Indian office real estate – buy

March 18, 2013 / By  

Institutional investors and private equity funds targeting India are gradually reducing their exposure to risky assets and are on a look-out for more stable income generating investment options. Meeting this requirement, stabilised office blocks with their low-risk income yielding qualities, have become one of the most sought-after portfolio components of institutional investors and funds.

The Indian office market is significantly driven by the IT/ITeS sector. According to the industry body NASCCOM, exports from the IT/ITeS industry are expected to grow by 12-14%, and domestic revenues of the IT/ITeS sector by around 13-15% in the fiscal year ending March 2014. According to the Manpower Employment Global Survey, hiring expectations were strongest in India during 2012 when compared to other countries globally and, interestingly, Indian employers have consistently expressed strong hiring expectations for 1Q13 and 2Q13. Similarly, according to the Grant Thornton International Business Report 2013, 62% of the Indian employers surveyed have hired during 2012, more than any other country globally. Indian employers continued to remain the most optimistic globally as 63% of the businesses surveyed were planning to expand their workforces in 2013. Furthermore, our in-house CFO survey revealed that 68% of the companies surveyed were planning to expand their operations in the next five years, inferring strong future demand for office space in India.

While India boasts of its talent pool and demographic dividends, the country has been a laggard when it comes to physical infrastructure. Realising this bottleneck, the Planning Commission has proposed a one trillion USD investment in infrastructure development in its 12th five-year plan, and this in turn is expected to boost the overall real estate market in the country. Moreover, with the Finance Minister presenting a better-than-expected fiscal deficit target of 4.8% for FY14, coupled with a reduced fiscal deficit of 5.2% in FY13 against 5.9% in FY12, the government of India has created a conducive environment to facilitate further monetary easing. This should enhance business opportunities and is expected to create a beneficial effect for the Indian office sector.

Although Indian office assets are expected to deliver good returns, being able to evaluate the risk on the ground and picking the winning asset will truly differentiate the results. With most developers looking for liquidity, investors could earn a better yield if they invested now. Furthermore, most of the funds that invested during the pre-GFC era with a fund life of five-to-seven years are on the lookout for an exit opportunity, and hence this would be an ideal time for new investors to enter the Indian office market. Learning from lessons of the past, Indian real estate assets, and, in particular, office assets should be held much longer than seven years in order to beat economic cycles and to reap the real benefits from India’s economic progress.

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