Office real estate strategy in India – an occupier perspective in 2013February 7, 2013 / By
Following a vibrant year in 2011, overall demand for space in the domestic office sector contracted throughout 2012. However, as the year closed, numerous positives revealed a more certain path for 2013. Large multinational firms are likely to drive corporate demand in India during 2013. With almost every fortune 500 company having taken a position in the country, most of the demand for office space will come from the cautious expansion and consolidation of their operations.
Occupiers have realised that the current favourable market conditions may not last forever. Therefore, occupiers are focusing on continuing to be cost-effective along with addressing longer-term issues, such as the expansion and consolidation of their real estate portfolios in accordance with their business strategies. Newer occupiers are moving from larger to smaller spaces that allow them to optimally utilise their space and implement smart work concepts, shifting from pre-let projects to completed, ready-to-move-in buildings and choosing high-quality spaces that are available at the current competitive market terms. As such, a transition by occupiers from average to high-quality buildings to reduce maintenance and operational costs over the long run has been observed. These occupiers are opting for buildings with sufficient car parking and other amenities and attempting to force longer-term leases in an effort to ensure that the capital they commit to corporate real estate generates a positive arbitrage.
Controlling real estate costs will remain a key element of occupiers’ strategies in 2013. The real estate costs for space ranges between 10-15% of total operating cost depending on the business sector and the capital committed to corporate real estate generally generates a lower return than the same capital committed to alternative business uses.
Early (pre-mature) renewal of leases can be done if passing rents are higher than market rents. Lease incentives can be negotiated in high-vacancy markets and if passing rents are on par with market rents, a long-term lock-in can be negotiated. The other strategy of occupiers is to set up an operating real estate subsidiary inside the company to create an identifiable metric for calibrating the success of corporate real estate operations, a major shortcoming of most corporate real estate departments.
Many occupiers are adopting the above-mentioned strategies to their keep real estate expenses cost-effective. These occupiers include Cap Gemini, Goldman Sachs, NDS, Mercedes and Cisco to name a few and many occupiers will focus on cost-effective strategies during 2013 and 2014.
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