Real Estate (RE) costs form a significant portion of the overall expenditures of any office occupier and are only lower than the costs of human resources. In recent quarters, the top seven office markets in India have entered initial growth phases, and office occupancy costs have started to rise after remaining occupier friendly for about eight quarters. However, the financial indicators continue to remain far below the peak values recorded during 1Q08, prior to the onset of the GFC. Going forward, pan-India rents will likely grow by an average of 24% by end-2014, while capital values are expected to increase by 29% from their corresponding trough levels during the same period (Figure 1).
Figure 1: India Office Financial Indicators (RV | CV) Index
Source: Real Estate Intelligence Service, Jones Lang LaSalle (4Q12)
Note: RVI – Rental Value Index; CVI – Capital Value Index
Moreover, increasing domestic costs and uncertainty concerning outsourcing businesses from the US and Europe have pressured major office occupiers’ top and bottom lines. Thus, Corporate Real Estate (CRE) managers are being exposed to greater scrutiny from external and internal stakeholders, leading to augmented compliance and reporting requirements and more stringent targets for cost reduction.
Finding a solution for each of the following 10 questions would ensure optimal RE costs and result in improved profitability and value creation for an occupier’s business:
- Is a robust information infrastructure in place to proactively analyse and strategise? Does an effective process to ensure speedy RE decisions exist?
- Are RE costs compared to the industry’s benchmark?
- Are business units/verticals financially accountable for RE costs?
- Is revenue growth balanced with the right sizing of RE space?
- Are alternative workplace strategies being used as a cost saving technique?
- Are on-going lease agreements re-negotiated or restructured to align with the RE costs under the prevailing market’s conditions?
- Is sale and leaseback considered for enhanced liquidity?
- Is a meticulous plan in place to uncover under-utilised space in the RE portfolio?
- Is a sustainable lease practice endorsed and followed? Are environmental, social and economic factors balanced to ensure sustainable outcomes?
- Is there an integrated approach towards facility management to ensure cost benefits?
Though some cost-saving techniques, such as implementing an alternative workplace strategy or relocating operations, would have to be implemented over the long term, some of the following techniques could easily be employed almost immediately:
– Conducting dark space audits to eliminate under-utilised space
– Conducting portfolio assessments to identify the values of lease-held and free-held properties
– Making business units financially accountable for their RE costs
– Evaluating sale and lease back options to improve liquidity
– Early renewal of on-going leases
– Conducting sustainability and energy audits
With occupancy costs expected to increase in the mid-term, we foresee the above techniques gaining more importance among CRE professionals in India in the near term. For more insights on the topic, read our forthcoming research paper titled – “Real Estate Cost Optimisation – The Road Less Travelled”
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