100 per cent power backup and air-conditioning costs between Rs 2,500 and Rs 3,000 per sq ft in most locations, making the business a limited margin business for developers vis-a-vis other asset classes like mixed-use developments,´ he explains.
Some locations demand more intensive construction technologies. In Bandra-Kurla Complex (BKC) in Mumbai, for instance, the prospect of seepage from the nearby creek has required basements to be developed with draft walls, which has pushed up the cost of construction to Rs 6,000-7,000 per sq ft. But a CBD location such as BKC can withstand such aberrations as margins, rental (Rs 200-300 per sq ft per month) and capital values (Rs 29,000-36,000 per sq ft) are far higher than suburban and peripheral locations in Mumbai, observes Ahuja.
IT parks are essentially commercial real estate, a different class of asset to residential real estate. Both classes work differently.
´Developers lease out commercial real estate for a fairly long period of time, selling it to financial investment institutions when the asset is stabilised with sufficient tenants,´ says Limaye.
´In contrast, residential real estate is sold after completion.´
´IT park development represents business diversification for us,´ agrees Gera. ´We are creating a new class of asset yielding annuity income. We reckon the return will be commensurate to the yield from residential property, even though IT park development is capital-intensive and will yield a return over a longer period.´
A developer´s vision and objective will define what kind of projects they take on. During the leasing stage, developers can expect 7-9 per cent return from their investment. ´Rental yields from Grade-A office space for the IT and ITeS companies hover around 8-9 per cent,´ says Ahuja. Incidentally, against this, rental returns for mid-segment housing are 2-3 per cent, going up to 3-4 per cent in city centres and falling to 1 per cenr in peripheral markets seeing an oversupply situation, he adds.
Attractive IT parks
No matter whether investors come in at the development stage, when they evaluate their exit route, or aim to pick up an income-yielding asset, here´s what they look for in an IT park project, explains Vijay Agrawal, Executive Director,
Equirus Capital: Is the developer a well known brand
Does the developer have a reputation of executing as promised, delivering on time? Has the developer successfully developed other IT parks that have attracted big brands as tenants ?
What is the developer´s financial capability? Investors expect new developers to invest 30-50 per cent of the project outlay, or to meet the cost of acquiring land.
Is the project located in a marketable location? Hyderabad has seen per-sq-ft rentals increase by Rs 10-15 in the past year; Bengaluru and Pune are seeing steady demand; tenant interest in Chennai is low since the flooding although investor interest in the city has not waned; lessee demand in NCR is slightly subdued.
Is the property proposed to be offered at attractive price points that will boost tenancy velocity?
What makes office space attractive to IT/ITes companies?
Sandeep Chadha, Partner, Milestone Capital Advisors, has some answers: Tenants have traditionally been attracted to offices developed on land parcels allocated for IT parks by the government, or registered as Software Technology Parks of India, where they can avail certain tax breaks.
IT companies look for well-developed neighbourhoods offering good infrastructure, lifestyle amenities and attractive, low to medium-priced residential accommodation, which make it easier to attract talented people. Good examples of neighbourhoods offering the walk-to-work concept are Whitefield and Electronic City in Bengaluru, Gurgaon and Noida in NCR, Thane and Navi Mumbai in Mumbai, Hinjewadi and Kharadi in Pune, OMR in Chennai, Hitech city and Gachibowli in Hyderabad, etc.
IT companies prefer offices with efficient floor plates ranging between 50,000 sq ft and 100,000 sq ft to accommodate large and flat organisations. They evaluate building materials and green features like carbon emissions, water reusability, solar gains, etc, and look for efficient building systems to reduce maintenance expenses. They prefer Platinum or Gold-rated LEED-certified buildings.
- Charu Bahri
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