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India's New Breed of Corporate Office User-Investors

July 2014
Anshuman Magazine, Chairman & Managing Director, CBRE South Asia Pvt Ltd

The commercial real estate office segment in India is primarily a leasing market. Although Indian firms have traditionally preferred to purchase office properties for their own businesses, multi-national entities in the country typically prefer to lease office space.

Emerging corporate office occupier trends in India

Over the past few quarters, a significant trend that has been noted — particularly in Bengaluru — has been the emergence of the new corporate user-investor, who has been buying office space. Key transactions during the first half of 2014 seem to have been the trendsetters for what looks like an emerging practice in the city’s corporate real estate market. This revival of a practice that was previously witnessed prior to the economic downturn in 2008-09, may be attributed to a number of reasons, including the utilisation of surplus cash by multi-national companies reducing opex and trading capex, among other factors.The opportunity for corporate end-users to reduce occupancy costs and operational issues by buying space makes for a persuasive case. Cash flow studies also reveal that buying office property often proves to be a more prudent option in the long-term over leasing.

As far as the reason behind Bengaluru being the center of such purchasing practices is concerned, more rational commercial property values and abundant quality investment-grade office space — at a fraction of the cost of the other major metropolitan cities of Mumbai and the NCR region — have seen the city emerging as a budget-friendly option for corporate end-users purchasing their own offices.

Leasing office space

Having said that, the existing trend of leasing office space is unlikely to change any time soon, across India’s leading cities. Leasing office space is also the preferred option for large development firms, as it is more likely to yield greater returns in the long-term, over other property types. For the astute and well-capitalised corporate user-investor, meanwhile, the opportunity to acquire an office property for a similar amount as would have been foregone for a 9–10 years’ lease, is very compelling indeed.