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Building for a new boom
Surajeet Das Gupta |
July 12, 2003
It is a real estate boom on an unprecedented scale. Over the next 36 months, the outskirts of India's metropolitan cities will be turned into vast building sites as armies of workmen backed by battalions of cranes erect high-rise towers and plush office blocks at a speed never before seen in this country.
The results of this building boom will be astonishing. In the next 12 months it's reckoned there will be about 8 million sq ft of new offices in cities like Bangalore, Delhi, Mumbai, Hyderabad and Chennai. That will increase to about 24 million sq ft in the next 36 months.
Is that a lot of new offices? Well, just consider the fact that Nariman Point, once India's commercial hub, has only about 4 million sq ft of office space totally in its slightly dilapidated office blocks.
So, that's about six Nariman Points being built at breakneck speed. "It's a building boom of amazing proportions," says Sanjay Verma, executive director, Cushman & Wakefield, the real estate consultants.
The other extraordinary fact is that the frenetic construction activity is happening in all the major metros at almost equal speed – though Bangalore leads the way followed by Gurgaon, the one-time satellite town that is rapidly turning into a twin city to Delhi.
In the thick of the fray are the country's leading developers. In Bangalore, the Prestige Group, for instance, will be building almost 2 million sq ft of office blocks worth nearly Rs 350 crore (Rs 3.5 billion) in the next two years.
Its most ambitious project is the futuristic UB Towers that will have 950,000 sq ft of space by the time it's finished.
The Prestige Group is also putting up another 1 million sq ft of space in a clutch of other buildings at various stages of construction.
"Most of the spaces built by us are getting occupied and leased as soon as they are ready," says Irfan Razack, managing director, Prestige Estates and Projects.
Cut to Gurgaon where Arvind Khanna, vice president of real estate developer DLF is raced off his feet as the building boom turns into a construction frenzy.
Khanna is in charge of DLF's bold new CyberCity -- a hi-tech office complex spread over 125 acres in Gurgaon.
Totally, over the next 18 months, DLF hopes to put in place about 2 million square feet for blue-chip corporate clients.
Even by DLF's standards, that's a huge amount of building. In fact, Khanna says over the next 18 months the company will build the same amount it has over the last 12 years.
Says Khanna: "We expect 70 per cent of the space to be booked on lease by the time the building structures are complete."
Move next to the rocky outskirts of Hyderabad where cranes and bulldozers are working round the clock to transform the landscape.
Larsen & Toubro has already given the city a taste of the future with its glass and concrete Hitec City.
Now it has 116 acres of land in Madhapur, on the city's outskirts, to develop more office complexes for the expected IT and Business Process Outsourcing revolution. It is also furiously constructing a third tower Cyber Pearl.
Says S Sreedharan, CEO, L&T Infocity: "The complex is receiving huge enquiries and will be fully booked as and when they start the marketing."
The lure of Hyderabad has also attracted Mumbai builders, the K Raheja group, which is developing 110 acres of land for IT infrastructure in collaboration with the government.
Who will occupy these new temples of corporate India? The answer, of course, is that the builders are working furiously in the expectation that India's IT revolution is about to move into higher gear.
Top builders reckon about 70 per cent to 80 per cent of the demand is coming from software services and BPO companies that are expanding swiftly.
The BPO industry alone reckons it will be hiring another 75,000 to 100,000 people in the next 12 months (that's compared to the 160,000 people handling work from around the world currently).
That translates into a space requirement of between 7.5 million and 10 million sq ft (each person needs roughly about 75 sq ft to 100 sq ft).
Keep in mind the fact that a clutch of new international BPO and IT companies are also making a beeline for India and about 40 per cent of the new demand is coming from such companies.
"The IT and BPO companies have a huge demand for space," says Sanjay Chandra, CEO (real estate), Unitech, one of Gurgaon's top developers.
The existing IT and BPO companies also expect to double their staff strength in the next one or two years and that's fuelling the building boom.
Some are even building campuses where they can spread out. In Bangalore, for example, Intel, SAP, Texas Instruments and Motorola have taken over 70 acres of land.
Says Khanna: "Some companies are going in for campuses because it offers easy scope for upscaling and it keeps employees secluded from other competitive companies in the same space."
In Chennai too, TCS, the big daddy of the software industry, is setting up a 70-acre development centre.
The company will also have a string of smaller neighbours including Xansa Technologies, which is picking up 200,000 sq ft in the Siruseri area.
