The impact of outsourcing on Indian real estate Commercial real estate in India †recovering from the downtrend Commercial real estate in India was hit the worst during the economic meltdown in the second half of 2008. Commercial rentals in top metros plummeted by more than 30-40%. Lately, following the residential segment, the commercial segment has started showings signs of recovery. With the economy back on a high growth trajectory and the ambitious hiring plans of outsourcing services and KPO companies, the demand for commercial space is poised to rise. Market research depicts an additional demand for ~243 mn sft of commercial space across India to be generated during 2010-2013. While Bangalore leads with the highest demand for commercial space, NCR (National Capital Region) is catching up owed to the emergence of outsourcing services, data management, equity research, analytical research, market research, business analysis and research companies in Gurgaon and Noida over the past few years. India’s outsourcing services/off-shoring industry - an introduction The genesis of outsourcing services lies in the fact that labour can’t be freely traded in the global market, while commodities and capital can. The trend towards outsourcing services to India and other low cost destinations began in the early 1990s. It was primarily driven by the cross border arbitrage that these destinations offer. Many international outsourcing companies reaped the benefits of this arbitrage by sourcing their production or service operations (initially low-end data management to more complex KPO services like equity research, analytical research and investment research etc) to lower-wage emerging-market country like India. In 2009, India’s share of the global offshoring market valued at USD 94 billion was nearly 51%; thus, providing immense potential for expansion, as the global offshoring market is still a small fraction of the global outsourcing services industry valued at USD235 billion as on 2009. This provides a huge scope to the Indian IT, outsourcing services and KPO companies to create new service offerings and widen their geographical reach by entering newer regions. In the next few years, we expect the labor cost arbitrage offered by India to generate stronger interest for the outsourcing services / KPO companies to enter into the country. The Indian KPO services industry is expected to reach ~USD6 bn in revenues in 2010-11 and ~USD10 bn by 2013-14. These KPO companies provide a wide range of solutions including data management, research analytics, equity research, market research, investment research, business analysis and business research etc. It is expected that in the coming years both the volume and complexity of the work (especially equity research, market research, analytical research etc) being outsourced to Indian KPO companies, will increase. Corporate real estate driven by outsourcing services/off-shoring industry Commercial real estate is further subdivided into Corporate (Office), Retail and Hotels. Corporate real estate still remains in its infancy in India with the first â€A’ grade classified office only dating back to the mid 1990’s. Currently, all major Indian metropolitan cities boast a substantial amount of â€A’ grade office space. The initial waves, in the early 1990’s, of Western companies outsourcing services to India were accompanied by an acceptance of any kind of facility available, irrespective of the cost. However, these companies were not accessing the quality of corporate real estate and services available elsewhere in the world. Only recently the local property developers started to fully comprehend the workspace specifications required for IT-enabled outsourcing services or KPO services. This local development, in addition to greater exposure from international service providers, is beginning to enable the delivery of quality real estate solutions at economical costs suitable for BPO/KPO companies. Business outsourcing †overall impact assessment In 2006, the total supply of commercial office space (grade-A, non-captive) in National Capital Region (NCR), Mumbai, Hyderabad, Bengaluru, Pune and Chennai together was recorded in the range of 40â€45 million sq. ft (according to E&Y estimates). The absorption was primarily driven by the IT/ITES industry, which accounted for almost 70â€75% of total absorption. Thereafter, a whopping 47 million sqft of absorption was seen in 2007 of which ~70% was absorbed by the IT/ITES sector. Office rentals have been rising in harmony with demand at 30-40% per annum from 2005 to 2008. However, during the recession a geographic de-concentration of the real estate activity was observed 1) from large metros like Bengaluru, Chennai, Mumbai and NCR to tier II and tier III cities (such as Chandigarh, Chennai, Jaipur, Pune, Hyderabad, Kochi and Visakhapatnam) and 2) from Central Business Districts (CBDs) to Secondary and Peripheral Business Districts (SBDs and PBDs). This transition has been driven primarily by the shift of IT-BPO & KPO companies to these less expensive destinations. A substantial downsizing of operations became the order of the day for the outsourcing companies hit by the recession. Consequently, the absorption of commercial space fell drastically to 37mn sft in 2008 and further to 26mn sft in 2009. Most micro-markets across the country witnessed a 15-25% decline in rentals in 2009, as compared to 2008. However, the story took a new turn in 2010, wherein the decline has slowed to almost zero and new projects have been announced. The future looks vivid with promising growth forecasts The Global IT outsourcing services industry is anticipated to grow at a CAGR of 5.6% to USD 292 bn in 2013 as companies riding out of recession harness the need for information technology to retain competitive advantage. With the Indian economy estimated to grow above 7% in the near future, robust demand for office space is expected from companies, particularly in the IT/ITeS, KPO outsourcing, and analytical research services. Outsourcing services or BPO & KPO companies has emerged as key drivers of commercial real estate in India’s metro cities and is expected to generate a demand for 100-125mn sft of office space over the next five years. Market research pegs returns from realty in India at an average of 15% annually with a tremendous upsurge in commercial real estate on account of the Indian BPO/KPO services boom. Lease rentals have been picking up steadily and there is a huge demand for quality infrastructure. Market research forecasts office rents to appreciate by mid-2011 and that more outright purchases would be made by MNCs and private equity firms. Additionally, IT/ITES and outsourcing companies will continue to account for 60-70% of office demand, further emphasizing the impact of the outsourcing services/KPO services industry on the commercial real estate market in India.
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