Nevertheless, in the construction stakes it is Bangalore that is leading the way. The corporate rush to Bangalore has had had an amazing effect on local firms which all have full order books at the moment.
RMZ Builders, for instance, is speeding ahead with seven mega-projects that will have a total of 1.5 million sq ft. It will soon start building a 'built-to-suit' campus for Hughes Software at its RMZ Eco World complex, which has just been launched.
But there's no disguising the fact that the construction industry has changed beyond all recognition in recent years. The new boom is being lead by the users who are calling the shots.
"Users are demanding quality and getting it. Earlier it was a buyers market and quality was not an issue," says Kekoo Colah, executive director, Knight Frank.
That isn't all. The new corporations have different demands from the past. For instance, most companies now want large floor-plates, so that they can accommodate their entire office in one floor. The result: Unitech's new buildings have about 56,000 sq ft of space on each floor -- that's three times bigger than their older buildings. At a different level, DLF may build a captive power plant for its CyberCity complex.
A host of other factors have also changed and made the current boom possible. Rentals have stabilised and that has made it possible for companies to build on a grander scale than before.
Says Verma: "Despite the demand the average vacancy rates in the cities is around 20 per cent to 25 per cent. Except in Banglore, there is an over supply."
That's particularly evident in Mumbai where once sky-high prices have dropped. In suburbs like Andheri-Kurla and Malad the fall in prices has triggered a spate of building.
Lease rentals for commercial space in these locations (at Rs 30 to Rs 35 a sq ft) are almost similar to prices in Gurgaon and the Bangalore suburbs.
The big money is also moving back into the construction industry after a gap of several years. The blue-chip banks like HDFC and ICICI Bank have started buying commercial space from developers as an investment.
For instance, ICICI Bank has acquired 107,000 square feet of space leased to HSBC in Bangalore from the RMZ group.
Why are the investors returning to property? Says Colah: "Investors feel now that prices have bottomed out and capital values will go up. Banks are flush with funds, other sources of investment like the stock market are no longer attractive and high worth individuals are faced with falling interest rates."
Colah points out that most investors are already getting returns of 11 per cent to 13 per cent on their investment from rentals.
Which way will the real estate boom go? Don't forget there are powerful forces backing it. The Karnataka Government, for instance, is planning a giant hardware park in Devanahalli on the outskirts of Bangalore. The parkwill spread over a colossal 4,300 acres and it will be near the city's new international airport.
The construction boom is also spreading to other, smaller cities. In Kerala for instance, the government is setting up an IT park in Kochi on 100 acres of land.
Says Anshuman Magazine, managing director, CB Richard Ellis, which is advising the government: "The attempt is to make Kerala an attractive destination for the IT industry."
Similarly, HSBC has started building a 160,000 sq ft service centre in Vizag. Says a senior HSBC executive: "Vizag has a 50 per cent to 60 per cent cost advantage in terms of both real estate prices and manpower costs."
Will this boom last? The sceptics point out that hectic commercial activity is heavily dependent on the BPO and IT services industries growing as rapidly as projected. But, in the changing world of high technology, dreams have a habit of disintegrating rapidly.
The other worry is oversupply. For instance, Cushman & Wakefield reckons that about 1.5 million sq ft of office space will become available in Bandra-Kurla in the next 18 months.
It says this could force down rentals by 5 per cent to 12 per cent in the suburbs. And fly-by-night operators are also cashing in on the boom and this could force prices down further.
Developers complain that their margins are getting squeezed even as volumes climb steeply.
Says Chandra: "Construction prices are going up by 4 per cent to 5 per cent but we cannot increase prices so margins are under pressure."
There are other fears. In some places it will be tough to ensure that infrastructure -- everything from water, power and the roads -- keeps pace with the furious burst of construction.
So are we heading towards a commercial property market bust like the one that took place in the late '90s? The developers and real estate consultants insist that isn't going to happen.
Says Chandra: "The earlier boom was speculative and investor lead, the new boom is end-user lead. They have already committed money for the space and have a business plan in place."
It's a stunning comeback for the developers and the real estate industry, which has been in the dumps for around five or six years.
This time the developers believe that they are building on firm foundations. But they had better say a few prayers and hope that the infotech and BPO party doesn't stop for some time to come.Additional reporting: Anusha S, Mansi Kapur, R Raghavendra, Sanjay K Pillai and Vasanth Kumar.